As filed with the Securities and Exchange
Commission on December 16, 2010
Registration
No. 333-169550
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 6
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
FORTEGRA FINANCIAL
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
(State or Other Jurisdiction
of
Incorporation or Organization)
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6411
(Primary Standard
Industrial
Classification Code Number)
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58-1461399
(I.R.S. Employer
Identification Number)
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Fortegra Financial Corporation
100 West Bay Street
Jacksonville, FL 32202
(866)-961-9529
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Richard S. Kahlbaugh
President and Chief Executive Officer
Fortegra Financial Corporation
100 West Bay Street
Jacksonville, FL 32202
(866)-961-9529
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent For
Service)
Copies to:
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Alexander D. Lynch, Esq.
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
(212) 310-8000
(Phone)
(212) 310-8007
(Fax)
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Michael Groll, Esq.
Richard B. Spitzer, Esq.
Dewey & LeBoeuf LLP
1301 Avenue of the Americas
New York, New York 10019
(212) 259-8000 (Phone)
(212) 259-6333 (Fax)
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Title of Each Class of
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Amount to be
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Offering Price
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Aggregate Offering
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Amount of
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Securities to be Registered
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Registered(1)
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Per Share
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Price(1)(2)
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Registration Fee
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Common Stock, $0.01 par value per share
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6,900,000
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$11.00
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$75,900,000
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$5411.67(3)
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(1)
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Includes shares of common stock that may be purchased by the
underwriters to cover over-allotments, if any.
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(2)
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Estimated solely for the purposes of computing the amount of the
registration fee pursuant to Rule 457(a) under the
Securities Act of 1933, as amended.
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(3)
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Previously paid.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. Neither we
nor the selling stockholders may sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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Subject to Completion, dated
December 16, 2010
6,000,000 Shares
FORTEGRA FINANCIAL
CORPORATION
Common Stock
$
per share
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Fortegra Financial Corporation is
offering 4,265,637 shares and the selling stockholders,
which consist of certain of our executive officers and entities
affiliated with members of our board of directors, are offering
1,734,363 shares. We will not receive any of the proceeds
from the sale of the shares being sold by the selling
stockholders.
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This is our initial public offering and
no public market currently exists for our shares.
Proposed trading symbol: New York Stock
Exchange FRF
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We anticipate that the initial public
offering price will be $11.00 per share.
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This investment involves risk. See Risk Factors
beginning on page 14.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to Fortegra Financial Corporation
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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The underwriters have a
30-day
option to purchase 900,000 additional shares of common stock
from the selling stockholders to cover over-allotments, if
any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved of anyones investment
in these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.
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Piper Jaffray |
SunTrust Robinson Humphrey |
Liquidnet, Inc.
The date of this prospectus
is ,
2010
TABLE OF
CONTENTS
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Page
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F-1
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EX-23.1 |
EX-23.2 |
You should rely only on the information contained in this
prospectus. We have not, the selling stockholders have not and
the underwriters have not, authorized any other person to
provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely
on it. We are not, the selling stockholders are not and the
underwriters are not, making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this
prospectus is only accurate as of the date on the front cover of
this prospectus. Our business, financial condition, results of
operations and prospects may have changed since that date.
Fortegra Financial, Bliss &
Glennon, Consecta, Life of the
South, LOTSolutions and Universal
Equipment Recovery Group and their respective logos are
our trademarks. Solely for convenience, we refer to our
trademarks in this prospectus without the
tm
and
®
symbols, but such references are not intended to indicate, in
any way, that we will not assert, to the fullest extent under
applicable law, our rights to our trademarks. Other service
marks, trademarks and trade names referred to in this prospectus
are the property of their respective owners. As indicated in
this prospectus, we have included market data and industry
forecasts that were obtained from industry publications and
other sources.
i
SUMMARY
The items in the following summary are described in more
detail later in this prospectus. This summary provides an
overview of selected information and does not contain all of the
information you should consider. Therefore, you should also read
the more detailed information set out in this prospectus,
including the risk factors, the consolidated financial
statements and the notes thereto, and the other documents to
which this prospectus refers before making an investment
decision. Unless the context requires otherwise, references in
this prospectus to Fortegra Financial,
we, us, our company or
similar terms refer to Fortegra Financial Corporation and its
subsidiaries.
Overview
We are an insurance services company that provides distribution
and administration services and insurance-related products to
insurance companies, insurance brokers and agents and other
financial services companies in the United States. We sell our
services and products directly to businesses rather than
directly to consumers.
We began nearly 30 years ago as a provider of credit insurance
products and, through our transformational efforts, have evolved
into a diversified insurance services company. We now leverage
our proprietary technology infrastructure, internally developed
best practices and access to specialty insurance markets to
provide our clients with distribution and administration
services and insurance-related products. Our services and
products complement consumer credit offerings, provide
outsourcing solutions designed to reduce the costs associated
with the administration of insurance and other financial
products and facilitate the distribution of excess and surplus
lines insurance products through insurance companies, brokers
and agents. These services and products are designed to increase
revenues, improve customer value and loyalty and reduce costs
for our clients.
We generally target market segments that are niche and specialty
in nature, which we believe are underserved by competitors and
have high barriers to entry. We focus on building quality client
relationships and emphasizing customer service. This focus,
along with our ability to help clients enhance revenue and
reduce costs, has enabled us to develop and maintain numerous
long-term client relationships. Over 80% of our clients have
been with us for more than five years.
Our fee-driven revenue model is focused on delivering a high
volume of recurring transactions through our clients and
producing attractive profit margins and operating cash flows.
Historically, our business has grown both organically and
through acquisitions of complementary businesses. Our total
revenues have grown 11.4% from $167.1 million for the year
ended December 31, 2008 to $186.1 million for the year
ended December 31, 2009. Our adjusted earnings before
interest expense, taxes,
non-controlling
interest and depreciation and amortization (Adjusted EBITDA) has
grown 30.7% from $24.1 million for the year ended
December 31, 2008 to $31.5 million for the year ended
December 31, 2009. Our net income has grown 44.0% from
$8.0 million for the year ended December 31, 2008 to
$11.6 million for the year ended December 31, 2009.
Our
Businesses
We operate in three business segments. In each segment, we
deliver services and products that generate incremental revenues
and utilize technology to reduce operating costs. Our businesses
benefit from efficiencies by sharing accounting, compliance,
legal, technology, human resources and administrative services.
In 2009, Corporate expenses were primarily acquisition related
and included executive stock compensation expense. These costs
were not allocated back to the business segments and represented
(17.9%) of our pre-tax income in 2009.
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Payment Protection. Our Payment
Protection segment, marketed under our Life of the South brand,
delivers credit insurance, debt protection, warranty, service
contract and car club solutions along with administrative
services to consumer finance companies, regional banks,
community banks, retailers, small loan companies, warranty
administrators, automobile dealers, vacation ownership
developers and credit unions. Our clients then offer these
products to their customers in conjunction with consumer finance
transactions. Our Payment Protection segment specializes in
providing products that protect consumer lenders and their
borrowers from death, disability or other events that could
otherwise impair their borrowers ability to repay a debt.
We typically maintain long-term business relationships with our
clients. From 2005 to 2009, our annual client retention rates
averaged approximately 95% in our Payment Protection business.
We own and operate insurance company subsidiaries to facilitate,
on behalf of our Payment Protection clients, the distribution of
credit insurance and payment protection services and products.
This allows our clients to sell these services and products to
their customers without having to establish their own insurance
companies, which saves our clients the cost and time of
undertaking and complying with substantial regulatory and
licensing requirements. Our clients typically retain the
underwriting risk related to such products either through
retrospective commission arrangements or fully-collateralized
reinsurance companies owned by them, which we administer on
their behalf. While the majority of our Payment Protection
revenue is fee-based, we assume insurance underwriting risk in
select instances to meet our clients needs and to enhance
our profitability.
Our Payment Protection business generates service and
administrative fees for distributing and administering payment
protection products on behalf of our clients. We also earn
ceding commissions in our Payment Protection business for credit
insurance that we cede to reinsurers through coinsurance
arrangements. We elect to cede to reinsurers a significant
portion of the credit insurance that we distribute to
participate in the underwriting profits of these products and to
maximize our return on capital. We also generate net investment
income from our invested assets portfolio. In 2009, the Payment
Protection business represented approximately 57.7% of our
pre-tax income.
BPO. Our business process outsourcing
(BPO) segment, marketed under our Consecta brand, provides a
broad range of administrative services tailored to insurance and
other financial services companies. Our BPO business is our most
technology-driven segment. Through our operating platform, which
utilizes our proprietary technology, we provide ongoing sales
and marketing support, electronic underwriting, premium billing
and collections, policy administration, claims adjudication and
call center management services on behalf of our clients. In
2009, our platform and technology enabled our insurance
administration team of 35 individuals on a daily basis to bill
approximately 38,000 customers, process and deliver
approximately 5,500 policies, fulfill approximately 900 customer
service calls and process approximately 900 claims.
Our proprietary administrative technology platform allows our
clients to outsource the fixed costs and complexity associated
with internal development and ongoing administration of
insurance products at a lower cost than if our client performs
these functions on its own. In addition, the scalability of our
operating platform allows us to add new clients or additional
services for clients without incurring significant incremental
costs.
Our BPO business generates service and administrative fees and
other income under
per-unit
priced contracts. Service and administrative fees for our BPO
business are based on the complexity and volume of business that
we manage on behalf of our clients. We do not take any insurance
underwriting risk in our BPO business. In 2009, the BPO business
represented approximately 48.4% of our pre-tax income.
2
Wholesale Brokerage. Our Wholesale
Brokerage segment, marketed under our Bliss & Glennon
brand, is one of the largest surplus lines brokers in California
according to the Surplus Line Association of California and
ranked in the top 20 wholesale brokers in the United States in
2009 by premium volume according to Business Insurance, an
industry publication. This business segment uses a wholesale
model to sell specialty property and casualty (P&C) and
surplus lines insurance through retail insurance brokers and
agents and insurance companies. We believe that our emphasis on
customer service, rapid responsiveness to submissions and
underwriting integrity in this segment has resulted in high
customer satisfaction among retail insurance brokers and agents
and insurance companies.
Our Wholesale Brokerage business provides retail insurance
brokers and agents and insurance companies the ability to obtain
various types of commercial insurance coverages outside of their
core areas of focus, broader access to insurance markets and the
expertise to place complex risks. We also provide underwriting
services for ancillary or niche insurance products as a managing
general agent (MGA) for specialized insurance carriers. We
believe that insurance carriers value their relationship with us
because we provide them with access to new markets without the
need for costly distribution infrastructure. Our Wholesale
Brokerage business also utilizes our technology platform to
provide its clients with administrative services, including
policy underwriting, premium and claim administration and
actuarial analysis.
Our Wholesale Brokerage business earns wholesale brokerage
commissions and fees for the placement of specialty insurance
products. We also earn profit commissions in our Wholesale
Brokerage business, which are commissions that we receive from
carriers based upon the ultimate profitability of the insurance
policies that we place with those carriers. We do not take any
insurance underwriting risk in our Wholesale Brokerage business.
We acquired Bliss & Glennon in April 2009, and our
Wholesale Brokerage business represented approximately 11.8% of
our pre-tax income in 2009.
Market
Opportunity
We operate in the insurance, consumer finance and commercial
finance industries in the United States, offering our services
and products through the brands and distribution bases of our
clients. We believe that we are well positioned to capitalize on
several key industry trends.
Growth of Outsourcing in the Insurance
Industry. By outsourcing business functions
that can be more efficiently and cost effectively provided by
specialized service providers, we believe that insurance
companies can increase productivity, focus on core competencies
and reduce operating costs. According to Celent, an independent
research firm, the size of the North American insurance
outsourcing market is expected to grow from approximately
$2.0 billion in 2008 to over $4.0 billion in 2013,
representing a compounded annual growth rate of 14.9%.
Financial Performance of Financial Services Companies and
Retailers. Financial services companies and
retailers offer complementary services and products, including
payment protection and insurance-related services and products,
which we believe increase their revenues, enhance customer value
and loyalty and improve their profitability. According to the
Consumer Credit Industry Association, net written premium for
credit-related insurance was $6.2 billion in the United
States in 2009.
Growth of the Specialty Property and Casualty
Insurance Market. We believe the market for
specialty P&C insurance products has grown as a result of
increased acceptance of these products by insured parties and
the development of new risk management products by insurance
carriers. Insurance carriers operating in the surplus lines
market generally distribute their products through wholesale
insurance brokers, such as Bliss & Glennon. According
to A.M. Best, premiums written by surplus lines focused
insurance carriers increased from $9.9 billion to
$34.4 billion from 1998 to 2008. While this market
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fluctuates based on the trends generally affecting the insurance
industry, we believe that demand for surplus lines insurance
will increase if economic conditions in the United States
improve.
Our
Competitive Strengths
Strong Value Proposition for Our Clients and Their
Customers. Our solutions manage the essential
aspects of insurance distribution and administration, providing
low-cost access to complex, often highly-regulated markets,
which we believe enables our clients to generate high-margin,
incremental revenues, enter new markets, mitigate risk, improve
operating efficiencies and enhance customer loyalty.
Proprietary Technology and Low-Cost Operating
Platform. Our proprietary technology delivers
low-cost, highly automated services to our clients without
significant up-front investments and enables us to automate core
business processes and reduce our clients operating costs.
Scalability. We believe that our
scalable and flexible technology infrastructure, together with
our highly trained and knowledgeable information technology
personnel and consultants, enables us to add new clients and
launch new services and products and expand our transaction
volume quickly and easily without significant incremental
expense.
High Barriers to Entry. We believe that
each of our businesses would be time consuming and expensive for
new market participants to replicate due to the barriers to
entry provided by our long-term relationships with clients and
other market participants and substantial experience in the
markets that we serve.
Experienced Management Team. We have an
experienced management team with extensive operating and
industry experience in the markets that we serve. Our management
team has successfully developed profitable new services and
products and completed the acquisition of seven complementary
businesses since January 1, 2008.
While we believe these strengths will enable us to compete
effectively, there are various factors that could materially and
adversely affect our competitive position. See
Risks Affecting our Business and
Risk Factors. See Business for
additional information regarding our competitive strengths.
Key
Attributes of Our Business Model
We believe the following are the key attributes of our business
model:
Recurring Revenue Generation. Our
business model, which includes the deployment of our technology
with many of our clients, has historically generated substantial
recurring revenues, high profit margins and significant
operating cash flows.
Long-Term Relationships. By delivering
value-added services and products to our clients
customers, and offering fixed-term contracts, we become an
important part of our clients businesses and develop
long-term relationships.
Wholesale Distribution. We provide most
of our services and products to businesses on a wholesale basis
rather than directly to consumers and businesses on a retail
basis enabling our clients to enhance their customer
relationships and allowing us to take advantage of economies of
scale.
Business Diversification. Our
businesses and results of operations are highly diversified,
which positions us to take better advantage of emerging industry
trends and to better manage business,
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economic and insurance cycles than companies that operate in
only one sector of the financial services industry.
Our ability to maintain these attributes is subject to numerous
risks and uncertainties. See Risks Affecting
our Business and Risk Factors. See
Business for additional information regarding the
key attributes of our business model.
Our
Growth Strategy
The following are the key elements of our growth strategy:
Provide High Value Solutions. We
continue to enhance our technologies and processes and focus on
integrating our operations with those of our clients in order to
provide our clients with services and products that will allow
them to generate incremental revenues while reducing the costs
of providing insurance and other financial products.
Increase Revenue from Our Existing
Clients. We will seek to leverage our
long-standing relationships with our existing clients by
providing them with additional services and products,
introducing new services and products for them to market to
their customers and establishing volume-based fee arrangements.
Expand Client Base in Existing
Markets. We intend to take advantage of
business opportunities to develop new client relationships
through our direct sales force, from referrals from existing
clients and business partners, by responding to requests for
proposals and through our participation in industry events.
Enter New Geographic Markets. We will
look to expand our market presence in new geographic markets in
the United States and internationally by broadening the
jurisdictions in which we operate, hiring new employees, opening
new offices, seeking additional licenses and regulatory
approvals and pursuing acquisition opportunities.
Pursue Strategic Acquisitions. We plan
to continue pursuing acquisitions of complementary businesses in
each of our segments to expand our service offerings, access new
markets and expand our client base.
We may not be successful in implementing aspects of our growth
strategy. See Risks Affecting our
Business and Risk Factors elsewhere in this
prospectus for risks associated with our ability to execute our
growth strategy. See Business for additional
information regarding our growth strategies.
Risks
Affecting Our Business
Investing in our common stock involves substantial risk. Before
participating in this offering, you should carefully consider
all of the information in this prospectus, including risks
discussed in Risk Factors beginning on page 14.
In addition, while we have summarized our competitive strengths,
key attributes and growth strategy above, there are numerous
risks and uncertainties that may prevent us from capitalizing on
these strengths and key attributes or successfully executing our
growth strategy. The following is a list of some of our most
significant risks.
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General economic and financial market conditions may have a
material adverse effect on the business, results of operations
and financial condition of all of our business segments.
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We face significant competitive pressures in each of our
businesses, which could adversely affect our business, results
of operations and financial condition.
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Our results of operations may fluctuate significantly, which
makes future results of operations difficult to predict. If our
results of operations fall below expectations, the price of our
common stock could decline.
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Our results of operations could be adversely affected if we fail
to retain our existing clients, cannot sell additional services
and products to our existing clients, do not introduce new or
enhanced services and products or are not able to attract and
retain new clients.
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We typically face a long selling cycle to secure new clients in
each of our businesses as well as long implementation periods
that require significant resource commitments, which result in a
long lead time before we receive revenues from new client
relationships.
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Acquisitions are a significant part of our growth strategy and
we may not be successful in identifying suitable acquisition
candidates, completing such acquisitions or integrating the
acquired businesses, which could have a material adverse effect
on our business, results of operations, financial condition or
growth.
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Our business, results of operations, financial condition or
liquidity may be materially adversely affected by errors and
omissions and the outcome of certain actual and potential
claims, lawsuits and proceedings.
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We may lose clients or business as a result of consolidation
within the financial services industry.
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Our success is dependent upon the retention and acquisition of
talented people and the skills and abilities of our management
team and key personnel.
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Our Payment Protection business relies on independent financial
institutions, lenders and retailers to distribute its services
and products, and the loss of these distribution sources, or the
failure of our distribution sources to sell our Payment
Protection products could materially and adversely affect our
business and results of operations.
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A significant portion of our BPO revenues are attributable to
one client, and any loss of business from, or change in our
relationship with this client could have a material adverse
effect on our business, results of operations and financial
condition.
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We may not be able to accurately forecast our commission
revenues because our commissions depend on premiums charged by
insurance companies, which historically have varied and, as a
result, have been difficult to predict.
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We are subject to extensive governmental laws and regulations,
which increase our costs and could restrict the conduct of our
business.
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Our indebtedness may limit our financial and operating
activities and may adversely affect our ability to incur
additional debt to fund future needs.
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The failure to effectively maintain and modernize our systems to
keep up with technological advances could materially and
adversely affect our business.
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As a public company, we will become subject to additional
financial and other reporting and corporate governance
requirements that may be difficult for us to satisfy.
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Summit
Partners Transactions
In June 2007, entities affiliated with Summit Partners, a growth
equity investment firm, acquired 91.2% of our capital stock. The
acquisition was financed through (i) $20.0 million of
subordinated debentures maturing in 2013 issued to affiliates of
Summit Partners, (ii) $35.0 million of preferred trust
securities
6
maturing in 2037 and (iii) an equity investment of
$43.1 million by affiliates of Summit Partners. In
connection with the acquisition, all of our $11.5 million
of redeemable preferred stock outstanding prior to the
acquisition remained outstanding and certain stockholders prior
to the acquisition continued to hold such shares after the
acquisition. In addition to acquiring our capital stock in the
acquisition, the proceeds from the equity and debt financings
were used to repay pre-transaction indebtedness of
$10.1 million and pay transaction costs of
$5.8 million. We refer to the foregoing transactions
collectively as the Summit Partners Transactions.
In April 2009, in connection with our acquisition of
Bliss and Glennon, Inc., affiliates of Summit Partners
acquired additional shares of our capital stock for
$6.0 million. As of September 30, 2010, affiliates of
Summit Partners beneficially owned 88.6% of our capital stock.
Conflict
of Interest
Liquidnet, Inc., an underwriter for this offering, is affiliated
with Summit Partners and may be deemed to have a conflict
of interest under Rule 5121 of the Financial Industry
Regulatory Authority, Inc. (Rule 5121).
Accordingly this offering will be made in compliance with the
applicable provisions of Rule 5121. Please see
Conflict of Interest.
Office
Location
We were incorporated in Georgia in 1981 under the name Life of
the South Corporation. In 2009, we changed our name to Fortegra
Financial Corporation. We were reincorporated in Delaware in
November 2010. Our principal executive offices are located at
100 West Bay Street, Jacksonville, Florida 32202. Our
telephone number at that address is (866)-961-9529. Our
corporate website is www.fortegra.com. The information that
appears on our website is not part of, and is not incorporated
into, this prospectus.
7
The
Offering
|
|
|
Common stock offered by us
|
|
4,265,637 shares of common stock |
|
|
|
Common stock offered by the selling stockholders
|
|
1,734,363 shares of common stock |
|
|
|
Total offering
|
|
6,000,000 shares of common stock |
|
|
|
Common stock to be outstanding after this offering
|
|
20,256,739 shares of common stock |
|
|
|
Over-allotment option
|
|
The underwriters have an option to purchase a maximum of
900,000 additional shares of common stock from the selling
stockholders to cover over-allotments. The underwriters can
exercise this option at any time within 30 days from the
date of this prospectus. |
|
|
|
Use of proceeds
|
|
We estimate that the net proceeds to us from our sale of
4,265,637 shares of common stock in this offering will be
approximately $39.4 million, after deducting underwriting
discounts and commissions and estimated expenses payable by us
in connection with this offering. This assumes a public offering
price of $11.00 per share. With the net proceeds from shares
that we sell in this offering and increased borrowings of
approximately $7.3 million under our revolving credit
facility, we intend to use $12.0 million to redeem all of
our outstanding redeemable preferred stock, $20.6 million
to repay in full our outstanding subordinated debentures and
$14.1 million to pay the conversion amount on our
Class A common stock. See Use of Proceeds and
Certain Relationships and Related Person
Transactions Class A Common Stock Conversion. |
|
|
|
Dividend policy
|
|
We do not anticipate paying any dividends on our common stock in
the foreseeable future. See Dividend Policy. |
|
Risk factors
|
|
Investing in our common stock involves a high degree of risk.
See Risk Factors beginning on page 14 of this
prospectus for a discussion of factors you should carefully
consider before investing in our common stock. |
|
Proposed New York Stock Exchange symbol
|
|
FRF |
8
The number of shares of common stock outstanding after this
offering is based on the number of shares of common stock
outstanding as of September 30, 2010. Unless otherwise
indicated, this number:
|
|
|
|
|
includes 15,750 shares of common stock issued upon the exercise
of options by a selling stockholder on December 7, 2010 and
our receipt of proceeds therefrom;
|
|
|
|
|
|
excludes 1,867,524 shares of our common stock issuable upon
exercise of existing stock options that will be outstanding upon
completion of this offering, at a weighted average exercise
price of $2.92 per share;
|
|
|
|
|
|
excludes 88,268 shares of common stock issuable upon the
exercise of options with an exercise price equal to the initial
public offering price that we intend to grant to our chief
financial officer at the time of this offering as described
under Executive and Director CompensationEmployment
Agreements; and
|
|
|
|
|
|
excludes 3,751,732 shares of our common stock reserved for
future grants under our 2010 Omnibus Incentive Plan and
1,000,000 shares of our common stock reserved for issuance
under our Employee Stock Purchase Plan.
|
Unless otherwise indicated, the information in this prospectus:
|
|
|
|
|
gives effect to the conversion of our outstanding Class A
common stock into common stock prior to the consummation of this
offering;
|
|
|
|
gives effect to the redemption of our outstanding redeemable
preferred stock;
|
|
|
|
gives effect to a 5.25 for 1 stock split of our common stock
prior to the consummation of this offering;
|
|
|
|
gives effect to our amended and restated certificate of
incorporation, which will be in effect prior to the consummation
of this offering;
|
|
|
|
includes 60,000 shares of restricted stock to be granted to
certain directors in connection with this offering as described
under Executive and Director CompensationDirector
Compensation;
|
|
|
|
|
|
includes 100,000 shares of restricted stock to be granted
to certain of our executive officers and other employees in
connection with this offering as described under Certain
Relationships and Related Person TransactionsBonus
Pool;
|
|
|
|
|
|
assumes 28,435 shares of common stock will be issued upon the
exercise of existing stock options by a selling stockholder in
this offering and our receipt of proceeds therefrom;
|
|
|
|
|
|
assumes no exercise of the underwriters option to purchase
up to 900,000 additional shares from the selling
stockholders; and
|
|
|
|
|
|
assumes an initial public offering price of $11.00 per
share.
|
9
Summary
Historical Consolidated Financial and Other Data
The following table sets forth our summary historical
consolidated financial and other data for the periods and as of
the dates indicated. The consolidated statement of income and
other data as of and for the nine months ended
September 30, 2010 and 2009 are derived from our unaudited
consolidated financial statements included elsewhere in this
prospectus. We derived the consolidated statement of income and
other data for (i) the years ended December 31, 2009
and 2008, (ii) the period from June 20, 2007 to
December 31, 2007 and (iii) the period from
January 1, 2007 to June 19, 2007 from our audited
consolidated financial statements for such periods included
elsewhere in this prospectus. We have prepared the unaudited
consolidated financial information set forth below on the same
basis as our audited consolidated financial statements and have
included all adjustments, consisting of only normal recurring
adjustments, that we consider necessary for a fair presentation
of our financial position and operating results for such
periods. The results for any interim period are not necessarily
indicative of the results that may be expected for a full year.
On June 20, 2007, affiliates of Summit Partners acquired a
majority of our capital stock. The period prior to June 20,
2007 is referred to as Predecessor, and all periods
including and after such date are referred to as
Successor. The consolidated financial statements for
all Successor periods are not comparable to those of the
Predecessor period.
Our historical results are not necessarily indicative of future
operating results. You should read the information set forth
below in conjunction with Selected Historical Consolidated
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and the related notes
thereto included elsewhere in this prospectus.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
June 20, 2007
|
|
|
|
January 1,
|
|
|
|
|
September 30,
|
|
|
|
Years Ended December 31,
|
|
|
|
to December
|
|
|
|
2007 to June
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
31, 2007
|
|
|
|
19, 2007
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
Consolidated statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and administrative fees
|
|
|
$
|
26,047
|
|
|
|
$
|
23,247
|
|
|
|
$
|
31,829
|
|
|
|
$
|
24,279
|
|
|
|
$
|
10,686
|
|
|
|
$
|
8,165
|
|
Wholesale brokerage commissions and fees
|
|
|
|
19,168
|
|
|
|
|
11,106
|
|
|
|
|
16,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceding commissions
|
|
|
|
22,468
|
|
|
|
|
18,275
|
|
|
|
|
24,075
|
|
|
|
|
26,215
|
|
|
|
|
13,733
|
|
|
|
|
10,753
|
|
Net investment income
|
|
|
|
2,799
|
|
|
|
|
3,652
|
|
|
|
|
4,759
|
|
|
|
|
5,560
|
|
|
|
|
3,411
|
|
|
|
|
2,918
|
|
Net realized gains (losses)
|
|
|
|
156
|
|
|
|
|
(787
|
)
|
|
|
|
54
|
|
|
|
|
(1,921
|
)
|
|
|
|
(348
|
)
|
|
|
|
516
|
|
Net earned premium
|
|
|
|
83,417
|
|
|
|
|
82,350
|
|
|
|
|
108,116
|
|
|
|
|
112,774
|
|
|
|
|
68,219
|
|
|
|
|
64,906
|
|
Other income
|
|
|
|
120
|
|
|
|
|
711
|
|
|
|
|
971
|
|
|
|
|
178
|
|
|
|
|
28
|
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
154,175
|
|
|
|
|
138,554
|
|
|
|
|
186,113
|
|
|
|
|
167,085
|
|
|
|
|
95,729
|
|
|
|
|
87,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
|
27,086
|
|
|
|
|
25,010
|
|
|
|
|
32,566
|
|
|
|
|
29,854
|
|
|
|
|
20,324
|
|
|
|
|
21,224
|
|
Commissions
|
|
|
|
53,631
|
|
|
|
|
54,938
|
|
|
|
|
70,449
|
|
|
|
|
81,226
|
|
|
|
|
45,275
|
|
|
|
|
42,638
|
|
Personnel costs
|
|
|
|
27,939
|
|
|
|
|
22,610
|
|
|
|
|
31,365
|
|
|
|
|
21,742
|
|
|
|
|
10,722
|
|
|
|
|
9,409
|
|
Other operating expenses
|
|
|
|
17,527
|
|
|
|
|
16,967
|
|
|
|
|
22,291
|
|
|
|
|
12,225
|
|
|
|
|
8,508
|
|
|
|
|
7,118
|
|
Depreciation and amortization
|
|
|
|
3,336
|
|
|
|
|
2,520
|
|
|
|
|
3,507
|
|
|
|
|
2,629
|
|
|
|
|
1,292
|
|
|
|
|
221
|
|
Interest expense
|
|
|
|
6,122
|
|
|
|
|
5,852
|
|
|
|
|
7,800
|
|
|
|
|
7,255
|
|
|
|
|
4,130
|
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
|
135,641
|
|
|
|
|
127,897
|
|
|
|
|
167,978
|
|
|
|
|
154,931
|
|
|
|
|
90,251
|
|
|
|
|
81,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
|
18,534
|
|
|
|
|
10,657
|
|
|
|
|
18,135
|
|
|
|
|
12,154
|
|
|
|
|
5,478
|
|
|
|
|
5,832
|
|
Income taxes
|
|
|
|
6,872
|
|
|
|
|
4,031
|
|
|
|
|
6,551
|
|
|
|
|
4,208
|
|
|
|
|
1,761
|
|
|
|
|
1,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before non-controlling interest
|
|
|
|
11,662
|
|
|
|
|
6,626
|
|
|
|
|
11,584
|
|
|
|
|
7,946
|
|
|
|
|
3,717
|
|
|
|
|
3,849
|
|
Less: net income (loss) attributable to non-controlling interest
|
|
|
|
(31
|
)
|
|
|
|
46
|
|
|
|
|
26
|
|
|
|
|
(82
|
)
|
|
|
|
64
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
11,693
|
|
|
|
$
|
6,580
|
|
|
|
$
|
11,558
|
|
|
|
$
|
8,028
|
|
|
|
$
|
3,653
|
|
|
|
$
|
3,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$
|
3.90
|
|
|
|
$
|
2.26
|
|
|
|
$
|
3.94
|
|
|
|
$
|
2.90
|
|
|
|
$
|
1.32
|
|
|
|
$
|
1.00
|
|
Diluted
|
|
|
|
3.60
|
|
|
|
|
2.10
|
|
|
|
|
3.65
|
|
|
|
|
2.72
|
|
|
|
|
1.24
|
|
|
|
|
0.95
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
2,998,540
|
|
|
|
|
2,909,395
|
|
|
|
|
2,931,182
|
|
|
|
|
2,771,372
|
|
|
|
|
2,766,565
|
|
|
|
|
3,819,265
|
|
Diluted
|
|
|
|
3,248,982
|
|
|
|
|
3,128,876
|
|
|
|
|
3,170,653
|
|
|
|
|
2,956,211
|
|
|
|
|
2,955,381
|
|
|
|
|
4,028,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statement of cash flows data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
$
|
2,844
|
|
|
|
$
|
7,274
|
|
|
|
$
|
13,393
|
|
|
|
$
|
12,998
|
|
|
|
$
|
10,265
|
|
|
|
$
|
2,518
|
|
Investing activities
|
|
|
|
(29,780
|
)
|
|
|
|
(39,326
|
)
|
|
|
|
(26,532
|
)
|
|
|
|
(26,069
|
)
|
|
|
|
(10,297
|
)
|
|
|
|
22,424
|
|
Financing activities
|
|
|
|
14,839
|
|
|
|
|
31,573
|
|
|
|
|
20,997
|
|
|
|
|
(1,875
|
)
|
|
|
|
(571
|
)
|
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
|
$
|
83,417
|
|
|
|
$
|
82,350
|
|
|
|
$
|
108,116
|
|
|
|
$
|
112,774
|
|
|
|
$
|
68,219
|
|
|
|
$
|
64,906
|
|
Net losses and loss adjustment
expenses(1)
|
|
|
|
27,086
|
|
|
|
|
25,010
|
|
|
|
|
32,566
|
|
|
|
|
29,854
|
|
|
|
|
20,324
|
|
|
|
|
21,224
|
|
Commissions
|
|
|
|
53,631
|
|
|
|
|
54,938
|
|
|
|
|
70,449
|
|
|
|
|
81,226
|
|
|
|
|
45,275
|
|
|
|
|
42,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting
revenue(1)
|
|
|
$
|
2,700
|
|
|
|
$
|
2,402
|
|
|
|
$
|
5,101
|
|
|
|
$
|
1,694
|
|
|
|
$
|
2,620
|
|
|
|
$
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
(6,322
|
)
|
|
|
|
(1,508
|
)
|
|
|
|
(1,974
|
)
|
|
|
|
(1,227
|
)
|
|
|
|
(303
|
)
|
|
|
|
(433
|
)
|
EBITDA(2)
|
|
|
|
27,992
|
|
|
|
|
19,029
|
|
|
|
|
29,442
|
|
|
|
|
22,038
|
|
|
|
|
10,900
|
|
|
|
|
7,222
|
|
Adjusted
EBITDA(2)
|
|
|
|
29,909
|
|
|
|
|
20,679
|
|
|
|
|
31,519
|
|
|
|
|
24,076
|
|
|
|
|
13,825
|
|
|
|
|
8,966
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
|
Pro Forma
|
|
|
Actual
|
|
as
Adjusted(3)
|
|
|
(unaudited)
|
|
|
(in thousands)
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,843
|
|
|
$
|
17,960
|
|
Total assets
|
|
|
498,642
|
|
|
|
498,642
|
|
Notes payable
|
|
|
48,013
|
|
|
|
35,276
|
|
Preferred trust securities
|
|
|
35,000
|
|
|
|
35,000
|
|
Redeemable preferred stock
|
|
|
11,440
|
|
|
|
|
|
Total stockholders equity
|
|
|
94,881
|
|
|
|
119,531
|
|
11
|
|
(1)
|
We present net underwriting revenue in this prospectus to
provide investors with a supplemental measure of the
contribution to revenue from underwriting of credit insurance in
our Payment Protection segment. Please refer to Note 5 to
the Consolidated Financial Statements for a detailed
presentation of the elements of net earned premium and net
losses and loss adjustment expenses. Net losses and loss
adjustment expenses as presented above equals net losses and
loss adjustment expenses incurred as referenced in Note 5.
|
|
(2)
|
We present EBITDA and Adjusted EBITDA in this prospectus to
provide investors with a supplemental measure of our operating
performance and, in the case of Adjusted EBITDA, information
utilized in the calculation of the financial covenants under our
revolving credit facility and in the determination of
compensation. EBITDA, as used in this prospectus, is defined as
net income before interest expense, income taxes,
non-controlling interest and depreciation and amortization.
Adjusted EBITDA differs from the term EBITDA as it
is commonly used. Adjusted EBITDA, as used in this prospectus,
means Consolidated Adjusted EBITDA as that term is
defined under our revolving credit facility, which is generally
consolidated net income before consolidated interest expense,
consolidated amortization expense, consolidated depreciation
expense and consolidated tax expense, in each case as defined
more fully in the agreement governing our revolving credit
facility. The other items excluded in this calculation include,
but are not limited to, specified acquisition costs and unusual
or non-recurring charges. The calculation below does not give
effect to certain additional adjustments that are permitted
under our revolving credit facility which, if included, would
increase the amount reflected in this table.
|
In addition to the financial covenant requirements under our
revolving credit facility, management uses EBITDA and Adjusted
EBITDA as measures of operating performance for planning
purposes, including the preparation of budgets and projections,
the determination of bonus compensation for our executive
officers and the analysis of the allocation of resources and to
evaluate the effectiveness of business strategies. Further, we
believe EBITDA and Adjusted EBITDA are frequently used by
securities analysts, investors and other interested parties in
the evaluation of companies in industries similar to ours.
Adjusted EBITDA is also used by management to measure operating
performance and by investors to measure a companys ability
to service its debt and other cash needs. Management believes
the inclusion of the adjustments to EBITDA and Adjusted EBITDA
are appropriate to provide additional information to investors
about certain material non-cash items and about unusual items
that we do not expect to continue at the same level in the
future.
EBITDA and Adjusted EBITDA are not recognized terms under
accounting principles generally accepted in the United States,
or GAAP. Accordingly, they should not be used as an indicator
of, or alternative to, net income as a measure of operating
performance. Although we use EBITDA and Adjusted EBITDA as
measures to assess the operating performance of our business,
EBITDA and Adjusted EBITDA have significant limitations as
analytical tools because they exclude certain material costs.
For example, they do not include interest expense, which has
been a necessary element of our costs. Since we use capital
assets, depreciation expense is a necessary element of our costs
and ability to generate service revenues. In addition, the
omission of the substantial amortization expense associated with
our intangible assets further limits the usefulness of this
measure. EBITDA and Adjusted EBITDA also do not include the
payment of taxes, which is also a necessary element of our
operations. Because EBITDA and Adjusted EBITDA do not account
for these expenses, its utility as a measure of our operating
performance has material limitations. Due to these limitations,
management does not view EBITDA and Adjusted EBITDA in isolation
or as a primary performance measure and also uses other
measures, such as net income. Because the definitions of EBITDA
and Adjusted EBITDA (or similar measures) may vary among
companies and industries, they may not be comparable to other
similarly titled measures used by other companies.
footnotes continued on following page
12
The following table presents a reconciliation of net income to
EBITDA and Adjusted EBITDA for each of the periods presented on
an unaudited basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
June 20, 2007 to
|
|
|
|
January 1,
|
|
|
|
|
September 30,
|
|
|
|
Years Ended December 31,
|
|
|
|
December 31,
|
|
|
|
2007 to June 19,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share
data)
|
|
Net income
|
|
|
$
|
11,693
|
|
|
|
$
|
6,580
|
|
|
|
$
|
11,558
|
|
|
|
$
|
8,028
|
|
|
|
$
|
3,653
|
|
|
|
$
|
3,815
|
|
Interest expense
|
|
|
|
6,122
|
|
|
|
|
5,852
|
|
|
|
|
7,800
|
|
|
|
|
7,255
|
|
|
|
|
4,130
|
|
|
|
|
1,169
|
|
Depreciation and amortization
|
|
|
|
3,336
|
|
|
|
|
2,520
|
|
|
|
|
3,507
|
|
|
|
|
2,629
|
|
|
|
|
1,292
|
|
|
|
|
221
|
|
Income taxes
|
|
|
|
6,872
|
|
|
|
|
4,031
|
|
|
|
|
6,551
|
|
|
|
|
4,208
|
|
|
|
|
1,761
|
|
|
|
|
1,983
|
|
Non-controlling interest
|
|
|
|
(31
|
)
|
|
|
|
46
|
|
|
|
|
26
|
|
|
|
|
(82
|
)
|
|
|
|
64
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
27,992
|
|
|
|
|
19,029
|
|
|
|
|
29,442
|
|
|
|
|
22,038
|
|
|
|
|
10,900
|
|
|
|
|
7,222
|
|
Transaction
expenses(a)
|
|
|
|
389
|
|
|
|
|
1,650
|
|
|
|
|
2,077
|
|
|
|
|
2,038
|
|
|
|
|
2,289
|
|
|
|
|
|
|
Legacy
costs(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
636
|
|
|
|
|
1,744
|
|
Re-audit expenses
|
|
|
|
1,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
$
|
29,909
|
|
|
|
$
|
20,679
|
|
|
|
$
|
31,519
|
|
|
|
$
|
24,076
|
|
|
|
$
|
13,825
|
|
|
|
$
|
8,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents transaction costs associated with acquisitions.
|
|
(b)
|
Represents legacy costs that include compensation, insurance,
legal and other miscellaneous expenses associated with the
historical operation of our business prior to the Summit
Partners Transactions.
|
|
|
(3) |
Pro forma information gives effect to (i) the conversion of
our outstanding Class A common stock into common stock
prior to the consummation of this offering, (ii) a 5.25 for
1 stock split prior to the consummation of this offering and
(iii) the sale of shares of our common stock in this
offering by us at an assumed initial public offering price of
$11.00 per share after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, and
the application of the net proceeds from this offering as
described under Use of Proceeds and our increased
borrowings under our line of credit of approximately
$7.3 million.
|
13
RISK
FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the following risks, as well
as the other information contained in this prospectus, before
making an investment in our company. If any of the following
risks actually occur, our business, results of operations or
financial condition may be materially and adversely affected. In
such an event, the trading price of our common stock could
decline and you could lose part or all of your investment.
Risks
Related to Our Businesses and Industries
General
economic and financial market conditions may have a material
adverse effect on the business, results of operations, cash
flows and financial condition of all of our business
segments.
General economic and financial market conditions, including the
availability and cost of credit, the loss of consumer
confidence, reduction in consumer or business spending,
inflation, unemployment, energy costs and geopolitical issues,
have contributed to increased uncertainty and volatility as well
as diminished expectations for the U.S. economy and the
financial markets. These conditions could materially and
adversely affect each of our businesses. Adverse economic and
financial market conditions could result in:
|
|
|
|
|
a reduction in the demand for, and availability of, consumer
credit, which could result in reduced demand by consumers for
our Payment Protection products and our Payment Protection
clients opting to no longer make such products available;
|
|
|
|
higher than anticipated loss ratios on our Payment Protection
products due to rising unemployment or disability claims;
|
|
|
|
higher risk of increased fraudulent insurance claims;
|
|
|
|
individuals terminating loans or canceling credit insurance
policies, thereby reducing our revenues;
|
|
|
|
businesses reducing the amount of coverage under surplus lines
and specialty admitted insurance policies or allowing such
policies to lapse thereby reducing our premium or commission
income in our Wholesale Brokerage business;
|
|
|
|
a reduction in demand for new surplus lines and specialty
insurance policies from retail insurance brokers and agents or
retail insurance brokers and agents and insurance companies
ceasing to offer our surplus lines and specialty insurance
products and related services from our Wholesale Brokerage
business;
|
|
|
|
our clients being more likely to experience financial distress
or declare bankruptcy or liquidation, which could have an
adverse impact on demand for our services and products and the
remittance of premiums from such customers, as well as the
collection of receivables from such clients for items such as
unearned premiums, commissions or BPO-related accounts
receivable, which could make the collection of receivables from
our clients more difficult;
|
|
|
|
increased pricing sensitivity or reduced demand for our services
and products;
|
14
|
|
|
|
|
increased costs associated with, or the inability to obtain,
debt financing to fund acquisitions or the expansion of our
businesses; and
|
|
|
|
defaults in our fixed income investment portfolio or lower than
anticipated rates of return as a result of low interest rate
environments.
|
If we are unable to successfully anticipate changing economic or
financial market conditions, we may be unable to effectively
plan for or respond to such changes, and our business, results
of operations and financial condition could be materially and
adversely affected.
We
face significant competitive pressures in each of our
businesses, which could materially and adversely affect our
business, results of operations and financial
condition.
We face significant competition in each of our businesses.
Competition in our businesses is based on many factors,
including price, industry knowledge, quality of client service,
the effectiveness of our sales force, technology platforms and
processes, the security and integrity of our information
systems, the financial strength ratings of our insurance
subsidiaries, office locations, breadth of services and products
and brand recognition and reputation. Some competitors may offer
a broader array of services and products, may have a greater
diversity of distribution resources, may have better brand
recognition, may have lower cost structures or, with respect to
insurers, may have higher financial strength or claims paying
ratings. Some competitors also have larger client bases than we
do. In addition, new competitors could enter our markets in the
future. The competitive landscape for each of our businesses is
described below.
Payment Protection In our Payment
Protection business, we compete with insurance companies,
financial institutions and other insurance service providers.
The principal competitors for our Payment Protection business
include Aon Corporation, Assurant, Inc., Asurion Corporation and
smaller regional companies. As a result of state and federal
regulatory developments and changes in prior years, certain
financial institutions are able to offer debt cancellation plans
and are also able to affiliate with other insurance companies in
order to offer services similar to those in our Payment
Protection business. This has resulted in new competitors, some
of whom have significant financial resources, entering some of
our markets. As financial institutions gain experience with
payment protection programs, their reliance on our services and
products may diminish.
BPO Our BPO business competes with a
variety of companies, including large multinational firms that
provide consulting, technology
and/or
business process services, off-shore business process service
providers in low-cost locations like India, and in-house
captives of potential clients. Our principal business process
outsourcing competitors include Aon Corporation, Computer
Sciences Corporation, Direct Response Insurance Administration
Services, Inc., Marsh & McLennan Companies, Inc.,
Perot Systems Corporation (a subsidiary of Dell, Inc.) and
Unisys Corporation. The trend toward outsourcing and
technological changes may also result in new and different
competitors entering our markets. There could also be newer
competitors with strong competitive positions as a result of
consolidation of smaller competitors or of companies that each
provide different services or serve different industries.
Wholesale Brokerage Our Wholesale
Brokerage business competes for retail insurance clients with
numerous firms, including AmWINS Group, Inc., Arthur J.
Gallagher & Co., Brown & Brown, Inc. and The
Swett & Crawford Group, Inc. Many of our Wholesale
Brokerage competitors have relationships with insurance
companies or have a significant presence in niche insurance
markets that may give them an advantage over us. Because
relationships between insurance intermediaries and insurance
companies or clients are often local or regional in nature, this
potential competitive disadvantage is particularly pronounced
outside of California. This could also impact our ability to
compete effectively in any new states or regions that we enter.
A number of standard market insurance companies are engaged in
the sale of products that compete with those products we offer.
These carriers sell their products directly through retail
agents and brokers without the involvement of a wholesale
broker,
15
which may yield higher commissions to retail agents and brokers
and may impact our ability to compete.
We expect competition to intensify in each of our businesses.
Increased competition may result in lower prices and volumes,
higher personnel and sales and marketing costs, increased
technology expenditures and lower profitability. We may not be
able to supply clients with services that they deem superior and
at competitive prices and we may lose business to our
competitors. If we are unable to compete effectively in any of
our business segments, it would have a material adverse effect
on our business, results of operations and financial condition.
Our
results of operations may fluctuate significantly, which makes
our future results of operations difficult to predict. If our
results of operations fall below expectations, the price of our
common stock could decline.
Our annual and quarterly results of operations have fluctuated
in the past and may fluctuate significantly in the future due to
a variety of factors, many of which are beyond our control. In
addition, our expenses as a percentage of revenues may be
significantly different than our historical rates. As a result,
comparing our results of operations on a
period-to-period
basis may not be meaningful.
Factors that may cause our results of operations to fluctuate
from
period-to-period
include:
|
|
|
|
|
demand for our services and products;
|
|
|
|
the length of our sales cycle;
|
|
|
|
the amount of sales to new clients;
|
|
|
|
the timing of implementations of our services and products with
new clients;
|
|
|
|
pricing and availability of surplus lines and other specialty
insurance products coverages;
|
|
|
|
seasonality;
|
|
|
|
the timing of acquisitions;
|
|
|
|
competitive factors;
|
|
|
|
prevailing interest rates;
|
|
|
|
pricing changes by us or our competitors;
|
|
|
|
transaction volumes in our clients businesses;
|
|
|
|
the introduction of new services and products by us and our
competitors;
|
|
|
|
changes in regulatory and accounting standards; and
|
|
|
|
our ability to control costs.
|
In addition, our Payment Protection revenues can vary depending
on the level of consumer activity and the success of our clients
in selling payment protection products. In our Wholesale
Brokerage business,
16
our commission income can vary due to the timing of policy
renewals, as well as the timing and amount of the receipt of
profit commission payments and the net effect of new and lost
business production. We do not control the factors that cause
these variations. Specifically, customers demand for
insurance products can influence the timing of renewals, new
business, lost business (which includes policies that are not
renewed) and cancellations. In addition, we rely on retail
insurance brokers and agents and insurance companies for the
payment of certain commissions. Because these payments are
processed internally by these companies, we may not receive a
payment that is otherwise expected from a particular firm in one
period until after the end of that period, which can adversely
affect our ability to budget for such period.
Our
results of operations could be materially and adversely affected
if we fail to retain our existing clients, cannot sell
additional services and products to our existing clients, do not
introduce new or enhanced services and products or are not able
to attract and retain new clients.
Our revenue and revenue growth are dependent on our ability to
retain clients, to sell them additional services and products,
to introduce new services and products and to attract new
clients in each of our businesses. Our ability to increase
revenues will depend on a variety of factors, including:
|
|
|
|
|
the quality and perceived value of our product and service
offerings by existing and new clients;
|
|
|
|
the effectiveness of our sales and marketing efforts;
|
|
|
|
the speed with which our Wholesale Brokerage business can
respond to requests for price quotes from retail insurance
agents and brokers, and the availability of competitive services
and products from our carriers;
|
|
|
|
the successful installation and implementation of our services
and products for new and existing Payment Protection and BPO
clients;
|
|
|
|
availability of capital to complete investments in new or
complementary products, services and technologies;
|
|
|
|
the availability of adequate reinsurance for us and our clients,
including the ability of our clients to form, capitalize and
operate captive reinsurance companies;
|
|
|
|
our ability to find suitable acquisition candidates,
successfully complete such acquisitions and effectively
integrate such acquisitions;
|
|
|
|
our ability to integrate technology into our services and
products to avoid obsolescence and provide scalability;
|
|
|
|
the reliability, execution and accuracy of our services,
particularly our BPO services; and
|
|
|
|
client willingness to accept any price increases for our
services and products.
|
In addition, we are subject to risks of losing clients due to
consolidation in each of the markets we serve. Our inability to
retain existing clients, sell additional services and products,
or successfully develop and implement new and enhanced services
and products and attract new clients and, accordingly, increase
our revenues could have a material adverse effect on our results
of operations.
17
We
typically face a long selling cycle to secure new clients in
each of our businesses as well as long implementation periods
that require significant resource commitments, which result in a
long lead time before we receive revenues from new client
relationships.
The industries in which we compete generally consist of mature
businesses and markets and the companies that participate in
these industries have well-established business operations,
systems and relationships. Accordingly, each of our businesses
typically faces a long selling cycle to secure a new client.
Even if we are successful in obtaining a new client engagement,
that is generally followed by a long implementation period in
which the services are planned in detail and we demonstrate to
the client that we can successfully integrate our processes and
resources with their operations. We also typically negotiate and
enter into a contractual relationship with the new client during
this period. There is then a long implementation period in order
to commence providing the services.
We typically incur significant business development expenses
during the selling cycle. We may not succeed in winning a new
clients business, in which case we receive no revenues and
may receive no reimbursement for such expenses. Even if we
succeed in developing a relationship with a potential client and
begin to plan the services in detail, such potential client may
choose a competitor or decide to retain the work in-house prior
to the time a final contract is signed. If we enter into a
contract with a client, we will typically receive no revenues
until implementation actually begins. In addition, a significant
portion of our revenue is based upon the success of our
clients marketing programs, which may not generate the
transaction volume we anticipate. Our clients may also
experience delays in obtaining internal approvals or delays
associated with technology or system implementations, thereby
further lengthening the implementation cycle. If we are not
successful in obtaining contractual commitments after the
selling cycle, in maintaining contractual commitments after the
implementation cycle or in maintaining or reducing the duration
of unprofitable initial periods in our contracts, it may have a
material adverse effect on our business, results of operations
and financial condition. Furthermore, the time and effort
required to complete the implementation phases of new contracts
makes it difficult to accurately predict the timing of revenues
from new clients as well as our costs.
Acquisitions
are a significant part of our growth strategy and we may not be
successful in identifying suitable acquisition candidates,
completing such acquisitions or integrating the acquired
businesses, which could have a material adverse effect on our
business, results of operations, financial condition or
growth.
Historically, acquisitions have played a significant role in our
expansion into new businesses and in the growth of some of our
businesses. Acquiring complementary businesses is a significant
component of our growth strategy. Accordingly, we frequently
evaluate possible acquisition transactions for our business.
However, we may not be able to identify suitable acquisitions,
and such transactions may not be financed and completed on
acceptable terms. Furthermore, any future acquisitions may not
be successful. In addition, we may be competing with larger
competitors with substantially greater resources for acquisition
targets. Any deficiencies in the process of integrating
companies we may acquire could have a material adverse effect on
our results of operations and financial condition. Acquisitions
entail a number of risks including, among other things:
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failure to achieve anticipated revenues, earnings or cash flow;
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increased expenses;
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diversion of management time and attention;
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failure to retain customers or personnel;
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difficulties in realizing projected efficiencies,
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ability to realize synergies and cost savings;
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difficulties in integrating systems and personnel; and
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inaccurate assessment of liabilities.
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Our failure to adequately address these acquisition risks could
have a material adverse effect on our business, results of
operations, financial condition and growth. Future acquisitions
may reduce our cash resources available to fund our operations
and capital expenditures and could result in increased
amortization expense related to any intangible assets acquired,
potentially dilutive issuances of equity securities or the
incurrence of debt, which could increase our interest expense.
Our
business, results of operations, financial condition or
liquidity may be materially and adversely affected by errors and
omissions and the outcome of certain actual and potential
claims, lawsuits and proceedings.
We are subject to various actual and potential claims, lawsuits
and other proceedings relating principally to alleged errors and
omissions in connection with our conduct in each of our
businesses, including the handling and adjudicating of claims
and the placement of insurance. Because such placement of
insurance and handling claims can involve substantial amounts of
money, clients may assert errors and omissions claims against us
alleging potential liability for all or part of the amounts in
question. Claimants may seek large damage awards, and these
claims may involve potentially significant legal costs. Such
claims, lawsuits and other proceedings could, for example,
include claims for damages based on allegations that our
employees or
sub-agents
improperly failed to procure coverage, report claims on behalf
of clients, provide insurance companies with complete and
accurate information relating to the risks being insured or
appropriately apply funds that we hold for our clients on a
fiduciary basis.
While we would expect most of the errors and omissions claims
made against us (subject to our self-insured deductibles) to be
covered by our professional indemnity insurance, our results of
operations, financial condition and liquidity may be materially
and adversely affected if, in the future, our insurance coverage
proves to be inadequate or unavailable, or if there is an
increase in liabilities for which we self-insure. Our ability to
obtain professional indemnity insurance in the amounts and with
the deductibles we desire in the future may be materially and
adversely impacted by general developments in the market for
such insurance or our own claims experience. In addition,
claims, lawsuits and other proceedings may harm our reputation
or divert management resources away from operating our business.
We may
lose clients or business as a result of consolidation within the
financial services industry.
There has been considerable consolidation in the financial
services industry, driven primarily by the acquisition of small
and mid-size organizations by larger entities. We expect this
trend to continue. As a result, we may lose business or suffer
decreased revenues from retail insurance brokerage firms that
are acquired by other firms. Similarly, we may lose business or
suffer decreased revenues if one or more of our Payment
Protection clients or distributors consolidate or align
themselves with other companies. To date, our business has not
been materially affected by consolidation. However, we may be
affected by industry consolidation that occurs in the future,
particularly if any of our significant clients are acquired by
organizations that already possess the operations, services and
products that we provide.
19
Our
ability to implement and execute our strategic plans may not be
successful and, accordingly, we may not be successful in
achieving our strategic goals, which may materially and
adversely affect our business.
We may not be successful in developing and implementing our
strategic plans for our businesses or the operational plans that
have been or need to be developed to implement these strategic
plans. If the development or implementation of such plans is not
successful, we may not produce the revenue, margins, earnings or
synergies that we need to be successful. We may also face delays
or difficulties in implementing product, process and system
improvements, which could adversely affect the timing or
effectiveness of margin improvement efforts in our businesses
and our ability to successfully compete in the markets we serve.
The execution of our strategic and operating plans will, to some
extent, also be dependent on external factors that we cannot
control. In addition, these strategic and operational plans need
to continue to be assessed and reassessed to meet the challenges
and needs of our businesses in order for us to remain
competitive. The failure to implement and execute our strategic
and operating plans in a timely manner or at all, realize the
cost savings or other benefits or improvements associated with
such plans, have financial resources to fund the costs
associated with such plans or incur costs in excess of
anticipated amounts, or sufficiently assess and reassess these
plans could have a material and adverse effect on our business
or results of operations.
We may
not effectively manage our growth, which could materially harm
our business.
The growth of our business has placed and may continue to place
significant demands on our management, personnel, systems and
resources. To manage our growth, we must continue to improve our
operational and financial systems and managerial controls and
procedures, and we will need to continue to expand, train and
manage our personnel. We must also maintain close coordination
among our technology, compliance, risk management, accounting,
finance, marketing and sales organizations. We may not manage
our growth effectively, and if we fail to do so, our business
could be materially and adversely harmed.
If we continue to grow, we may be required to increase our
investment in facilities, personnel and financial and management
systems and controls. Continued growth may also require
expansion of our procedures for monitoring and assuring our
compliance with applicable regulations and that we recruit,
integrate, train and manage a growing employee base. The
expansion of our existing businesses, our expansion into new
businesses and the resulting growth of our employee base
increase our need for internal audit and monitoring processes
that are more extensive and broader in scope than those we have
historically required. We may not be successful in implementing
all of the processes that are necessary. Further, unless our
growth results in an increase in our revenues that is
proportionate to the increase in our costs associated with this
growth, our operating margins and profitability will be
materially and adversely affected.
As a
holding company, we depend on the ability of our subsidiaries to
transfer funds to us to pay dividends and to meet our
obligations.
We act as a holding company for our subsidiaries and do not have
any significant operations of our own. Dividends from our
subsidiaries are our principal sources of cash to meet our
obligations and pay dividends, if any, on our common stock.
These obligations include our operating expenses and interest
and principal payments on our current and any future borrowings.
The agreements governing our revolving credit facilities
restrict our subsidiaries ability to pay dividends or
otherwise transfer cash to us. Under the agreement with SunTrust
Bank and CB&T, our subsidiaries are permitted to make
distributions to us if no default or event of default has
occurred and is continuing at the time of such distribution.
Under our agreement with Wells Fargo, our restricted subsidiary
is permitted to make quarterly distributions to us if
(i) both prior to and after such payment no default or
event of default
20
has occurred or is continuing or would result from such payment
and (ii) such subsidiary has provided the lender under such
facility its financial statements for the most recently
completed quarter and certified to the lender that condition
(i) above is satisfied. If the cash we receive from our
subsidiaries pursuant to dividends or otherwise is insufficient
for us to fund any of these obligations, or if a subsidiary is
unable to pay dividends to us, we may be required to raise cash
through the incurrence of debt, the issuance of additional
equity or the sale of assets.
The payment of dividends and other distributions to us by each
of the regulated insurance company subsidiaries in our Payment
Protection segment is regulated by insurance laws and
regulations of the states in which they operate. In general,
dividends in excess of prescribed limits are deemed
extraordinary and require insurance regulatory
approval. Ordinary dividends, for which no regulatory approval
is generally required, are limited to amounts determined by a
formula, which varies by state. Some states have an additional
stipulation that dividends may only be paid out of earned
surplus. States also regulate transactions between our insurance
company subsidiaries and our other subsidiaries, such as those
relating to the shared services, and in some instances, require
prior approval of such transactions within the holding company
structure. If insurance regulators determine that payment of an
ordinary dividend or any other payments by our insurance
subsidiaries to us (such as payments for employee or other
services) would be adverse to policyholders or creditors, the
regulators may block or otherwise restrict such payments that
would otherwise be permitted without prior approval. In
addition, there could be future regulatory actions restricting
the ability of our insurance subsidiaries to pay dividends or
share services.
Our
success is dependent upon the retention and acquisition of
talented people and the skills and abilities of our management
team and key personnel.
Our business depends on the efforts, abilities and expertise of
our senior executives, particularly our Chairman, President and
Chief Executive Officer, Richard S. Kahlbaugh.
Mr. Kahlbaugh and our other senior executives are important
to our success because they have been instrumental in setting
our strategic direction, operating our business, identifying,
recruiting and training key personnel and identifying business
opportunities. The loss of one or more of these key individuals
could impair our business and development until qualified
replacements are found. We may not be able to replace these
individuals quickly or with persons of equal experience and
capabilities. Although we have employment agreements with
certain of these individuals, we cannot prevent them from
terminating their employment with us. We do not maintain key man
life insurance policies on any of our executive officers except
for Mr. Kahlbaugh. If we are unable to attract and retain
talented employees, it could have a material adverse effect on
our business, operating results and financial condition.
We may
need to raise additional capital in the future, but there is no
assurance that such capital will be available on a timely basis,
on acceptable terms or at all.
We may need to raise additional funds in order to grow our
businesses or fund our strategy or acquisitions. Additional
financing may not be available in sufficient amounts or on terms
acceptable to us and may be dilutive to existing stockholders if
raised through additional equity offerings. Additionally, any
securities issued to raise such funds may have rights,
preferences and privileges senior to those of our existing
stockholders. If adequate funds are not available on a timely
basis or on acceptable terms, our ability to expand, develop or
enhance our services and products, enter new markets, consummate
acquisitions or respond to competitive pressures could be
materially limited.
21
Risks
Related to Our Payment Protection Business
Our
Payment Protection business relies on independent financial
institutions, lenders and retailers to distribute its services
and products, and the loss of these distribution sources, or the
failure of our distribution sources to sell our Payment
Protection products could materially and adversely affect our
business and results of operations.
We distribute our Payment Protection products through financial
institutions, lenders and retailers. Our contracts with these
clients are typically not exclusive and many of these clients
offer payment protection services and products of our
competitors. Our relationships with these clients can be
cancelled on relatively short notice. In addition, the
distributors typically do not have any minimum performance or
sales requirements and our Payment Protection revenue is
dependent on the level of business conducted by the distributor
as well as the effectiveness of their sales efforts for our
Payment Protection products, each of which is beyond our
control. The impairment of our distribution relationships, the
loss of a significant number of our distribution relationships,
the failure to establish new distribution relationships, the
increase in sales of competitors services and products by
these distributors or the decline in their overall business
activity or the effectiveness of their sales of our Payment
Protection products could materially reduce our Payment
Protection sales and revenues. Also, the growth of our Payment
Protection business is dependent in part on our ability to
identify, attract and retain new distribution relationships and
successfully implement our information systems with those of our
new distributors.
Reinsurance
may not be available or adequate to protect us against losses,
and we are subject to the credit risk of
reinsurers.
As part of our overall risk and capacity management strategy, we
purchase reinsurance for a substantial portion of the risks
underwritten by our Payment Protection business through captive
reinsurance companies owned by our Payment Protection clients as
well as third party reinsurance companies. Market conditions
beyond our control determine the availability and cost of the
reinsurance protection we seek to renew or purchase. Our clients
may face difficulties forming, capitalizing and operating
captive reinsurance companies, which could impact their ability
to reinsure future business that we typically cede to them.
States also could impose restrictions on these reinsurance
arrangements, such as requiring the insurance company subsidiary
to retain a minimum amount of underwriting risk, which could
affect our profitability and results of operations. Reinsurance
for certain types of catastrophes generally could become
unavailable or prohibitively expensive for some of our
businesses. Such changes could substantially increase our
exposure to the risk of significant losses from natural or
man-made catastrophes and could hinder our ability to write
future business.
Although the reinsurer is liable to the respective insurance
subsidiary to the extent of the ceded reinsurance, the insurance
company remains liable to the insured as the direct insurer on
all risks reinsured. Ceded reinsurance arrangements, therefore,
do not eliminate our insurance company obligation to pay claims.
While the captive reinsurance companies owned by our clients are
generally required to maintain trust accounts with sufficient
assets to cover the reinsurance liabilities and we manage these
trust accounts on behalf of these reinsurance companies, we are
subject to credit risk with respect to our ability to recover
amounts due from reinsurers. The inability to collect amounts
due from reinsurers could have a material adverse effect on our
results of operations and our financial position.
Our reinsurance facilities are generally subject to annual
renewal. We may not be able to maintain our current reinsurance
facilities and our clients may not be able to continue to
operate their captive reinsurance companies. As a result, even
where highly desirable or necessary, we may not be able to
obtain other reinsurance facilities in adequate amounts and at
favorable rates. If we are unable to renew our expiring
facilities or to obtain or structure new reinsurance facilities,
either our net exposures would
22
increase or, if we are unwilling to bear an increase in net
exposures, we may have to reduce the level of our underwriting
commitments. Either of these potential developments could have a
material adverse effect on our results of operations and
financial condition.
Due to
the structure of some of our commissions, we are exposed to
risks related to the creditworthiness of some of our
agents.
We are subject to the credit risk of some of the agents with
which we contract within our Payment Protection business. We
typically advance agents commissions as part of our
product offerings. These advances are a percentage of the
premium charged. If we over-advance such commissions to agents,
they may not be able to fulfill their payback obligations, and
it could have a material adverse effect on our results of
operations and financial condition.
A
downgrade in the ratings of our insurer subsidiaries may
materially and adversely affect relationships with clients and
adversely affect our results of operations.
Claims paying ability and financial strength ratings are each a
factor in establishing the competitive position of our insurance
company subsidiaries. A ratings downgrade, or the potential for
such a downgrade, could, among other things, materially and
adversely affect relationships with clients, brokers and other
distributors of our services and products, thereby negatively
impacting our results of operations, and materially and
adversely affect our ability to compete in our markets. Rating
agencies can be expected to continue to monitor our financial
strength and claims paying ability, and no assurances can be
given that future ratings downgrades will not occur, whether due
to changes in our performance, changes in rating agencies
industry views or ratings methodologies, or a combination of
such factors.
Our
actual claims losses may exceed our reserves for claims, which
may require us to establish additional reserves that may
materially and adversely reduce our business results of
operations and financial condition.
We maintain reserves to cover our estimated ultimate exposure
for claims with respect to reported claims and incurred but not
reported claims as of the end of each accounting period.
Reserves, whether calculated under accounting principles
generally accepted in the United States or statutory accounting
principles, do not represent an exact calculation of exposure.
Instead, they represent our best estimates, generally involving
actuarial projections, of the ultimate settlement and
administration costs for a claim or group of claims, based on
our assessment of facts and circumstances known at the time of
calculation. The adequacy of reserves will be impacted by future
trends in claims severity, frequency, judicial theories of
liability and other factors. These variables are affected by
external factors such as changes in the economic cycle,
unemployment, changes in the social perception of the value of
work, emerging medical perceptions regarding physiological or
psychological causes of disability, emerging health issues, new
methods of treatment or accommodation, inflation, judicial
trends, legislative changes, as well as changes in claims
handling procedures. Many of these items are not directly
quantifiable, particularly on a prospective basis. Reserve
estimates are refined as experience develops. Adjustments to
reserves, both positive and negative, are reflected in the
statement of income of the period in which such estimates are
updated. Because establishment of reserves is an inherently
uncertain process involving estimates of future losses, there
can be no certainty that ultimate losses will not exceed
existing claims reserves. In general, future loss development
could require reserves to be increased, which could have a
material adverse effect on our earnings in the periods in which
such increases were made.
23
Our
investment portfolio is subject to several risks that may
diminish the value of our invested assets and cash and may
materially and adversely affect our business and
profitability.
Investment returns are an important part of our overall
profitability and significant interest rate fluctuations, or
prolonged periods of low interest rates, could impair our
profitability. Interest rates are highly sensitive to many
factors, including governmental monetary policies, domestic and
international economic and political conditions and other
factors beyond our control. We have a significant portion of our
investments in cash and highly liquid short-term investments.
Accordingly, during prolonged periods of declining or low market
interest rates, such as those we have been experiencing since
2008, the interest we receive on such investments decreases and
affects our profitability. Fixed maturity and short-term
investments represented 97.9% of the fair value of our total
investments as of September 30, 2010 and December 31,
2009. In addition, certain factors affecting our business, such
as volatility of claims experience, could force us to liquidate
securities prior to maturity, causing us to incur capital
losses. If we do not structure our investment portfolio so that
it is appropriately matched with our insurance liabilities, we
may be forced to liquidate investments prior to maturity at a
significant loss to cover such liabilities.
The fair market value of the fixed maturity securities in our
portfolio and the investment income from these securities
fluctuate depending on general economic and market conditions.
Because all of our fixed maturity securities are classified as
available for sale, changes in the market value of these
securities are reflected on our balance sheet. The fair market
value generally increases or decreases in an inverse
relationship with fluctuations in interest rates, while net
investment income realized by us from future investments in
fixed maturity securities will generally increase or decrease
with interest rates. In addition, actual net investment income
and/or cash
flows from investments that carry prepayment risk may differ
from those anticipated at the time of investment as a result of
interest rate fluctuations.
We employ asset/liability management strategies to reduce the
adverse effects of interest rate volatility and to increase the
likelihood that cash flows are available to pay claims as they
become due. Our asset/liability management strategies may fail
to eliminate or reduce the adverse effects of interest rate
volatility, and significant fluctuations in the level of
interest rates may therefore have a material adverse effect on
our results of operations and financial condition.
We are subject to credit risk in our investment portfolio,
primarily from our investments in corporate bonds and municipal
bonds. Defaults by third parties in the payment or performance
of their obligations could reduce our investment income and
realized investment gains or result in the recognition of
investment losses. The value of our investments may be
materially and adversely affected by increases in interest
rates, downgrades in the corporate bonds included in the
portfolio and by other factors that may result in the
recognition of
other-than-temporary
impairments. Each of these events may cause us to reduce the
carrying value of our investment portfolio.
Further, the value of any particular fixed maturity security is
subject to impairment based on the creditworthiness of a given
issuer. As of September 30, 2010 and December 31,
2009, fixed maturity securities represented 71.6% and 61.1%,
respectively, of the fair value of our total invested assets and
cash. Our fixed maturity portfolio also includes below
investment grade securities (rated BB or lower by
nationally recognized securities rating organizations). These
investments comprise approximately 0% and 4.0%, respectively, of
the fair value of our total investments as of September 30,
2010 and December 31, 2009 and generally provide higher
expected returns, but present greater risk and can be less
liquid than investment grade securities. A significant increase
in defaults and impairments on our fixed maturity investment
portfolio could have a material adverse effect on our results of
operations and financial condition.
24
Risks
Related to Our BPO Business
A
significant portion of our BPO revenues are attributable to one
client, and any loss of business from, or change in our
relationship with this client could materially and adversely
affect our business, results of operations and financial
condition.
We have derived and are likely to continue to derive a
significant portion of our BPO revenues from a limited number of
clients. Specifically, in our BPO business, services provided to
National Union Fire Insurance Company of Pittsburgh, PA (NUFIC)
accounted for 65.9%, 56.8%, 52.4% and 47.8% of our BPO revenues
for the nine months ended September 30, 2010 and the years
ended December 31, 2009, 2008 and 2007, respectively.
The loss of business from any of our significant clients,
particularly NUFIC, could have a material adverse effect on our
business, results of operations and financial condition.
The
profitability of our BPO business will suffer if we are not able
to price our outsourcing services appropriately, maintain asset
utilization levels and control our costs.
The profitability of our BPO business is largely a function of
the efficiency with which we utilize our assets and the pricing
that we are able to obtain for our services. Our utilization
rates are affected by a number of factors, including hiring and
assimilating new employees, forecasting demand for our services
and our need to devote time and resources to training,
professional development and other typically non-chargeable
activities. The prices we are able to charge for our services
are affected by a number of factors, including our clients
perceptions of our ability to add value through our services,
competition, the introduction of new services or products by us
or our competitors and general economic conditions. Our ability
to accurately estimate, attain and sustain revenues over
increasingly longer contract periods could negatively impact our
margins and cash flows. Therefore, if we are unable to price
appropriately or manage our asset utilization levels, there
could be a material adverse effect on our business, results of
operations and financial condition. The profitability of our BPO
business is also a function of our ability to control our costs
and improve our efficiency. As we increase the number of our
employees and grow our business, we may not be able to manage
the significantly larger workforce that may result and our
profitability may not improve.
We
enter into fixed-term contracts and
per-unit
priced contracts with our BPO clients, and our failure to
correctly price these contracts may negatively affect our
profitability.
The pricing of our services is usually included in contracts
entered into with our clients, many of which are for terms of
between one and three years. In certain cases, we have committed
to pricing over this period with only limited sharing of risk
regarding inflation. If we fail to estimate accurately future
wage inflation rates or our costs, or if we fail to accurately
estimate the productivity benefits we can achieve under a
contract, it could have a material adverse effect on our
business, results of operations and financial condition.
Some
of our BPO contracts contain provisions which, if triggered,
could result in the payment of penalties or lower future
revenues and could materially and adversely affect our business,
results of operations and financial condition.
Many of our BPO contracts contain service level and performance
provisions, including standards relating to the quality of our
services, that would provide our clients with the right to
terminate their contract if we do not meet pre-agreed service
level requirements and in the case of our contract with NUFIC,
require us to pay penalties. Our contract with NUFIC also
provides that, during the term of the contract and for
18 months thereafter, we may not develop or service
products for NUFICs competitors that are substantially
similar to those we administer on behalf of NUFIC. Failure to
meet these
25
requirements could result in the payment of significant
penalties by us to our clients which, in turn, could have a
material adverse effect on our business, results of operations
and financial condition.
Risks
Related to our Wholesale Brokerage Business
We may
not be able to accurately forecast our commission revenues
because our commissions depend on premiums charged by insurance
companies, which historically have varied and, as a result, have
been difficult to predict.
Our Wholesale Brokerage business derives revenue principally
from commissions paid by insurance companies, brokers and
agents. Commissions are based upon a percentage of premiums paid
by customers for insurance products. The amount of such
commissions is therefore highly dependent on premium rates
charged by insurance companies. We do not determine insurance
premium rates. Premium rates are determined by insurance
companies based on a fluctuating market and in many cases are
regulated by the states in which they operate. We have generally
encountered declining rates for property and casualty insurance
since late 2006.
Premium pricing within the commercial property and casualty
insurance market in which we operate historically has been
cyclical based on the underwriting capacity of the insurance
carriers operating in this market and has been impacted by
general economic conditions. In a period of decreasing insurance
capacity, insurance carriers typically raise premium rates. This
type of market frequently is referred to as a hard
market. In a period of increasing insurance capacity, insurance
carriers tend to reduce premium rates. This type of market
frequently is referred to as a soft market, which
the commercial P&C market has been experiencing since 2006.
Because our commission rates usually are calculated as a
percentage of the gross premium charged for the insurance
products that we place, our revenues are affected by the pricing
cycle of the market and the amount of risk that is insured.
General economic conditions may impact the amount of risk that
is insured by companies by affecting the value of the insured
properties, the size of company workforces and the willingness
of companies to self-insure certain risks to reduce insurance
expenses. The frequency and severity of natural disasters and
other catastrophic events can affect the timing, duration and
extent of industry cycles for many of the product lines we
distribute. It is very difficult to predict the severity, timing
or duration of these cycles. The cyclical nature of premium
pricing in the commercial property and casualty insurance market
may make our results of operations volatile and unpredictable.
To the extent that an economic downturn and/or soft
market persist for an extended period of time, our wholesale
brokerage commissions and fees, financial condition and results
of operations may be materially and adversely affected.
We may
experience reductions in the commission revenues we receive from
risk-bearing insurance companies as these insurance companies
seek to reduce their expenses by reducing commission rates
payable to non-affiliated brokers or agents such as us, which
may significantly affect the profitability of our Wholesale
Brokerage business.
As traditional risk-bearing insurance companies continue to
outsource the production of premium revenues to non-affiliated
brokers or agents such as us, those insurance companies may seek
to reduce further their expenses by reducing the commission
rates payable to those insurance agents or brokers. The
reduction of these commission rates, along with general
volatility
and/or
declines in premiums, may significantly affect the profitability
of our Wholesale Brokerage business. Because we do not determine
the timing or extent of premium pricing changes, we may not be
able to accurately forecast our commission revenues, including
whether they will significantly decline. As a result, we may
have to adjust our budgets to account for unexpected changes in
revenues, and any decreases in premium rates may have a material
adverse effect on our results of operations.
26
The
loss of the services of any of our highly qualified brokers
could harm our business and operating results.
Our future performance depends on our ability to recruit and
retain highly qualified brokers, including brokers who work in
the businesses that we have acquired or may acquire in the
future. Competition for productive brokers is intense, and our
inability to recruit or retain these brokers could harm our
business and operating results. While many of our senior brokers
own an equity interest in us and many have entered into
employment agreements with us, these brokers may not serve the
term of their employment agreements or renew their employment
agreements upon expiration. Moreover, any of the brokers who
leave our firm may not comply with the provisions of their
employment agreements that preclude them from competing with us
or soliciting our customers and employees, or these provisions
may not be enforceable under applicable law or sufficient to
protect us from the loss of any business. In addition, we do not
have employment, non-competition or non-solicitation agreements
with all of our brokers. We may not be able to retain or replace
the business generated by a broker who leaves our firm or
replace that broker with an equally qualified broker who is
acceptable to our clients.
Because
our Wholesale Brokerage business is highly concentrated in
California, adverse economic conditions or regulatory changes in
that state could materially and adversely affect our financial
condition.
A significant portion of our Wholesale Brokerage business is
concentrated in California. For the nine months ended
September 30, 2010 and the year ended December 31,
2009, $13.0 million and $15.9 million, respectively,
or 73.0% and 70.5%, respectively, of Bliss &
Glennons wholesale brokerage commissions and fees that are
attributable to a specific office were generated by its
California offices. We believe the regulatory environment for
insurance intermediaries in these states currently is no more
restrictive than in other states. The insurance business is a
state-regulated industry, and therefore, state legislatures may
enact laws, and state insurance regulators may adopt
regulations, that adversely affect the profitability of
insurance industries in their states. Because our Wholesale
Brokerage business is concentrated in a few states, we face
greater exposure to unfavorable changes in regulatory conditions
in those states than insurance intermediaries whose operations
are more diversified through a greater number of states. In
addition, the occurrence of adverse economic conditions, natural
or other disasters, or other circumstances specific to or
otherwise significantly impacting these states could have a
material adverse effect on our financial condition, results of
operations and cash flows.
If
insurance carriers begin to transact business without relying on
wholesale insurance brokers, our business, results of
operations, financial condition and cash flows could
suffer.
Our Wholesale Brokerage business acts as an intermediary between
retail agents and insurance carriers that, in some cases, will
not transact business directly with retail insurance brokers and
agents. If insurance carriers change the way they conduct
business and begin to transact business with retail agents
without including us or if retail agents are enabled to transact
business directly with insurance carriers as a result of changes
in the surplus lines and specialty insurance markets,
technological advancements or other factors, our role in the
distribution of surplus lines and specialty insurance products
could be eliminated or substantially reduced, and our business,
results of operations, financial condition and cash flows could
suffer.
Our
growth strategy may involve opening or acquiring new offices and
will involve hiring new brokers and underwriters for our
Wholesale Brokerage business, which will require substantial
investment by us and may materially and adversely affect our
results of operations and cash flows in a particular
period.
Our ability to grow our Wholesale Brokerage business organically
depends in part on our ability to open or acquire new offices
and recruit new brokers and underwriters. We may not be
successful in any
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efforts to open new offices or hire new brokers or underwriters.
The costs of opening a new office and hiring the necessary
personnel to staff the office can be substantial, and we often
are required to commit to multi-year, noncancelable lease
agreements. It has been our experience that our new Wholesale
Brokerage offices may not achieve profitability on a stand-alone
basis until they have been in operation for at least three
years. In addition, we often hire new brokers and underwriters
with the expectation that they will not become profitable until
12 months after they are hired. The cost of investing in
new offices, brokers and underwriters may have a material
adverse effect on our results of operations and cash flows in
future periods. Moreover, we may not be able to recover our
investments or these offices, brokers and underwriters may not
achieve profitability.
Our
financial results may be materially and adversely affected by
the occurrence of catastrophes.
Portions of our Wholesale Brokerage business involve the
placement of insurance policies that cover losses from
unpredictable events such as hurricanes, windstorms, hailstorms,
earthquakes, fires, industrial explosions, freezes, riots,
floods and other man-made or natural disasters, including acts
of terrorism. The incidence and severity of these catastrophes
in any given period are inherently unpredictable, and climate
change could further exacerbate the severity and frequency of
weather-related events. We are generally eligible to earn profit
commissions, which are commissions we receive from carriers
based upon the ultimate profitability of the business that we
place with those carriers. The occurrence and severity of
catastrophes could impair the amount of profit commissions that
we receive in the future which could have a material adverse
effect on our results of operations and financial condition.
We are
subject to risks related to our profit commission arrangements
and other compensation arrangements.
We derive a portion of our Wholesale Brokerage revenues from
profit commissions based on the profitability of the insurance
business we place with a carrier. Due to the inherent
uncertainty of loss in our industry and changes in underwriting
criteria due in part to the high loss ratios experienced by some
carriers, we cannot predict the receipt of these profit
commissions and the amount of such profit commissions may be
less than we anticipated. Because profit commissions affect our
revenues, any decrease in such amounts could have a material
adverse effect on our results of operations and financial
condition.
In addition, other companies have been the subject of
investigations regarding profit commission arrangements by
various governmental authorities within the past several years.
Some of these investigations have focused on whether retail
insurance brokers have adequately disclosed to their customers
the receipt of profit commissions that are paid by insurance
carriers to brokers based on the volume of business placed by
the broker with the insurance carrier and other factors. We have
not been subject to any investigations that are focused on our
disclosure of profit commissions. The legislatures of various
states may adopt new laws addressing profit commission
arrangements, including laws limiting or prohibiting such
arrangements, and adding new or different disclosure of such
arrangements to insureds. Various state departments of insurance
may also adopt new regulations addressing these matters. While
we cannot predict the outcome of future governmental actions
regarding commission payment practices or the responses by the
market and government regulators, any unfavorable resolution of
these matters could have a material adverse effect on our
results of operations.
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Risks
Related to Regulatory and Legal Matters
We are
subject to extensive governmental laws and regulations, which
increase our costs and could restrict the conduct of our
business.
Our operating subsidiaries are subject to extensive regulation
and supervision in the jurisdictions in which they do business.
Such regulation or compliance could reduce our profitability or
limit our growth by increasing the costs of compliance, limiting
or restricting the products or services we sell, or the methods
by which we sell our services and products, or subjecting our
businesses to the possibility of regulatory actions or
proceedings. In all jurisdictions, the applicable laws and
regulations are subject to amendment or interpretation by
regulatory authorities. Generally, such authorities have broad
discretion to grant, renew or revoke licenses and approvals and
to implement new regulations. We may be precluded or temporarily
suspended from carrying on some or all of our activities or
otherwise fined or penalized in any jurisdiction in which we
operate. No assurances can be made that our businesses can
continue to be conducted in each jurisdiction as they have been
in the past. Such regulation is generally designed to protect
the interests of policyholders. To that end, the laws of the
various states establish insurance departments with broad powers
with respect to matters, such as:
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licensing and authorizing companies and agents to transact
business;
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regulating capital and surplus and dividend requirements;
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regulating underwriting limitations;
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regulating the ability of companies to enter and exit markets;
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imposing statutory accounting requirements and annual statement
disclosures;
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approving changes in control of insurance companies;
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regulating premium rates, including the ability to increase or
maintain premium rates;
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regulating trade and claims practices;
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regulating certain transactions between affiliates;
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regulating reinsurance arrangements, including the balance sheet
credit that may be taken by the ceding or direct insurer;
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mandating certain insurance benefits;
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regulating the content of disclosures to consumers;
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regulating the type, amounts and valuation of investments;
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mandating assessments or other surcharges for guaranty funds and
the ability to recover such assessments in the future through
premium increases;
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regulating market conduct and sales practices of insurers and
agents, including compensation arrangements; and
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regulating a variety of other financial and non-financial
components of an insurers business.
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Our non-insurance operations and certain aspects of our
insurance operations are subject to various federal and state
regulations, including state and federal consumer protection,
privacy and other laws. An insurers ability to write new
business is partly a function of its statutory surplus.
Maintaining appropriate levels of surplus as measured by
Statutory Accounting Principles is considered important by
insurance regulatory authorities and the private agencies that
rate insurers claims-paying abilities and
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financial strength. Failure to maintain certain levels of
statutory surplus could result in increased regulatory scrutiny,
a downgrade by rating agencies, or enforcement action by
regulatory authorities.
We may be unable to maintain all required licenses and approvals
and, despite our best efforts, our business may not fully comply
with the wide variety of applicable laws and regulations or the
relevant regulators interpretation of such laws and
regulations. Also, some regulatory authorities have relatively
broad discretion to grant, renew or revoke licenses and
approvals or to limit or restrain operations in their
jurisdiction. If we do not have the requisite licenses and
approvals or do not comply with applicable regulatory
requirements, the insurance regulatory authorities could
preclude or temporarily suspend us from operating, limit some or
all of our activities or financially penalize us. These types of
actions could have a material adverse effect on our results of
operations and financial condition.
Failure
to protect our clients confidential information and
privacy could result in the loss of reputation and customers,
reduction in our profitability and subject us to fines,
penalties and litigation.
We retain confidential information in our information systems,
and we are subject to a variety of privacy regulations and
confidentiality obligations. For example, some of our activities
are subject to the privacy regulations of the Gramm-Leach-Bliley
Act. We also have contractual obligations to protect
confidential information we obtain from our clients. These
obligations generally require us, in accordance with applicable
laws, to protect such information to the same extent that we
protect our own confidential information. We have implemented
physical, administrative and logical security systems with the
intent of maintaining the physical security of our facilities
and systems and protecting our, our clients and their
customers confidential information and
personally-identifiable individuals against unauthorized access
through our information systems or by other electronic
transmission or through the misdirection, theft or loss of data.
Despite such efforts, we are subject to a breach of our security
systems which may result in unauthorized access to our
facilities
and/or the
information we are trying to protect. Anyone who is able to
circumvent our security measures and penetrate our information
systems could access, view, misappropriate, alter, or delete any
information in the systems, including personally identifiable
customer information and proprietary business information. In
addition, most states require that customers be notified if a
security breach results in the disclosure of personally
identifiable customer information. Any compromise of the
security of our information systems that results in
inappropriate disclosure of such information could result in,
among other things, unfavorable publicity and damage to our
reputation, governmental inquiry and oversight, difficulty in
marketing our services, loss of clients, significant civil and
criminal liability and the incurrence of significant technical,
legal and other expenses, any of which may have a material
adverse effect on our results of operations and financial
condition.
Changes
in regulation may reduce our profitability and limit our
growth.
Legislation or other regulatory reform that increases the
regulatory requirements imposed on us or that changes the way we
are able to do business may significantly harm our business or
results of operations in the future. If we were unable for any
reason to comply with these requirements, it could result in
substantial costs to us and may have a material adverse effect
on our results of operations and financial condition.
Legislative or regulatory changes that could significantly harm
us and our subsidiaries include, but are not limited to:
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prohibiting retailers from providing debt cancellation policies;
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prohibiting insurers from fronting captive reinsurance
arrangements;
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placing or reducing interest rate caps on the consumer finance
products our clients offer;
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limitations or imposed reductions on premium levels or the
ability to raise premiums on existing policies;
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increases in minimum capital, reserves and other financial
viability requirements;
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impositions of increased fines, taxes or other penalties for
improper licensing, the failure to promptly pay claims, however
defined, or other regulatory violations;
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increased licensing requirements;
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restrictions on the ability to offer certain types of products;
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new or different disclosure requirements on certain types of
products; and
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imposition of new or different requirements for coverage
determinations.
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In recent years, the state insurance regulatory framework has
come under increased federal scrutiny and some state
legislatures have considered or enacted laws that may alter or
increase state authority to regulate insurance companies and
insurance holding companies. Further, the National Association
of Insurance Commissioners (NAIC) and state insurance regulators
are re-examining existing laws and regulations, specifically
focusing on modifications to holding company regulations,
interpretations of existing laws and the development of new laws
and regulations. Additionally, there have been attempts by the
NAIC and several states to limit the use of discretionary
clauses in policy forms. The elimination of discretionary
clauses could increase our costs under our Payment Protection
products. New interpretations of existing laws and the passage
of new legislation may harm our ability to sell new services and
products and increase our claims exposure on policies we issued
previously. In addition, the NAICs proposed expansion of
the Market Conduct Annual Statement could increase the
likelihood of examinations of insurance companies operating in
niche markets. Court decisions that impact the insurance
industry could result in the release of previously protected
confidential and privileged information by departments of
insurance, which could increase the risk of litigation.
Traditionally, the U.S. federal government has not directly
regulated the business of insurance. However, federal
legislation and administrative policies in several areas can
significantly and adversely affect insurance companies. These
areas include financial services regulation, securities
regulation, privacy, tort reform legislation and taxation. In
view of recent events involving certain financial institutions
and the financial markets, Congress recently passed and the
President signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act, which we refer to in this prospectus as
the Dodd-Frank Act. The Dodd-Frank Act provides for
the enhanced federal supervision of financial institutions,
including insurance companies in certain circumstances, and
financial activities that represent a systemic risk to financial
stability or the U.S. economy.
Under the Dodd-Frank Act, the Federal Insurance Office will be
established within the U.S. Treasury Department to monitor
all aspects of the insurance industry and its authority would
likely extend to all lines of insurance that our insurance
subsidiaries write. The director of the Federal Insurance Office
will serve in an advisory capacity to the Financial Stability
Oversight Council and have the ability to recommend that an
insurance company or an insurance holding company be subject to
heightened prudential standards by the Federal Reserve, if it is
determined that financial distress at the company could pose a
threat to the financial stability of the U.S. economy. The
Dodd-Frank Act also provides for the preemption of state laws
when inconsistent with certain international agreements and
would streamline the regulation of reinsurance and surplus lines
insurance. At this time, we cannot assess
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whether any other proposed legislation or regulatory changes
will be adopted, or what impact, if any, the Dodd-Frank Act or
any other legislation or changes could have on our results of
operations, financial condition or liquidity.
Further, in a time of financial uncertainty or a prolonged
economic downturn, regulators may choose to adopt more
restrictive insurance laws and regulations. For example,
insurance regulators may choose to restrict the ability of
insurance subsidiaries to make payments to their parent
companies or reject rate increases due to the economic
environment.
With respect to the property and casualty insurance policies our
Payment Protection business underwrites, federal legislative
proposals regarding National Catastrophe Insurance, if adopted,
could reduce the business need for some of the related products
we provide. Additionally, as the U.S. Congress continues to
respond to the recent housing foreclosure crisis, it could enact
legislation placing additional barriers on creditor-placed
insurance.
With regard to payment protection products, there are federal
and state laws and regulations that govern the disclosures
related to lenders sales of those products. Our ability to
administer those products on behalf of financial institutions is
dependent upon their continued ability to sell those products.
To the extent that federal or state laws or regulations change
to restrict or prohibit the sale of these products, our
administration services and fees revenues would be adversely
affected. The Dodd-Frank Act created a new Bureau of Consumer
Financial Protection within the Federal Reserve, which will add
new regulatory oversight for these lender products. The full
impact of this oversight cannot be determined until the Bureau
has been established and implementing regulations are put in
place.
In recent years, several large organizations became subjects of
intense public scrutiny due to high-profile data security
breaches involving sensitive financial and health information.
These events focused national attention on identity theft and
the duty of organizations to notify impacted consumers in the
event of a data security breach. Existing legislation in most
states requires customer notification in the event of a data
security breach. In addition, some states are adopting laws and
regulations requiring minimum information security practices
with respect to the collection and storage of
personally-identifiable consumer data, and several bills before
Congress contain provisions directed to national information
security standards and breach notification requirements. Several
significant legal, operational and reputational risks exist with
regard to a data breach and customer notification. A breach of
data security requiring public notification can result in
regulatory fines, penalties or sanctions, civil lawsuits, loss
of reputation, loss of clients and reduction of our
profitability.
Our
business is subject to risks related to litigation and
regulatory actions.
We may be materially and adversely affected by judgments,
settlements, unanticipated costs or other effects of legal and
administrative proceedings now pending or that may be instituted
in the future, or from investigations by regulatory bodies or
administrative agencies. From time to time, we have had
inquiries from regulatory bodies and administrative agencies
relating to the operation of our business. Such inquiries may
result in various audits, reviews and investigations. An adverse
outcome of any investigation by, or other inquiries from, such
bodies or agencies could have a material adverse effect on us
and result in the institution of administrative or civil
proceedings, sanctions and the payment of fines and penalties,
changes in personnel, and increased review and scrutiny of us by
our clients, regulatory authorities, potential litigants, the
media and others.
In particular, our insurance-related operations are subject to
comprehensive regulation and oversight by insurance departments
in jurisdictions in which we do business. These insurance
departments have broad administrative powers with respect to all
aspects of the insurance business and, in particular, monitor
the manner in which an insurance company offers, sells and
administers its products. Therefore,
32
we may from time to time be subject to a variety of legal and
regulatory actions relating to our current and past business
operations, including, but not limited to:
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disputes over coverage or claims adjudication;
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disputes over claim payment amounts and compliance with
individual state regulatory requirements;
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disputes regarding sales practices, disclosures, premium
refunds, licensing, regulatory compliance, underwriting and
compensation arrangements;
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disputes with taxation and insurance authorities regarding our
tax liabilities;
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periodic examinations of compliance with applicable federal and
state laws; and
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industry-wide investigations regarding business practices
including, but not limited to, the use of finite reinsurance and
the marketing and refunding of insurance policies or
certificates of insurance.
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The prevalence and outcomes of any such actions cannot be
predicted, and such actions or any litigation may have a
material adverse effect on our results of operations and
financial condition. In addition, if we were to experience
difficulties with our relationship with a regulatory body in a
given jurisdiction, it could have a material adverse effect on
our ability to do business in that jurisdiction.
In addition, plaintiffs continue to bring new types of legal
claims against insurance and related companies. Current and
future court decisions and legislative activity may increase our
exposure to these types of claims. Multiparty or class action
claims may present additional exposure to substantial economic,
non-economic and/or punitive damage awards. The success of even
one of these claims, if it resulted in a significant damage
award or a detrimental judicial ruling could have a material
adverse effect on our results of operations and financial
condition. This risk of potential liability may make reasonable
settlements of claims more difficult to obtain. We cannot
determine with any certainty what new theories of liability or
recovery may evolve or what their impact may be on our
businesses.
We cannot predict at this time the effect that current
litigation, investigations and regulatory activity will have on
the industries in which we operate or our business. In light of
the regulatory and judicial environments in which we operate, we
will likely become subject to further investigations and
lawsuits from time to time in the future. Our involvement in any
investigations and lawsuits would cause us to incur legal and
other costs and, if we were found to have violated any laws, we
could be required to pay fines and damages, perhaps in material
amounts. In addition, we could be materially and adversely
affected by the negative publicity for the insurance and other
financial services industries related to any such proceedings
and by any new industry-wide regulations or practices that may
result from any such proceedings.
Risks
Related to Our Indebtedness
Our
indebtedness may limit our financial and operating activities
and may materially and adversely affect our ability to incur
additional debt to fund future needs.
As of September 30, 2010, we had total indebtedness and
redeemable preferred stock of $94.5 million. During the
year ended December 31, 2009, our annual debt service
requirement was $7.8 million. Our debt service obligations
vary annually based on our variable rate indebtedness and
redeemable preferred stock. Although we believe that our current
cash flow will be sufficient to cover our annual interest
expense, any increase in our indebtedness or any decline in the
amount of cash available increases the
33
possibility that we could not pay, when due, the principal of,
interest on or other amounts due in respect of our indebtedness.
In addition, our indebtedness and any future indebtedness we may
incur could:
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make it more difficult for us to satisfy our obligations with
respect to our indebtedness, including financial and other
restrictive covenants, which could result in an event of default
under the agreements governing our indebtedness;
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make us more vulnerable to adverse changes in general economic,
industry and competitive conditions and adverse changes in
government regulation;
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require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flows to fund working
capital, capital expenditures, acquisitions and other general
corporate purposes;
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
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place us at a competitive disadvantage compared to competitors
that have less debt; and
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limit our ability to borrow additional amounts for working
capital, capital expenditures, acquisitions, debt service
requirements, execution of our business strategy or other
purposes.
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Any of the above-listed factors could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
Increases
in interest rates could increase interest payable under our
variable rate indebtedness and a portion of our redeemable
preferred stock.
We are subject to interest rate risk in connection with our
variable rate indebtedness and a portion of our redeemable
preferred stock, which totaled $30.1 million as of
September 30, 2010. Interest rate changes could increase
the amount of our interest payments and thus negatively impact
our future earnings and cash flows. If we do not have sufficient
earnings, we may be required to refinance all or part of our
existing debt, sell assets, borrow more money or sell more
securities, none of which we can guarantee we will be able to do.
Despite
our indebtedness levels, we and our subsidiaries may still be
able to incur more indebtedness, which could further exacerbate
the risks described above.
We and our subsidiaries may be able to incur substantial
additional indebtedness in the future subject to the limitations
contained in the agreements governing our indebtedness. If we or
our subsidiaries incur additional debt, the risks that we and
they now face as a result of our indebtedness could intensify.
Restrictive
covenants in the agreements governing our indebtedness may
restrict our ability to pursue our business
strategies.
The agreements governing our indebtedness contain a number of
restrictive covenants that impose significant operating and
financial restrictions on us and may limit our ability to pursue
our business strategies or undertake actions that may be in our
best interests. The agreements governing our indebtedness
include covenants restricting, among other things, our ability
to:
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incur or guarantee additional debt;
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incur liens;
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complete mergers, consolidations and dissolutions;
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sell certain of our assets that have been pledged as
collateral; and
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undergo a change in control.
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Our
assets have been pledged to secure some of our existing
indebtedness.
Our revolving credit facility with SunTrust Bank and CB&T
is secured by substantially all of our property and assets and
property and assets owned by LOTS Intermediate Co. and certain
of our subsidiaries that act as guarantors of our existing
indebtedness. Such assets include the stock of LOTS Intermediate
Co. and the right, title and interest of the borrowers and each
guarantor in their respective material real estate property,
fixtures, accounts, equipment, investment property, inventory,
instruments, general intangibles, money, cash or cash
equivalents, software and other assets and, in each case, the
proceeds thereof, subject to certain exceptions. The total
carrying value of all our assets was $478.6 million as of
December 31, 2009. In the event of a default under our
indebtedness, the lender could foreclose against the assets
securing such obligations. A foreclosure on these assets could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Risks
Related to Our Technology and Intellectual Property
Our
information systems may fail or their security may be
compromised, which could damage our business and materially and
adversely affect our results of operations and financial
condition.
Our business is highly dependent upon the effective operation of
our information systems and our ability to store, retrieve,
process and manage significant databases and expand and upgrade
our information systems. We rely on these systems throughout our
businesses for a variety of functions, including marketing and
selling our Payment Protection products, providing our BPO
services, managing our operations, processing claims and
applications, providing information to clients, performing
actuarial analyses and maintaining financial records. The
interruption or loss of our information processing capabilities
through the loss of stored data, programming errors, the
breakdown or malfunctioning of computer equipment or software
systems, telecommunications failure or damage caused by weather
or natural disasters or any other significant disruptions could
harm our business, ability to generate revenues, client
relationships, competitive position and reputation. Although we
have additional data processing locations in Jacksonville,
Florida and Atlanta, Georgia, disaster recovery procedures and
insurance to protect against certain contingencies, such
measures may not be effective or insurance may not continue to
be available at reasonable prices, cover all such losses or be
sufficient to compensate us for the loss of business that may
result from any failure of our information systems. In addition,
our information systems may be vulnerable to physical or
electronic intrusions, computer viruses or other attacks which
could disable our information systems and our security measures
may not prevent such attacks. The failure of our systems as a
result of any security breaches, intrusions or attacks could
cause significant interruptions to our operations, which could
result in a material adverse effect on our business, results of
operations and financial condition.
The
failure to effectively maintain and modernize our systems to
keep up with technological advances could materially and
adversely affect our business.
Our businesses are dependent upon our ability to ensure that our
information systems keep up with technological advances. Our
ability to keep our systems integrated with those of our clients
is critical to the success of our businesses. If we do not
effectively maintain our systems and update them to address
technological advancements, our relationships and ability to do
business with our clients may be materially and adversely
affected. Our businesses depend significantly on effective
information systems, and we have many different information
systems for our various businesses. We must commit significant
resources to maintain and enhance existing information systems
and develop new systems that allow us
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to keep pace with continuing changes in information processing
technology, evolving industry, regulatory and legal standards
and changing client preferences. A failure to maintain effective
and efficient information systems, or a failure to efficiently
and effectively consolidate our information systems and
eliminate redundant or obsolete applications, could have a
material adverse effect on our results of operations and
financial condition or our ability to do business in particular
jurisdictions. If we do not effectively maintain adequate
systems, we could experience adverse consequences, including:
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the inability to effectively market and price our services and
products and make underwriting and reserving decisions;
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the loss of existing clients;
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difficulty attracting new clients;
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regulatory problems such as a failure to meet prompt payment
obligations;
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internal control problems;
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exposure to litigation;
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security breaches resulting in loss of data; and
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increases in administrative expenses.
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Our
success will depend, in part, on our ability to protect our
intellectual property rights and our ability not to infringe
upon the intellectual property rights of third
parties.
The success of our business will depend, in part, on preserving
our trade secrets, maintaining the security of our know-how and
data and operating without infringing upon patents and
proprietary rights held by third parties. Failure to protect,
monitor and control the use of our intellectual property rights
could cause us to lose a competitive advantage and incur
significant expenses. We rely on a combination of contractual
provisions, confidentiality procedures and copyright, trademark,
service mark and trade secret laws to protect the proprietary
aspects of our brands, technology and data. These legal measures
afford only limited protection, and competitors or others may
gain access to our intellectual property and proprietary
information.
Our trade secrets, data and know-how could be subject to
unauthorized use, misappropriation, or disclosure. Our
trademarks could be challenged, forcing us to re-brand our
services or products, resulting in loss of brand recognition and
requiring us to devote resources to advertising and marketing
new brands or licensing. If we are found to have infringed upon
the intellectual property rights of third parties, we may be
subject to injunctive relief restricting our use of affected
elements of intellectual property used in the business, or we
may be required to, among other things, pay royalties or enter
into licensing agreements in order to obtain the rights to use
necessary technologies, which may not be possible on
commercially reasonable terms, or redesign our systems, which
may not be feasible.
Furthermore, litigation may be necessary to enforce our
intellectual property rights, to protect our trade secrets and
to determine the validity and scope of our proprietary rights.
The intellectual property laws and other statutory and
contractual arrangements we currently depend upon may not
provide sufficient protection in the future to prevent the
infringement, use or misappropriation of our trademarks, data,
technology and other services and products. Policing
unauthorized use of intellectual property rights can be
difficult and expensive, and adequate remedies may not be
available. Any future litigation, regardless
36
of outcome, could result in substantial expense and diversion of
resources with no assurance of success and could have a material
adverse effect on our business, results of operation and
financial condition.
Risks
Related to Our Common Stock and this Offering
There
may not be an active, liquid trading market for our common
stock.
Prior to this offering, there has been no public market for
shares of our common stock. We cannot predict the extent to
which investor interest in our company will lead to the
development of a trading market on the New York Stock Exchange
or how liquid that market may become. If an active trading
market does not develop, you may have difficulty selling any of
our common stock that you purchase. The initial public offering
price of shares of our common stock will be determined by
negotiation between us and the underwriters and may not be
indicative of prices that will prevail following the completion
of this offering. The market price of shares of our common stock
may decline below the initial public offering price, and you may
not be able to resell your shares of our common stock at or
above the initial offering price.
As a
public company, we will become subject to additional financial
and other reporting and corporate governance requirements that
may be difficult for us to satisfy.
We have historically operated our business as a private company.
After this offering, we will be required to file with the
Securities and Exchange Commission annual and quarterly
information and other reports that are specified in
Section 13 of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. We will also be required to ensure
that we have the ability to prepare financial statements that
are fully compliant with all Securities and Exchange Commission
reporting requirements on a timely basis. We will also become
subject to other reporting and corporate governance
requirements, including the requirements of the New York Stock
Exchange, and certain provisions of the Sarbanes-Oxley Act of
2002 and the regulations promulgated thereunder, which will
impose significant compliance obligations upon us. As a public
company, we will be required to:
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prepare and distribute periodic public reports and other
stockholder communications in compliance with our obligations
under the federal securities laws and New York Stock Exchange
rules;
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create or expand the roles and duties of our board of directors
and committees of the board;
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institute more comprehensive financial reporting and disclosure
compliance functions;
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supplement our internal accounting and auditing function,
including hiring additional staff with expertise in accounting
and financial reporting for a public company;
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enhance and formalize closing procedures at the end of our
accounting periods;
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enhance our internal audit and tax functions;
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enhance our investor relations function;
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37
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establish new internal policies, including those relating to
disclosure controls and procedures; and
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involve and retain to a greater degree outside counsel and
accountants in the activities listed above.
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Our
internal control over financial reporting does not currently
meet the standards required by Section 404 of the
Sarbanes-Oxley Act of 2002 and we have identified a material
weakness in our internal controls, and the failure to achieve
and maintain effective internal control over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act of
2002 or to remedy the material weakness could materially and
adversely affect us.
Prior to this offering, we have been a private company with
limited accounting personnel and other resources with which to
address our internal controls and procedures over financial
reporting. Our internal control over financial reporting does
not currently meet the standards required by Section 404,
standards that we will be required to meet in the course of
preparing our 2011 financial statements. We do not currently
have comprehensive documentation of our internal controls, nor
do we document or test our compliance with these controls on a
periodic basis in accordance with Section 404. Furthermore,
we have not tested our internal controls in accordance with
Section 404 and, due to our lack of documentation, such a
test would not be possible to perform at this time.
In preparing our consolidated financial statements for the years
ended December 31, 2009, 2008, the period from
June 20, 2007 to December 31, 2007 and the period from
January 1, 2007 to June 19, 2007, a material weakness
in our internal control over financial reporting was identified,
as defined in the standards established by the U.S. Public
Accounting Oversight Board. The material weakness identified
resulted from an ineffective control environment over financial
reporting due to our failure to adequately staff our financial
reporting function with a sufficient number of staff experienced
in preparing GAAP-based consolidated financial statements,
related footnote disclosures and public company reports.
To remedy this material weakness, we are in the process of
implementing several measures to improve our internal control
over financial reporting, including (i) hiring a chief
financial officer and a vice president of internal audit
effective October 1, 2010; (ii) increasing the
headcount of qualified financial reporting personnel, including
an SEC reporting manager; (iii) improving the capabilities
of existing financial reporting personnel through training and
education in the reporting requirements and deadlines set under
GAAP, SEC rules and regulations and the Sarbanes-Oxley Act of
2002; (iv) transitioning to an Oracle platform for our
general ledger, purchasing and accounts payable systems and
(v) engaging independent consultants to assist in
establishing processes and oversight measures to comply with the
requirements under GAAP, SEC rules and regulations and the
Sarbanes-Oxley Act of 2002. We plan to complete all remediation
efforts by January 2011, but we may be unable to implement all
changes on this timetable.
In addition to the remediation efforts noted above, we are in
the early stages of addressing our internal control procedures
to satisfy the requirements of Section 404, which requires
an annual management assessment of the effectiveness of our
internal control over financial reporting. If, as a public
company, we are not able to implement the requirements of
Section 404 in a timely manner or with adequate compliance,
our independent registered public accounting firm may not be
able to attest to the effectiveness of our internal control over
financial reporting. If we are unable to maintain adequate
internal control over financial reporting, we may be unable to
report our financial information on a timely basis, may suffer
adverse regulatory consequences or violations of applicable
stock exchange listing rules and may breach the covenants under
our credit facilities. There could also be a negative
38
reaction in the financial markets due to a loss of investor
confidence in us and the reliability of our financial statements.
In addition, we will incur additional costs in order to improve
our internal control over financial reporting and comply with
Section 404, including increased auditing and legal fees
and costs associated with hiring additional accounting and
administrative staff.
After
this offering, our principal stockholder will continue to have
substantial control over us.
After the consummation of this offering, affiliates of Summit
Partners will collectively beneficially own approximately 61.4%
of our outstanding common stock (approximately 57.4% if the
underwriters over-allotment option is exercised in full).
See Principal and Selling Stockholders. As a
consequence, Summit Partners or its affiliates will continue to
be able to exert a significant degree of influence or actual
control over our management and affairs and matters requiring
stockholder approval, including the election of directors, a
merger, consolidation or sale of all or substantially all of our
assets, and any other significant transaction. The interests of
this stockholder may not always coincide with our interests or
the interests of our other stockholders. For instance, this
concentration of ownership may have the effect of delaying or
preventing a change in control of us otherwise favored by our
other stockholders and could depress our stock price.
We
expect that our stock price will fluctuate significantly, which
could cause the value of your investment to decline, and you may
not be able to resell your shares at or above the initial public
offering price.
Securities markets worldwide have experienced, and are likely to
continue to experience, significant price and volume
fluctuations. This market volatility, as well as general
economic, market or political conditions, could reduce the
market price of our common stock regardless of our operating
performance. The trading price of our common stock is likely to
be volatile and subject to wide price fluctuations in response
to various factors, including:
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market conditions in the broader stock market;
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actual or anticipated fluctuations in our quarterly financial
and operating results;
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introduction of new products or services by us or our
competitors;
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issuance of new or changed securities analysts reports or
recommendations;
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investor perceptions of us and the industries in which we
operate;
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sales, or anticipated sales, of large blocks of our stock;
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additions or departures of key personnel;
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regulatory or political developments;
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litigation and governmental investigations; and
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changing economic conditions.
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These and other factors may cause the market price and demand
for our common stock to fluctuate substantially, which may limit
or prevent investors from readily selling their shares of common
stock and may otherwise negatively affect the liquidity of our
common stock. In addition, in the past, when the market price of
a stock has been volatile, holders of that stock have sometimes
instituted securities class action litigation against the
company that issued the stock. If any of our stockholders
brought a
39
lawsuit against us, we could incur substantial costs defending
the lawsuit. Such a lawsuit could also divert the time and
attention of our management from our business, which could
significantly harm our profitability and reputation.
If a
substantial number of shares become available for sale and are
sold in a short period of time, the market price of our common
stock could decline.
If our existing stockholders sell substantial amounts of our
common stock in the public market following this offering, the
market price of our common stock could decrease significantly.
The perception in the public market that our existing
stockholders might sell shares of common stock could also
depress the market price of our common stock. Upon the
consummation of this offering, we will have
20,256,739 shares of common stock outstanding. Our
directors, executive officers, the selling stockholders and
substantially all of our other stockholders will be subject to
the lock-up
agreements described in Underwriting and are subject
to the Rule 144 holding period requirements described in
Shares Eligible for Future Sale. After these
lock-up
agreements have expired and holding periods have elapsed,
additional shares will be eligible for sale in the public
market. The market price of shares of our common stock may drop
significantly when the restrictions on resale by our existing
stockholders lapse. A decline in the price of shares of our
common stock might impede our ability to raise capital through
the issuance of additional shares of our common stock or other
equity securities.
If
securities or industry analysts do not publish research or
reports about our business, publish research or reports
containing negative information about our business, adversely
change their recommendations regarding our stock or if our
results of operations do not meet their expectations, our stock
price and trading volume could decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us or our business. If one or more of these
analysts cease coverage of our company or fail to publish
reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or
trading volume to decline. Moreover, if one or more of the
analysts who cover us downgrade our stock, or if our results of
operations do not meet their expectations, our stock price could
decline.
Some
provisions of Delaware law and our amended and restated
certificate of incorporation and bylaws may deter third parties
from acquiring us and diminish the value of our common
stock.
Our amended and restated certificate of incorporation and bylaws
provide for, among other things:
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restrictions on the ability of our stockholders to call a
special meeting and the business that can be conducted at such
meeting;
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restrictions on the ability of our stockholders to remove a
director or fill a vacancy on the board of directors;
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our ability to issue preferred stock with terms that the board
of directors may determine, without stockholder approval;
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the absence of cumulative voting in the election of directors;
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a prohibition of action by written consent of stockholders
unless such action is recommended by all directors then in
office; and
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advance notice requirements for stockholder proposals and
nominations.
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40
These provisions in our amended and restated certificate of
incorporation and bylaws may discourage, delay or prevent a
transaction involving a change in control of our company that is
in the best interest of our non-controlling stockholders. Even
in the absence of a takeover attempt, the existence of these
provisions may adversely affect the prevailing market price of
our common stock if they are viewed as discouraging future
takeover attempts.
Applicable
insurance laws may make it difficult to effect a change in
control of us.
State insurance regulatory laws contain provisions that require
advance approval, by the state insurance commissioner, of any
change in control of an insurance company that is domiciled, or,
in some cases, having such substantial business that it is
deemed to be commercially domiciled, in that state. We own,
directly or indirectly, all of the shares of stock of insurance
companies domiciled in Delaware, Georgia and Louisiana, and 85%
of the shares of stock of an insurance company domiciled in
Kentucky. Because any purchaser of shares of our common stock
representing 10% or more of the voting power of our capital
stock generally will be presumed to have acquired control of
these insurance company subsidiaries, the insurance change in
control laws of Delaware, Georgia, Louisiana and Kentucky would
apply to such a transaction.
In addition, the laws of many states contain provisions
requiring pre-notification to state agencies prior to any change
in control of a non-domestic insurance company subsidiary that
transacts business in that state. While these pre-notification
statutes do not authorize the state agency to disapprove the
change in control, they do authorize issuance of cease and
desist orders with respect to the non-domestic insurer if it is
determined that conditions, such as undue market concentration,
would result from the change in control.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of our company,
including through transactions, and in particular unsolicited
transactions, that some or all of our shareholders might
consider to be desirable.
We do
not anticipate paying any cash dividends for the foreseeable
future.
We currently intend to retain our future earnings, if any, for
the foreseeable future, to repay indebtedness and for general
corporate purposes. We do not intend to pay any dividends to
holders of our common stock. As a result, capital appreciation
in the price of our common stock, if any, will be your only
source of gain on an investment in our common stock. See
Dividend Policy.
New
investors in our common stock will experience immediate and
substantial book value dilution after this
offering.
The initial public offering price of our common stock will be
substantially higher than the pro forma net tangible book value
per share of the outstanding common stock immediately after the
offering. Based on our net tangible book value as of
September 30, 2010, if you purchase our common stock in
this offering, you will suffer immediate dilution in net
tangible book value per share of approximately $10.69 per share.
See Dilution.
41
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements that are
subject to risks and uncertainties. All statements other than
statements of historical fact included in this prospectus are
forward-looking statements. Forward-looking statements give our
current expectations and projections relating to our financial
condition, results of operations, plans, objectives, future
performance and business. You can identify forward-looking
statements by the fact that they do not relate strictly to
historical or current facts. These statements may include words
such as anticipate, estimate,
expect, project, plan,
intend, believe, may,
should, can have, likely and
other words and terms of similar meaning in connection with any
discussion of the timing or nature of future operating or
financial performance or other events.
The forward-looking statements contained in this prospectus are
based on assumptions that we have made in light of our industry
experience and our perceptions of historical trends, current
conditions, expected future developments and other factors we
believe are appropriate under the circumstances. As you read and
consider this prospectus, you should understand that these
statements are not guarantees of performance or results. They
involve risks, uncertainties (some of which are beyond our
control) and assumptions. Although we believe that these
forward-looking statements are based on reasonable assumptions,
you should be aware that many factors could affect our actual
financial results and cause them to differ materially from those
anticipated in the forward-looking statements. We believe these
factors include, but are not limited to, those described under
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operations. Should one or more of these risks or
uncertainties materialize, or should any of these assumptions
prove incorrect, our actual results may vary in material
respects from those projected in these forward-looking
statements.
Any forward-looking statement made by us in this prospectus
speaks only as of the date on which we make it. Factors or
events that could cause our actual results to differ may emerge
from time to time, and it is not possible for us to predict all
of them. We undertake no obligation to publicly update any
forward-looking statement, whether as a result of new
information, future developments or otherwise, except as may be
required by law.
42
USE OF
PROCEEDS
We estimate that the net proceeds to us from our sale of
4,265,637 shares of common stock in this offering will be
approximately $39.4 million, after deducting underwriting
discounts and commissions and estimated expenses payable by us
in connection with this offering. This assumes a public offering
price of $11.00 per share. With the net proceeds from shares
that we sell in this offering and increased borrowings of
approximately $7.3 million under our revolving credit
facility, we intend to use $12.0 million to redeem all of
our outstanding redeemable preferred stock, $20.6 million
to repay in full our outstanding subordinated debentures and
$14.1 million to pay the conversion amount on our
Class A common stock, $14.0 million of which will be
paid to affiliates of Summit Partners and $0.1 million of
which will be paid to other holders of our Class A common
stock, including certain of our executive officers. See
Certain Relationships and Related Person
Transactions Class A Common Stock
Conversion.
As of September 30, 2010, we had $7.4 million,
$2.1 million and $1.9 million outstanding of our
Series A, B and C redeemable preferred stock, respectively;
and $20.0 million of our subordinated debentures
outstanding. Any outstanding Series A and B redeemable
preferred stock must be redeemed in full on December 31,
2034 and any outstanding Series C redeemable preferred
stock must be redeemed in full on December 31, 2035. Our
Series A and C redeemable preferred stock each accrue
cumulative cash dividends at a rate of 8.25% per annum of the
liquidation preference of $1,000 per share of such series of
redeemable preferred stock. Our Series B redeemable
preferred stock accrues cash dividends at a rate per annum of
4.0% plus 90 day LIBOR times the liquidation preference of
$1,000 per share of Series B redeemable preferred stock. As
of September 30, 2010, the dividend rate on our
Series B redeemable preferred stock was 4.5% of the
liquidation preference. Our subordinated debentures bear
interest at a rate of 14% per annum and mature on
December 13, 2013. We entered into our $35.0 million
revolving credit facility with SunTrust Bank on June 16,
2010, and there was $28.0 million outstanding under the
facility on September 30, 2010. On November 30, 2010,
CB&T, a division of Synovus Bank, entered into a joinder
agreement to the revolving credit facility with a revolving
commitment of $20.0 million, which increased the size of
the facility to $55.0 million. Loans under our revolving
credit agreement bear interest based upon a base rate or
adjusted LIBO rate (as defined in the revolving credit
agreement) plus an applicable margin. As of September 30,
2010, the interest rate applicable to our revolving loans was
6.0%. The maturity date for loans under our revolving credit
agreement is June 16, 2013.
A $1.00 increase (decrease) in the assumed initial public
offering price of $11.00 per share would increase (decrease) the
net proceeds to us from this offering by $4.0 million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting underwriting discounts and commissions and estimated
expenses payable by us.
We will not receive any proceeds from the sale of shares by the
selling stockholders, which include entities affiliated with
members of our board of directors.
DIVIDEND
POLICY
We have not declared or paid cash dividends on our common stock
in the past two years. We do not anticipate paying any cash
dividends on our capital stock in the foreseeable future. We
intend to retain all available funds and any future earnings to
reduce debt and fund the development and growth of our business.
Any future determination to pay dividends will be at the
discretion of our board of directors and will take into account:
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restrictions in our debt instruments;
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general economic business conditions;
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our financial condition and results of operations;
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the ability of our operating subsidiaries to pay dividends and
make distributions to us; and
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such other factors as our board of directors may deem relevant.
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43
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our capitalization on an actual basis as of September 30,
2010 on a pro forma basis and on a pro forma as adjusted basis
to give effect to the transactions set forth below.
The pro forma column gives effect to:
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the conversion of our outstanding Class A common stock into
shares of common stock prior to the consummation of this
offering and the payment of the Class A conversion amount;
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a 5.25 for 1 stock split of our common stock prior to the
consummation of this offering;
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our issuance of (i) 15,750 shares of our common stock
upon exercise of options by a selling stockholder in December
2010 and the receipt of proceeds of $24,360 therefrom and
(ii) 28,435 shares of our common stock upon exercise
of options by a selling stockholder in connection with this
offering and the receipt of proceeds of $92,500
therefrom; and
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our reincorporation in Delaware.
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The pro forma as adjusted column gives effect to the
transactions set forth above and further effect to:
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the sale of 4,265,637 shares of our common stock in this
offering by us at an assumed initial public offering price of
$11.00 per share after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, and
the application of the net proceeds from this offering as
described under Use of Proceeds and our increased
borrowings under our line of credit of approximately
$7.3 million.
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This table should be read in conjunction with Use of
Proceeds, Selected Historical Consolidated Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated financial statements and the related notes thereto
included elsewhere in this prospectus.
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As of September 30, 2010
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(unaudited)
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Pro Forma
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Actual
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Pro Forma
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As
Adjusted(1)
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(in thousands, except share and
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per share data)
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Cash and cash equivalents
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$
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17,843
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$
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17,960
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$
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17,960
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Debt:
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Line of credit for
$35.0 million(2)
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$
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28,013
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28,013
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$
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35,276
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Preferred trust securities
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35,000
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35,000
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35,000
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Subordinated
debentures(3)
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20,000
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20,000
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Series A redeemable preferred stock due 2034, Series B
redeemable preferred stock due 2034 and Series C redeemable
preferred stock due 2035
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11,440
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11,440
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Total debt
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94,453
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94,453
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70,276
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44
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As of September 30, 2010
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(unaudited)
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Pro Forma
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Actual
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Pro Forma
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As
Adjusted(1)
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(in thousands, except share and
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per share data)
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Stockholders equity:
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Common stock:
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Class A common stock, par value
$0.331/3
per share (3,094,169 authorized and 2,684,173 issued);
par value $0.01 per share on a pro forma and pro forma as
adjusted basis (3,094,169 authorized and 0 issued on a
pro forma and a pro forma as adjusted basis)
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895
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Common stock, par value
$0.331/3
per share (6,000,000 authorized and 321,858 issued);
par value $0.01 per share on a pro forma and pro forma as
adjusted basis (150,000,000 authorized on a pro forma and
pro forma as adjusted basis; 15,991,102 issued on a pro
forma basis; 20,256,739 issued on a pro forma as adjusted
basis)(4)
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107
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160
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203
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Treasury stock (8,491 shares; 44,578 shares on a pro forma
as adjusted basis)
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|
|
(176
|
)
|
|
|
(176
|
)
|
|
|
(176
|
)
|
Additional paid-in
capital(5)
|
|
|
53,794
|
|
|
|
39,806
|
|
|
|
79,243
|
|
Accumulated other comprehensive income, net of tax (expense)
of $(2,111)
|
|
|
3,815
|
|
|
|
3,815
|
|
|
|
3,815
|
|
Retained earnings
|
|
|
34,903
|
|
|
|
34,903
|
|
|
|
34,903
|
|
Non-controlling interest
|
|
|
1,543
|
|
|
|
1,543
|
|
|
|
1,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
94,881
|
|
|
|
80,051
|
|
|
|
119,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
189,334
|
|
|
$
|
174,504
|
|
|
$
|
189,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Assuming the number of shares sold by us in this offering
remains the same as set forth on the cover page, a $1.00
increase (decrease) in the assumed initial public offering price
would (decrease) increase total debt by $4.0 million and would
increase (decrease) stockholders equity by $4.0 million.
To the extent we raise more proceeds in this offering, we will
borrow less under our line of credit. To the extent we raise
less proceeds in this offering, we will borrow more under our
line of credit.
|
|
|
(2)
|
On November 30, 2010, the line of credit was increased to
$55.0 million. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources Revolving Credit Facilities
Revolving Credit Facility.
|
|
(3)
|
On June 16, 2010, we amended the maturity date for our
subordinated debentures from June 20, 2012 to
December 13, 2013.
|
|
|
(4) |
The 20,256,739 shares outstanding on a pro forma and pro
forma as adjusted basis include 14,097,161 shares issued
upon conversion of 2,684,173 shares of Class A common
stock in connection with this offering.
|
|
|
(5) |
Additional paid-in capital on a pro forma and pro forma as
adjusted basis reflects the payment of the Class A
conversion amount of $14.1 million, $14.0 million of
which will be paid to affiliates of Summit Partners and
$0.1 million of which will be paid to other holders of our
Class A common stock, including certain of our executive
officers. See Use of Proceeds and Certain
Relationships and Related Person Transactions
Class A Common Stock Conversion. Also reflects our
receipt of approximately $116,000 in net proceeds received in
connection with the exercise of options by a selling stockholder
in December 2010 and in connection with this offering.
|
45
UNAUDITED
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information set forth below is
derived from our historical consolidated statement of income, as
adjusted to give pro forma effect to our acquisition of
Bliss & Glennon as if it had occurred as of
January 1, 2009.
The information shown in the column labeled Fortegra
for the year ended December 31, 2009 is derived from our
audited consolidated financial statements included elsewhere in
this prospectus.
The acquisition of Bliss & Glennon has been accounted
for in accordance with the authoritative guidance related to
business combinations. Under the purchase method of accounting,
the total estimated purchase price is allocated to the net
tangible and intangible assets acquired, based on their
estimated fair values.
The pro forma financial information has been prepared based upon
available information and assumptions that we believe are
reasonable. However, the pro forma financial information is
presented for illustrative and informational purposes only and
does not purport to represent what our results of operations or
financial condition would have been if the acquisition had
occurred on the assumed date nor are they necessarily indicative
of our future performance.
You should read this unaudited pro forma financial information
together with the audited consolidated financial statements and
related notes thereto of Fortegra and Bliss & Glennon
included elsewhere in this prospectus, as well as the
information contained under Risk Factors,
Selected Historical Consolidated Financial Data and
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
46
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
to April 14, 2009
|
|
|
Adjustments for
|
|
|
|
|
|
|
Fortegra
|
|
|
Bliss & Glennon
|
|
|
Bliss & Glennon
|
|
|
Pro Forma
|
|
|
|
(audited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and administrative fees
|
|
$
|
31,829
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,829
|
|
Wholesale brokerage commissions and fees
|
|
|
16,309
|
|
|
|
8,104
|
|
|
|
|
|
|
|
24,413
|
|
Ceding commissions
|
|
|
24,075
|
|
|
|
|
|
|
|
|
|
|
|
24,075
|
|
Net investment income
|
|
|
4,759
|
|
|
|
22
|
|
|
|
|
|
|
|
4,781
|
|
Net realized gains
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Net earned premium
|
|
|
108,116
|
|
|
|
|
|
|
|
|
|
|
|
108,116
|
|
Other income
|
|
|
971
|
|
|
|
7
|
|
|
|
|
|
|
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
186,113
|
|
|
|
8,133
|
|
|
|
|
|
|
|
194,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
32,566
|
|
|
|
|
|
|
|
|
|
|
|
32,566
|
|
Commissions
|
|
|
70,449
|
|
|
|
|
|
|
|
|
|
|
|
70,449
|
|
Personnel costs
|
|
|
31,365
|
|
|
|
4,170
|
|
|
|
|
|
|
|
35,535
|
|
Other operating expenses
|
|
|
22,291
|
|
|
|
2,762
|
|
|
|
(1,714
|
)(1)
|
|
|
23,339
|
|
Depreciation and amortization
|
|
|
3,507
|
|
|
|
88
|
|
|
|
|
|
|
|
3,595
|
|
Interest expense
|
|
|
7,800
|
|
|
|
|
|
|
|
|
|
|
|
7,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
167,978
|
|
|
|
7,020
|
|
|
|
(1,714
|
)
|
|
|
173,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
18,135
|
|
|
|
1,113
|
|
|
|
1,714
|
|
|
|
20,962
|
|
Income taxes
|
|
|
6,551
|
|
|
|
436
|
|
|
|
273
|
(2)
|
|
|
7,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before non-controlling interest
|
|
|
11,584
|
|
|
|
677
|
|
|
|
1,441
|
|
|
|
13,702
|
|
Less: net income attributable to the non-controlling interest
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,558
|
|
|
$
|
677
|
|
|
$
|
1,441
|
|
|
$
|
13,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.94
|
|
|
|
|
|
|
|
|
|
|
$
|
4.57
|
|
Diluted
|
|
|
3.65
|
|
|
|
|
|
|
|
|
|
|
|
4.23
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,931,182
|
|
|
|
|
|
|
|
|
|
|
|
2,995,614
|
|
Diluted
|
|
|
3,170,653
|
|
|
|
|
|
|
|
|
|
|
|
3,235,085
|
|
|
|
(1)
|
Represents transaction expenses, including professional fees,
incurred in connection with the acquisition of Bliss &
Glennon.
|
|
(2)
|
Represents the increase in income tax expense associated with
the increase in income before income taxes and non-controlling
interest.
|
47
DILUTION
If you invest in our common stock in this offering, your
ownership interest will be diluted to the extent of the
difference between the initial public offering price per share
and the pro forma as adjusted net tangible book value per share
of common stock upon the completion of this offering.
As of September 30, 2010, our net tangible book value was
approximately $(17.8) million, or $(5.48) per share.
Our net tangible book value per share represents our total
tangible assets less total liabilities divided by the total
number of shares of common stock outstanding. Dilution in the
net tangible book value per share represents the difference
between the amount per share paid by purchasers of common stock
in this offering and the pro forma net tangible book value per
share of common stock immediately after the consummation of this
offering.
After giving effect to (i) the conversion of our
outstanding Class A common stock into shares of common
stock prior to the consummation of this offering; (ii) a
5.25 for 1 stock split of our common stock prior to the
consummation of this offering; (iii) the sale of our common
stock at the initial public offering price of $11.00 per share,
and after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, and (iv) the
application of the net proceeds from the offering as described
in Use of Proceeds, our pro forma as adjusted net
tangible book value as of September 30, 2010 would have
been approximately $6.9 million, or $0.31 per share.
This represents an immediate increase in pro forma net tangible
book value of $5.79 per share to our existing stockholders and
an immediate dilution of $10.69 per share to new investors
purchasing shares of common stock in this offering at the
initial public offering price.
The following table illustrates this dilution to new investors
on a per share basis:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
11.00
|
|
Pro forma net tangible book value per share as of
September 30, 2010
|
|
$
|
(5.48
|
)
|
|
|
|
|
Increase in pro forma net tangible book value per share
attributable to the sale of shares in this offering
|
|
|
5.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
10.69
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $11.00 per share would increase (decrease) our
pro forma as adjusted net tangible book value after this
offering by $4.0 million and increase (decrease) the
dilution to new investors by $0.82 per share, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
48
The following table summarizes, as of September 30, 2010,
the total number of shares of our common stock we issued and
sold, the total consideration we received and the average price
per share paid to us by our existing stockholders and to be paid
by new investors purchasing shares of our common stock from us
in this offering. The table assumes an initial public offering
price of $11.00 per share and deducts underwriting discounts and
commissions and estimated offering expenses payable by us:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Purchased(1)
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
15,786,916
|
|
|
|
78.7
|
%
|
|
$
|
57,179,960
|
|
|
|
54.9
|
%
|
|
$
|
3.62
|
|
New investors
|
|
|
4,265,637
|
|
|
|
21.3
|
|
|
|
46,922,007
|
|
|
|
45.1
|
|
|
$
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,052,553
|
|
|
|
100
|
%
|
|
$
|
104,101,967
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes 60,000 shares of restricted stock to be granted to
certain directors in connection with this offering,
100,000 shares of restricted stock to be granted to certain
of our executive officers and other employees in connection with
this offering 15,570 shares of common stock issued upon the
exercise of options by a selling stockholder in December 2010
and 28,435 shares of common stock to be issued upon the
exercise of existing stock options by a selling stockholder in
this offering.
|
Sales by the selling stockholders in this offering will reduce
the number of shares held by existing stockholders to
14,052,553, or 70.1% of the total number of shares of our common
stock to be outstanding after the offering, and will increase
the number of shares held by new investors to 6,000,000, or
29.9%, of the total number of shares of our common stock to be
outstanding after the offering. If the underwriters exercise
their over-allotment option in full, the percentage of shares of
common stock held by existing stockholders will decrease to
65.6% of the total number of shares of our common stock
outstanding after the offering, and the number of shares of our
common stock held by new investors will increase to 6,900,000,
or 34.4%, of the total shares of our common stock outstanding
after this offering.
A $1.00 increase (decrease) in the assumed initial public
offering price of $11.00 per share would increase (decrease) the
total consideration paid by new investors and all stockholders
by $4.0 million.
In addition, we may choose to raise additional capital due to
market conditions or strategic considerations even if we believe
we have sufficient funds for our current or future operating
plans. To the extent that additional capital is raised through
the sale of equity or convertible debt securities, the issuance
of such securities could result in further dilution to our
stockholders.
49
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical
consolidated financial data for the periods and as of the dates
indicated. The selected historical consolidated financial and
other data as of and for the nine months ended
September 30, 2010 and 2009 are derived from our unaudited
consolidated financial statements included elsewhere in this
prospectus. The consolidated balance sheet data as of
December 31, 2009 and 2008 and the consolidated statement
of income and other data for each of (i) the years ended
December 31, 2009 and 2008, (ii) the period from
June 20, 2007 to December 31, 2007 and (iii) the
period from January 1, 2007 to June 19, 2007 are
derived from our audited consolidated financial statements
included elsewhere in this prospectus. The consolidated balance
sheet data as of December 31, 2007, 2006 and 2005 and the
consolidated statement of income and other data for the years
ended December 31, 2006 and 2005 are derived from our
audited financial statements and not included in this prospectus.
We have prepared the unaudited consolidated financial
information set forth below on the same basis as our audited
consolidated financial statements and have included all
adjustments, consisting of only normal recurring adjustments,
that we consider necessary for a fair presentation of our
financial position and operating results for such periods. The
results for any interim period are not necessarily indicative of
the results that may be expected for a full year.
On June 20, 2007, affiliates of Summit Partners acquired a
majority of our capital stock. All periods prior to
June 20, 2007 are referred to as Predecessor,
and all periods including and after such date are referred to as
Successor. The consolidated financial statements for
all Successor periods are not comparable to those of the
Predecessor periods.
The results indicated below and elsewhere in this prospectus are
not necessarily indicative of our future performance. You should
read this information together with Capitalization,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and the related notes thereto included
elsewhere in this prospectus.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from June 20,
|
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Years Ended
|
|
|
2007 to
|
|
|
|
2007 to
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share data and per share data)
|
|
Consolidated statement of income data:
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and administrative fees
|
|
$
|
26,047
|
|
|
$
|
23,247
|
|
|
$
|
31,829
|
|
|
$
|
24,279
|
|
|
$
|
10,686
|
|
|
|
$
|
8,165
|
|
|
$
|
16,708
|
|
|
$
|
15,521
|
|
Wholesale brokerage commissions and fees
|
|
|
19,168
|
|
|
|
11,106
|
|
|
|
16,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceding commissions
|
|
|
22,468
|
|
|
|
18,275
|
|
|
|
24,075
|
|
|
|
26,215
|
|
|
|
13,733
|
|
|
|
|
10,753
|
|
|
|
19,538
|
|
|
|
13,190
|
|
Net investment income
|
|
|
2,799
|
|
|
|
3,652
|
|
|
|
4,759
|
|
|
|
5,560
|
|
|
|
3,411
|
|
|
|
|
2,918
|
|
|
|
5,308
|
|
|
|
3,899
|
|
Net realized gains (losses)
|
|
|
156
|
|
|
|
(787
|
)
|
|
|
54
|
|
|
|
(1,921
|
)
|
|
|
(348
|
)
|
|
|
|
516
|
|
|
|
962
|
|
|
|
110
|
|
Net earned premium
|
|
|
83,417
|
|
|
|
82,350
|
|
|
|
108,116
|
|
|
|
112,774
|
|
|
|
68,219
|
|
|
|
|
64,906
|
|
|
|
132,438
|
|
|
|
145,545
|
|
Other income
|
|
|
120
|
|
|
|
711
|
|
|
|
971
|
|
|
|
178
|
|
|
|
28
|
|
|
|
|
353
|
|
|
|
1,587
|
|
|
|
1,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
154,175
|
|
|
|
138,554
|
|
|
|
186,113
|
|
|
|
167,085
|
|
|
|
95,729
|
|
|
|
|
87,611
|
|
|
|
176,541
|
|
|
|
179,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
27,086
|
|
|
|
25,010
|
|
|
|
32,566
|
|
|
|
29,854
|
|
|
|
20,324
|
|
|
|
|
21,224
|
|
|
|
41,857
|
|
|
|
46,446
|
|
Commissions
|
|
|
53,631
|
|
|
|
54,938
|
|
|
|
70,449
|
|
|
|
81,226
|
|
|
|
45,275
|
|
|
|
|
42,638
|
|
|
|
85,516
|
|
|
|
90,419
|
|
Personnel costs
|
|
|
27,939
|
|
|
|
22,610
|
|
|
|
31,365
|
|
|
|
21,742
|
|
|
|
10,722
|
|
|
|
|
9,409
|
|
|
|
20,834
|
|
|
|
17,963
|
|
Other operating expenses
|
|
|
17,527
|
|
|
|
16,967
|
|
|
|
22,291
|
|
|
|
12,225
|
|
|
|
8,508
|
|
|
|
|
7,118
|
|
|
|
15,093
|
|
|
|
15,548
|
|
Depreciation and amortization
|
|
|
3,336
|
|
|
|
2,520
|
|
|
|
3,507
|
|
|
|
2,629
|
|
|
|
1,292
|
|
|
|
|
221
|
|
|
|
513
|
|
|
|
461
|
|
Interest expense
|
|
|
6,122
|
|
|
|
5,852
|
|
|
|
7,800
|
|
|
|
7,255
|
|
|
|
4,130
|
|
|
|
|
1,169
|
|
|
|
1,973
|
|
|
|
1,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
135,641
|
|
|
|
127,897
|
|
|
|
167,978
|
|
|
|
154,931
|
|
|
|
90,251
|
|
|
|
|
81,779
|
|
|
|
165,786
|
|
|
|
172,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
18,534
|
|
|
|
10,657
|
|
|
|
18,135
|
|
|
|
12,154
|
|
|
|
5,478
|
|
|
|
|
5,832
|
|
|
|
10,755
|
|
|
|
7,059
|
|
Income taxes
|
|
|
6,872
|
|
|
|
4,031
|
|
|
|
6,551
|
|
|
|
4,208
|
|
|
|
1,761
|
|
|
|
|
1,983
|
|
|
|
3,530
|
|
|
|
2,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before non-controlling interest
|
|
|
11,662
|
|
|
|
6,626
|
|
|
|
11,584
|
|
|
|
7,946
|
|
|
|
3,717
|
|
|
|
|
3,849
|
|
|
|
7,225
|
|
|
|
4,886
|
|
Less: net income (loss) attributable to non-controlling interest
|
|
|
(31
|
)
|
|
|
46
|
|
|
|
26
|
|
|
|
(82
|
)
|
|
|
64
|
|
|
|
|
34
|
|
|
|
161
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,693
|
|
|
$
|
6,580
|
|
|
$
|
11,558
|
|
|
$
|
8,028
|
|
|
$
|
3,653
|
|
|
|
$
|
3,815
|
|
|
$
|
7,064
|
|
|
$
|
4,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.90
|
|
|
$
|
2.26
|
|
|
$
|
3.94
|
|
|
$
|
2.90
|
|
|
$
|
1.32
|
|
|
|
$
|
1.00
|
|
|
$
|
1.87
|
|
|
$
|
1.22
|
|
Diluted
|
|
|
3.60
|
|
|
|
2.10
|
|
|
|
3.65
|
|
|
|
2.72
|
|
|
|
1.24
|
|
|
|
|
0.95
|
|
|
|
1.73
|
|
|
|
1.11
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,998,540
|
|
|
|
2,909,395
|
|
|
|
2,931,182
|
|
|
|
2,771,372
|
|
|
|
2,766,565
|
|
|
|
|
3,819,265
|
|
|
|
3,777,345
|
|
|
|
3,701,148
|
|
Diluted
|
|
|
3,248,982
|
|
|
|
3,128,876
|
|
|
|
3,170,653
|
|
|
|
2,956,211
|
|
|
|
2,955,381
|
|
|
|
|
4,028,242
|
|
|
|
4,077,936
|
|
|
|
4,047,162
|
|
Consolidated statement of cash flows data:
|
Operating activities
|
|
$
|
2,844
|
|
|
$
|
7,274
|
|
|
$
|
13,393
|
|
|
$
|
12,998
|
|
|
$
|
10,265
|
|
|
|
$
|
2,518
|
|
|
$
|
8,592
|
|
|
$
|
11,806
|
|
Investing activities
|
|
|
(29,780
|
)
|
|
|
(39,326
|
)
|
|
|
(26,532
|
)
|
|
|
(26,069
|
)
|
|
|
(10,297
|
)
|
|
|
|
22,424
|
|
|
|
(8,208
|
)
|
|
|
(19,150
|
)
|
Financing activities
|
|
|
14,839
|
|
|
|
31,573
|
|
|
|
20,997
|
|
|
|
(1,875
|
)
|
|
|
(571
|
)
|
|
|
|
(474
|
)
|
|
|
(1,925
|
)
|
|
|
8,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
2006
|
|
2005
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,843
|
|
|
$
|
29,940
|
|
|
$
|
22,082
|
|
|
$
|
43,495
|
|
|
|
$
|
16,836
|
|
|
$
|
18,377
|
|
Total assets
|
|
|
498,642
|
|
|
|
478,626
|
|
|
|
442,369
|
|
|
|
416,300
|
|
|
|
|
297,317
|
|
|
|
248,731
|
|
Notes payable
|
|
|
48,013
|
|
|
|
31,487
|
|
|
|
20,000
|
|
|
|
21,079
|
|
|
|
|
7,400
|
|
|
|
2,200
|
|
Preferred trust securities
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred securities
|
|
|
11,440
|
|
|
|
11,540
|
|
|
|
11,540
|
|
|
|
11,540
|
|
|
|
|
21,740
|
|
|
|
20,340
|
|
Total stockholders equity
|
|
|
94,881
|
|
|
|
80,793
|
|
|
|
57,021
|
|
|
|
51,473
|
|
|
|
|
35,747
|
|
|
|
29,426
|
|
51
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with Selected Historical Consolidated
Financial Data and our consolidated financial statements
and related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements, based on current
expectations and related to future events and our future
financial performance, that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in
these forward-looking statements as a result of certain factors,
including but not limited to those set forth under Risk
Factors and elsewhere in this prospectus.
Overview
We are an insurance services company that provides distribution
and administration services and insurance-related products to
insurance companies, insurance brokers and agents and other
financial services companies in the United States. We sell our
services and products directly to businesses rather than
directly to consumers.
We began nearly 30 years ago as a provider of credit insurance
products and, through our transformational efforts, have evolved
into a diversified insurance services company. We now leverage
our proprietary technology infrastructure, internally developed
best practices and access to specialty insurance markets to
provide our clients with distribution and administration
services and insurance-related products. Our services and
products complement consumer credit offerings, provide
outsourcing solutions designed to reduce the costs associated
with the administration of insurance and other financial
products and facilitate the distribution of excess and surplus
lines insurance products through insurance companies, brokers
and agents. These services and products are designed to increase
revenues, improve customer value and loyalty and reduce costs
for our clients.
We intend to take advantage of embedded growth opportunities and
new market development through geographic expansion, expanding
our products and service presence with existing clients and
acquiring complementary businesses. To support our growth
initiatives, we continue to focus on adding enhanced features to
our existing information systems and developing new processes to
enhance efficiency, drive economies of scale and provide
additional competitive advantages.
Our company is comprised of three business segments: Payment
Protection, BPO and Wholesale Brokerage.
|
|
|
|
|
Our Payment Protection segment, marketed under our Life of the
South brand, delivers credit insurance, debt protection,
warranty, service contract and car club solutions, along with
administrative services to consumer finance companies, regional
banks, community banks, retailers, small loan companies,
warranty administrators, automobile dealers, vacation ownership
developers and credit unions. Our Payment Protection segment
specializes in providing products that protect consumer lenders
and their borrowers from death, disability or other events that
could otherwise impair their borrowers ability to repay a
debt.
|
|
|
|
Our BPO segment, marketed under our Consecta brand, provides a
broad range of administrative services tailored to insurance and
other financial services companies. Our BPO segment is our most
technology-driven segment. Through our operating platform, which
utilizes our proprietary technology, we provide ongoing sales
and marketing support, electronic underwriting, premium billing
and collections, policy administration, claims adjudication and
call center management services on behalf of our clients. In
2009, our platform and technology enabled our insurance
administration team of 35 individuals on a
|
52
|
|
|
|
|
daily basis to bill approximately 38,000 customers, process and
deliver approximately 5,500 policies, fulfill approximately 900
customer service calls and process approximately 900 claims. Our
BPO segment also includes our asset recovery business.
|
|
|
|
|
|
Our Wholesale Brokerage segment, marketed under our
Bliss & Glennon brand, is one of the largest surplus
lines brokers in California and ranked in the top 20 wholesale
brokers in the United States in 2009 by premium volume. This
business segment uses a wholesale model to sell specialty
property and casualty (P&C) and surplus lines
insurance through retail insurance brokers and agents and
insurance companies. We believe that our emphasis on customer
service, rapid responsiveness to submissions and underwriting
integrity in this segment has resulted in high customer
satisfaction among retail insurance brokers and agents and
insurance companies.
|
Corporate
History
We were incorporated in 1981 and initially provided credit life
and disability insurance for financial institutions, primarily
small community banks in Georgia, and their customers under our
Life of the South brand. From 1994 to 2003, through a series of
strategic acquisitions and organic growth, we expanded our
payment protection client, or producer, base to include consumer
finance companies, retailers, automobile dealers, credit card
issuers, credit unions and regional and community banks
throughout the United States. During this period, we expanded
our product and service offerings to include credit property,
debt cancellation and warranty products.
In 2003, we continued the expansion of our administrative
capabilities for insurance and payment protection products to
customers of financial institutions. We utilized our proprietary
technology enhancements to support mass marketing and began
providing fulfillment of life and health insurance products. We
previously operated our BPO business under the LOTSolutions
brand. In 2007, we expanded our BPO segment to provide services
to finance companies owned by industrial equipment
manufacturers. We entered into the asset recovery business in
December 2008 through our acquisition of CIRG, a third-party
administrator serving commercial lending institutions for
pre-collections, recovery, deficiency collections, dealer
inventory seizures and management of asset portfolio run-off.
Our asset recovery business is part of our BPO segment.
In March 2008, we acquired Gulfco Life Insurance Company to
expand the presence of our Payment Protection segment in the
Louisiana market. In December 2008, we acquired
Darby & Associates, a wholesale provider of payment
protection products in North Carolina. This acquisition expanded
our Payment Protection segment in North Carolina, which is that
segments third largest state in terms of 2009 revenues and
an important foothold with our consumer finance company clients
(our largest distribution channel within the Payment Protection
segment). In April 2009, we acquired Bliss & Glennon,
an excess and surplus lines wholesale insurance broker, and
entered into the wholesale brokerage business, which continued
our strategic expansion of specialized and administration
services for insurance carriers and other financial services
businesses.
Through our February 2010 acquisition of South Bay Acceptance
Corporation, we expanded into premium finance to support our
Wholesale Brokerage segment. In 2010, we commenced marketing our
BPO segment under the Consecta brand. In May 2010, we acquired
Continental Car Club to enable our Payment Protection segment to
expand into the roadside assistance market. Continental Car Club
provides car club memberships through consumer finance
companies. In September 2010, we acquired United Motor Club,
which also provides car club memberships through consumer
finance companies.
53
We historically have used a combination of cash on hand and
borrowings under our lines of credit to pay the purchase price
of our acquisitions. The following table summarizes our
acquisition activity for the nine months ended
September 30, 2010 and the years ended December 31,
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Years Ended December 31,
|
|
|
September 30, 2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
(in thousands, except number of acquisitions closed)
|
|
Number of acquisitions
closed(1)
|
|
|
3
|
|
|
|
1
|
|
|
|
3
|
|
|
|
2
|
|
Total cash
consideration(1)
|
|
$
|
22,248
|
|
|
$
|
40,500
|
|
|
$
|
2,265
|
|
|
$
|
7,366
|
|
|
|
(1) |
Includes the purchase of three shell insurance companies,
American Guaranty Insurance Company and Triangle Life Insurance
Company in 2007, and Gulfco Life Insurance Company in 2008. Each
of these companies was acquired for cash consideration equal to
its statutory surplus and the value of the single state
licenses. As of December 31, 2009, each company had been
merged into one of our other subsidiaries.
|
Summit
Partners Transactions
In June 2007, entities affiliated with Summit Partners, a global
growth equity investment firm, acquired 91.2% of our capital
stock. The acquisition was financed through
(i) $20.0 million of subordinated debentures maturing
in 2013 issued to affiliates of Summit Partners,
(ii) $35.0 million of preferred trust securities
maturing in 2037 and (iii) an equity investment of
$43.1 million by affiliates of Summit Partners. In
connection with the acquisition, all of our $11.5 million
of redeemable preferred stock outstanding prior to the
acquisition remained outstanding and certain stockholders prior
to the acquisition continued to hold such shares after the
acquisition. In addition to acquiring our capital stock in the
acquisition, the proceeds from the equity and debt financings
were used to repay pre-transaction indebtedness of
$10.1 million and pay transaction costs of
$5.8 million. We refer to the foregoing transactions
collectively as the Summit Partners Transactions.
In April 2009, in connection with our acquisition of
Bliss & Glennon, affiliates of Summit Partners
acquired additional shares of our capital stock for
$6.0 million. As of September 30, 2010, affiliates of
Summit Partners beneficially owned 88.6% of our capital stock.
Components
of Revenues and Expenses
Revenues
Service and Administrative Fees. We
earn service and administrative fees from two of our business
segments. Such fees are typically positively correlated with
transaction volume and are recognized as revenue as they become
both realized and earned. See Critical
Accounting Policies Service and Administrative
Fees.
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Payment Protection. Our Payment
Protection products are sold as complementary products to
consumer retail and credit transactions and are thus subject to
the volatility of volume of consumer purchase and credit
activities. We receive service and administrative fees for
administering Payment Protection products that are sold by our
clients, such as credit insurance, debt protection, car club and
warranty solutions. We earn administrative fees for
administering debt cancellation plans, facilitating the
distribution and administration of warranty or extended service
contracts, providing car club membership benefits and providing
related services for our clients. For credit insurance products,
our clients typically retain the risk associated with credit
insurance products that they sell to their customers through
economic arrangements with us. Our Payment Protection revenue
includes revenue earned from reinsurance arrangements with
producer owned reinsurance companies (PORCs) owned by our
clients. Our clients own PORCs that assume the credit insurance
premiums and
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54
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associated risk that they originate in exchange for fees paid to
us for ceding the premiums. In addition, our Payment Protection
revenue includes administrative fees charged by us under
retrospective commission arrangements with producers, where the
commissions paid are adjusted based on actual losses incurred
compared to premium earned after a specified net allowance
retained by us. Under these arrangements, our insurance
companies receive the insurance premiums and administer the
policies that are distributed by our clients. The producer of
the credit insurance policies receives a retrospective
commission if the premium generated by that producer in the
accounting period exceeds the costs associated with those
polices, which includes our administrative fees, incurred
claims, reserves and premium taxes. If the net result is
negative, we either offset that negative amount against future
retrospective commission payments, reduce the producers
up-front commission on a prospective basis to increase the
likelihood that it will return to a positive position or request
payment of the negative amount from the producer. Revenues in
our Payment Protection business may fluctuate seasonally based
on consumer spending trends, where consumer spending has
historically been higher in April, September and December,
corresponding to Easter,
back-to-school
and the holiday season. Accordingly, our Payment Protection
revenues may reflect higher second, third and fourth quarters
than in the first quarter. For the years ended December 31,
2009, 2008 and 2007, Payment Protection contributed 26.1%, 42.7%
and 50.0% of overall service and administrative fees,
respectively.
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BPO. Our BPO revenues consist
exclusively of service and administrative fees for providing a
broad set of administrative services tailored to insurance and
other financial services companies including ongoing sales and
marketing support, electronic underwriting, premium billing and
collections, policy administration, claims adjudication and call
center management services. Our BPO revenues are based on the
volume of business that we manage on behalf of our clients. Our
BPO segment typically charges fees on a
per-unit of
service basis as a percentage of our clients insurance
premiums. For the years ended December 31, 2009, 2008 and 2007,
BPO contributed 73.9%, 57.3% and 50.0% of overall service and
administrative fees, respectively.
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Wholesale Brokerage Commissions and
Fees. Wholesale brokerage commissions and
fees consist of commissions paid to us by insurance companies,
net of the portion of the commissions we share with retail
insurance brokers and agents. The commissions we receive from
insurance carriers are typically calculated as a percentage of
the premiums paid for the specialized and complex insurance
products (commonly known as surplus lines) we
distribute. We typically earn our commissions on the later of
the effective date of the policy or the date coverage is bound.
We pay our retail insurance agent and broker clients a portion
of the gross commissions we receive from insurance carriers for
placing insurance. In certain cases, our Wholesale Brokerage
segment also charges fees for policy issuance, inspections and
other types of transactions.
Wholesale brokerage commissions and fees are generally affected
by fluctuations in the amount of premium charged by insurance
carriers. The premiums charged fluctuate based on, among other
factors, the amount of capital available in the insurance
marketplace, the type of risk being insured, the nature of the
insured party and the terms of the insurance purchased. If
premiums increase or decrease, our revenues are typically
affected in a corresponding fashion. In a declining premium rate
environment, the resulting decline in our revenue may be offset,
in whole or in part, by an increase in commission rates from
insurance carriers and by an increased likelihood that insured
parties may use the savings generated by the reduction in
premium rates to purchase greater coverage. In an increasing
pricing environment, the resulting increase in our revenue may
be offset, in whole or in part, by a decrease in commission
rates by insurance carriers and by an increased likelihood that
insured parties may determine to reduce the amount of coverage
they purchase. The market for P&C insurance products is
cyclical from a capacity and pricing perspective. We refer to a
period of reduced capacity and rising
55
premium rates as a hard market and a period of
increased capacity and declining premium rates as a
soft market.
Gross commission rates for the products that we distribute in
our Wholesale Brokerage segment, whether acting as a wholesale
broker or as an MGA, generally range from 15% to 25% of the
annual premium for the policy. Wholesale brokerage commissions
and fees net of commissions paid to our retail insurance agent
and broker clients are typically approximately 10%.
Demand for surplus lines insurance products also affects our
premium volume and net commissions. State regulations generally
require a buyer of insurance to have been turned down by three
or more traditional carriers before being eligible to purchase
the surplus lines distributed by us. As standard insurance
carriers eliminate non-core lines of business and implement more
conservative risk selection techniques, demand for excess and
surplus lines insurance improves. The surplus lines market has
increased from approximately 6.7% of total P&C commercial
lines insurance premiums in 1998 to approximately 13.8% in 2008,
as reported by A.M. Best. Premiums written by surplus lines
property and casualty insurers increased from $9.9 billion
to $34.4 billion over the same time period.
Our wholesale brokerage commission and fee revenues fluctuate
seasonally based on policy renewal dates. Our wholesale
brokerage commissions and fees in the first two calendar
quarters of any year historically have been higher than in the
last two calendar quarters. In addition, our quarterly wholesale
brokerage revenues may be affected by new placements and
cancellations or non-renewals of large insurance policies as the
revenue stream related to this policy is recognized once per
year, as opposed to ratably throughout the year.
We also receive profit commissions for certain arrangements with
certain insurance carriers on binding authority business. These
profit commissions are based on the profitability of the
business that we underwrite or broker on the insurance
carriers behalf. Profit commissions typically range from
0.6% to 1.7% of the annual premium and are paid periodically
based on the terms of the individual carrier contract.
Ceding Commissions. We elect to cede to
reinsurers under coinsurance arrangements a significant portion
of the credit insurance that we distribute on behalf of our
clients. We continue to provide all policy administration for
credit insurance that we cede to reinsurers. Ceding commissions
consist of commissions paid to us by our reinsurers to reimburse
us for costs related to the acquisition, administration and
servicing of policies and premium that we cede to reinsurers. In
addition, a portion of the ceding commission is determined based
on the underwriting profits of the ceded credit insurance. The
credit insurance that we distribute has historically generated
attractive underwriting profits. Furthermore, some reinsurers
pay to us a portion or all of the investment income earned on
reserves that are maintained in trust accounts.
Ceding commissions are generally positively correlated with our
credit insurance transaction and premium volumes. The portion of
our ceding commissions that is related to the underwriting
profits of the ceded credit insurance also fluctuates based on
the claims made on such policies. The portion of our ceding
commissions that is related to investment income can be impacted
by the amount of reserves that are maintained in trust accounts
and changes in interest rates. Ceding commissions are earned
over the life of the policy. For the years ended
December 31, 2009, 2008 and 2007, ceding commissions
represented 12.9%, 15.7% and 13.4% of total revenue. Ceding
commissions are generated by the Payment Protection segment only
for credit insurance.
Net Earned Premium. Net earned premium
consists of revenue generated from the direct sale of Payment
Protection insurance policies by our distributors or premiums
written for Payment Protection insurance policies by another
carrier and assumed by us. Whether direct or assumed, the
premium is earned over the term of the respective policy.
Premiums earned are offset by earned premiums ceded to
56
our reinsurers, including PORCs. The amount ceded is
proportional to the amount of risk assumed by the reinsurer.
The principal factors affecting earned premiums are:
(i) the proportion of the risk assumed by the reinsurer as
defined in the reinsurance treaty; (ii) increases and
decreases in written premium; (iii) increases and decreases
in policy cancellation rates; (iv) the average duration of
the policies written; and (v) changes in regulation that
would modify the earning patterns for the policies underwritten
and administered.
We limit the underwriting risk we take in our Payment Protection
insurance policies. When we do assume risk in our Payment
Protection insurance policies, we utilize both reinsurance
(quota share and excess of loss) and retrospective commission
agreements to manage and mitigate our risk.
Net Investment Income. Net investment
income consists of investment income from our invested assets
portfolio. We recognize investment income from interest payments
and dividends less portfolio management expenses. Our investment
portfolio is primarily invested in fixed maturity securities.
The fair market value of the fixed maturity securities in our
portfolio and the investment income from these securities
fluctuate depending on general economic and market conditions.
The fair market value generally increases or decreases in an
inverse relationship with fluctuations in interest rates.
Investment income can be significantly impacted by changes in
interest rates. Interest rate volatility can increase or reduce
unrealized gains or unrealized losses in our portfolios.
Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international
economic and political conditions and other factors beyond our
control. Fluctuations in interest rates affect our returns on,
and the market value of, fixed maturity and short-term
investments.
We also have investments that carry prepayment risk, such as
mortgage-backed and asset-backed securities. Actual net
investment income
and/or cash
flows from investments that carry prepayment risk may differ
from estimates at the time of investment as a result of interest
rate fluctuations. In periods of declining interest rates,
mortgage prepayments generally increase and mortgage-backed
securities, commercial mortgage obligations and bonds are more
likely to be prepaid or redeemed as borrowers seek to borrow at
lower interest rates. Therefore, we may be required to reinvest
those funds in lower interest-bearing investments.
We earn realized gains when invested assets are sold for an
amount greater than the amortized cost in the case of fixed
maturity securities and recognize realized losses when
investment securities are written down as a result of an
other-than-temporary impairment or sold for an amount less than
their carrying cost.
Other Income. Other income primarily
consists of miscellaneous fees generated by our Wholesale
Brokerage and Payment Protection segments. In 2009, it also
included income in our Wholesale Brokerage segment that was
derived from the reversal of a cancellation reserve that was no
longer deemed to be applicable subsequent to our acquisition of
Bliss & Glennon.
Expenses
Our most significant operating expenses are commissions,
personnel costs, including salaries, bonuses and benefits and
net losses and loss adjustment expenses. The commissions expense
includes the commissions paid to distributors selling credit
insurance policies offered by our Payment Protection division.
Commission rates, in many instances, are set by state regulators
and are also impacted by market conditions. In certain
instances, our commissions are subject to retrospective
adjustment based on the profitability of the related policies.
These retrospective commission adjustments are payments made or
adjustments to future commission expense based on claims
experience. Under these retrospective commission arrangements,
the producer of the credit insurance policies, which is
typically our client, receives a retrospective commission if the
premium generated by that producer in the accounting
57
period exceeds the costs associated with those policies, which
includes our administrative fees, claims, reserves, and premium
taxes. If the net result is negative, we either offset that
negative amount against future retrospective commission
payments, reduce the producers up-front commission on a
prospective basis to increase the likelihood that it will return
to a positive position or request payment of the negative amount
from the producer.
Net losses and loss adjustment expenses include actual paid
claims and the change in unpaid claim reserves, net of
reinsurance. Our profitability depends in part on accurately
predicting net loss and loss adjustment expenses. Incurred
claims are impacted by loss frequency, which is the measure of
the number of claims per unit of insured exposure, and loss
severity, which is based on the average size of claims. Factors
affecting loss frequency and loss severity include changes in
claims reporting patterns, claims settlement patterns, judicial
decisions, legislation, economic conditions, morbidity patterns
and the attitudes of claimants towards settlements.
Actual claims paid are claims payments made to the policyholder
or beneficiary during the accounting period. The change in
unpaid claim reserve is an increase or reduction to the unpaid
claim reserve in the accounting period to maintain the unpaid
claim reserve at the levels defined by our actuaries.
Unpaid claims are reserve estimates that are established in
accordance with GAAP using generally accepted actuarial methods.
Credit life, credit disability and accidental death and
dismemberment (AD&D) unpaid claims reserves
include claims in the course of settlement and incurred but not
reported (IBNR). For all other product lines, unpaid
claims reserves are bulk reserves and are entirely IBNR. We use
a number of algorithms in establishing our unpaid claims
reserves. These algorithms are used to calculate unpaid claims
as a function of paid losses, earned premium, target loss
ratios, in force amounts, unearned premium reserves, industry
recognized morbidity tables or a combination of these factors.
The factors used to develop the IBNR reserves vary by product
line. However, in general terms, the primary factor used to
develop IBNR reserves for credit life insurance is a function of
the amount of life insurance in force. This factor can vary from
$0.60 to $1.00 per $1,000 of in force coverage. The primary
factor used to develop IBNR reserves for credit disability is a
function of the pro-rata unearned premium reserve and is
typically 5% of unearned premium reserve. Finally, IBNR reserves
for AD&D policies is a function of in force coverage and is
currently $0.11 per $1,000 of in force coverage.
In accordance with applicable statutory insurance company
regulations, our unpaid claims reserves are evaluated by
appointed actuaries. The appointed actuaries perform this
function in compliance with the Standards of Practice and Codes
of Conduct of the American Academy of Actuaries. The appointed
actuaries perform their actuarial analyses each year and prepare
opinions, statements and reports documenting their
determinations.
The appointed actuaries conduct their actuarial analysis on a
basis gross of reinsurance. The same estimates used as a basis
in calculating the gross unpaid claims reserves are then used as
the basis for calculating the net unpaid claims reserves, which
take into account the impact of reinsurance. Anticipated future
loss development patterns form a key assumption underlying these
analyses. Our claims are generally reported and settled quickly,
resulting in a consistent historical loss development pattern.
From the anticipated loss development patterns, a variety of
actuarial loss projection techniques are employed, such as the
chain ladder method, the Bornhuetter-Ferguson method and
expected loss ratio method.
Our unpaid claims reserves do not represent an exact calculation
of exposure, but instead represent our best estimates, generally
involving actuarial projections at a given time. The process
used in determining our unpaid claims reserves cannot be exact
since actual claim costs are dependent upon a number of complex
factors such as changes in doctrines of legal liabilities and
damage awards. These factors are not directly quantifiable,
particularly on a prospective basis. We periodically review and
update our
58
methods of making such unpaid claims reserve estimates and
establishing the related liabilities based on our actual
experience. We have not made any changes to our methodologies
for determining unpaid claims reserves in the periods presented.
In addition to our general personnel costs, some of the
employees in our Wholesale Brokerage segment are paid a
percentage of commissions and fees they generate. Accordingly,
compensation for brokers in our Wholesale Brokerage segment is
predominantly variable. Bonuses for the remaining employees are
discretionary and are based on an evaluation of their individual
performance and the performance of their particular business
segment, as well as our entire firm.
Other operating expenses consist primarily of rent, insurance,
investigation fees, transaction expenses, professional fees,
technology costs, travel and entertainment and advertising, and
they are also a significant portion of our expenses. In
addition, we have variable costs that are based on the volume of
business we process.
A substantial portion of our depreciation and amortization
expense consists of amortization of definite-lived intangible
assets, such as purchased customer accounts and non-compete
agreements, which were acquired as part of our business
acquisitions. Our depreciation and amortization expense
increased in 2007 as a result of the amortization of intangible
assets recorded in connection with the Summit Partners
Transactions and likewise increased the amortization of
intangible assets in relation to our subsequent acquisitions.
We also have interest expense relating to our credit facilities
and preferred trust securities. Our interest expense increased
as result of our increased indebtedness resulting from the
Summit Partners Transactions and recent acquisitions.
The following table sets forth our expenses as a percentage of
revenues for the periods indicated on an unaudited basis:
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|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
Period from
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|
|
Period from
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|
|
|
|
|
|
|
|
|
|
June 20,
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|
January 1,
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|
|
|
|
|
|
Years Ended
|
|
2007 to
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|
|
2007 to
|
|
|
Nine Months Ended
|
|
December 31,
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|
December 31,
|
|
|
June 19,
|
|
|
2010
|
|
2009
|
|
2009
|
|
2008
|
|
2007
|
|
|
2007
|
Net losses and loss adjustment expenses
|
|
|
17.6
|
%
|
|
|
18.1
|
%
|
|
|
17.5
|
%
|
|
|
17.9
|
%
|
|
|
21.2
|
%
|
|
|
|
24.2
|
%
|
Commissions
|
|
|
34.8
|
%
|
|
|
39.7
|
%
|
|
|
37.9
|
%
|
|
|
48.6
|
%
|
|
|
47.3
|
%
|
|
|
|
48.7
|
%
|
Personnel costs
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|
|
18.1
|
%
|
|
|
16.3
|
%
|
|
|
16.9
|
%
|
|
|
13.0
|
%
|
|
|
11.2
|
%
|
|
|
|
10.7
|
%
|
Other operating expenses
|
|
|
11.4
|
%
|
|
|
12.2
|
%
|
|
|
12.0
|
%
|
|
|
7.3
|
%
|
|
|
8.9
|
%
|
|
|
|
8.1
|
%
|
Depreciation and amortization
|
|
|
2.2
|
%
|
|
|
1.8
|
%
|
|
|
1.9
|
%
|
|
|
1.6
|
%
|
|
|
1.3
|
%
|
|
|
|
0.3
|
%
|
Interest expense
|
|
|
4.0
|
%
|
|
|
4.2
|
%
|
|
|
4.2
|
%
|
|
|
4.3
|
%
|
|
|
4.3
|
%
|
|
|
|
1.3
|
%
|
Income
Taxes
Income tax expense is comprised of federal and state taxes based
on income in multiple jurisdictions and changes in uncertain tax
positions. Our effective tax rate was 37%, 36%, 35% and 33% in
the nine months ended September 30, 2010 and the years
ended December 31, 2009, 2008 and 2007, respectively. The
increase in the effective income tax rate is a result of our
shift into the 35% corporate income tax bracket, the reduction
in available federal small life insurance company tax deductions
associated with the growth in our statutory life insurance
companies, and the expansion of our business into states with
higher corporate income tax rates.
59
Consolidated
Statements of Income
For purposes of the following discussion and analysis of our
consolidated statements of income, the consolidated statements
of income for the year ended December 31, 2007 reflect our
consolidated statements of income for the predecessor period
from January 1, 2007 to June 19, 2007 (the 2007
predecessor period) combined with our consolidated
statements of income for the successor period from June 20,
2007 to December 31, 2007 (the 2007 successor
period).
Overview
The following tables set forth our consolidated statements of
income in dollars and as a percentage of total revenues for the
periods presented on an unaudited basis:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 20,
|
|
|
|
January 1,
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
2007 to
|
|
|
|
2007 to
|
|
|
|
September 30,
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and administrative fees
|
|
$
|
26,047
|
|
|
$
|
23,247
|
|
|
$
|
31,829
|
|
|
$
|
24,279
|
|
|
$
|
10,686
|
|
|
|
$
|
8,165
|
|
Wholesale brokerage commissions and fees
|
|
|
19,168
|
|
|
|
11,106
|
|
|
|
16,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceding commissions
|
|
|
22,468
|
|
|
|
18,275
|
|
|
|
24,075
|
|
|
|
26,215
|
|
|
|
13,733
|
|
|
|
|
10,753
|
|
Net investment income
|
|
|
2,799
|
|
|
|
3,652
|
|
|
|
4,759
|
|
|
|
5,560
|
|
|
|
3,411
|
|
|
|
|
2,918
|
|
Net realized gains (losses)
|
|
|
156
|
|
|
|
(787
|
)
|
|
|
54
|
|
|
|
(1,921
|
)
|
|
|
(348
|
)
|
|
|
|
516
|
|
Net earned premium
|
|
|
83,417
|
|
|
|
82,350
|
|
|
|
108,116
|
|
|
|
112,774
|
|
|
|
68,219
|
|
|
|
|
64,906
|
|
Other income
|
|
|
120
|
|
|
|
711
|
|
|
|
971
|
|
|
|
178
|
|
|
|
28
|
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
154,175
|
|
|
|
138,554
|
|
|
|
186,113
|
|
|
|
167,085
|
|
|
|
95,729
|
|
|
|
|
87,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
27,086
|
|
|
|
25,010
|
|
|
|
32,566
|
|
|
|
29,854
|
|
|
|
20,324
|
|
|
|
|
21,224
|
|
Commissions
|
|
|
53,631
|
|
|
|
54,938
|
|
|
|
70,449
|
|
|
|
81,226
|
|
|
|
45,275
|
|
|
|
|
42,638
|
|
Personnel costs
|
|
|
27,939
|
|
|
|
22,610
|
|
|
|
31,365
|
|
|
|
21,742
|
|
|
|
10,722
|
|
|
|
|
9,409
|
|
Other operating expenses
|
|
|
17,527
|
|
|
|
16,967
|
|
|
|
22,291
|
|
|
|
12,225
|
|
|
|
8,508
|
|
|
|
|
7,118
|
|
Depreciation and amortization
|
|
|
3,336
|
|
|
|
2,520
|
|
|
|
3,507
|
|
|
|
2,629
|
|
|
|
1,292
|
|
|
|
|
221
|
|
Interest expense
|
|
|
6,122
|
|
|
|
5,852
|
|
|
|
7,800
|
|
|
|
7,255
|
|
|
|
4,130
|
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
135,641
|
|
|
|
127,897
|
|
|
|
167,978
|
|
|
|
154,931
|
|
|
|
90,251
|
|
|
|
|
81,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
non-controlling
interest
|
|
|
18,534
|
|
|
|
10,657
|
|
|
|
18,135
|
|
|
|
12,154
|
|
|
|
5,478
|
|
|
|
|
5,832
|
|
Income taxes
|
|
|
6,872
|
|
|
|
4,031
|
|
|
|
6,551
|
|
|
|
4,208
|
|
|
|
1,761
|
|
|
|
|
1,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before non-controlling interest
|
|
|
11,662
|
|
|
|
6,626
|
|
|
|
11,584
|
|
|
|
7,946
|
|
|
|
3,717
|
|
|
|
|
3,849
|
|
Less: net income (loss) attributable to non-controlling interest
|
|
|
(31
|
)
|
|
|
46
|
|
|
|
26
|
|
|
|
(82
|
)
|
|
|
64
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,693
|
|
|
$
|
6,580
|
|
|
$
|
11,558
|
|
|
$
|
8,028
|
|
|
$
|
3,653
|
|
|
|
$
|
3,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 20,
|
|
|
|
January 1,
|
|
|
|
Nine
|
|
|
Years Ended
|
|
|
2007 to
|
|
|
|
2007 to
|
|
|
|
Months Ended
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and administrative fees
|
|
|
16.9
|
%
|
|
|
16.8
|
%
|
|
|
17.1
|
%
|
|
|
14.5
|
%
|
|
|
11.2
|
%
|
|
|
|
9.3
|
%
|
Wholesale brokerage commissions and fees
|
|
|
12.4
|
%
|
|
|
8.0
|
%
|
|
|
8.8
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
0.0
|
%
|
Ceding commissions
|
|
|
14.6
|
%
|
|
|
13.2
|
%
|
|
|
12.9
|
%
|
|
|
15.7
|
%
|
|
|
14.3
|
%
|
|
|
|
12.3
|
%
|
Net investment income
|
|
|
1.8
|
%
|
|
|
2.6
|
%
|
|
|
2.6
|
%
|
|
|
3.3
|
%
|
|
|
3.6
|
%
|
|
|
|
3.3
|
%
|
Net realized gains (losses)
|
|
|
0.1
|
%
|
|
|
(0.6
|
)%
|
|
|
0.0
|
%
|
|
|
(1.1
|
)%
|
|
|
(0.4
|
)%
|
|
|
|
0.6
|
%
|
Net earned premium
|
|
|
54.1
|
%
|
|
|
59.4
|
%
|
|
|
58.1
|
%
|
|
|
67.5
|
%
|
|
|
71.3
|
%
|
|
|
|
74.1
|
%
|
Other income
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
17.6
|
%
|
|
|
18.1
|
%
|
|
|
17.5
|
%
|
|
|
17.9
|
%
|
|
|
21.2
|
%
|
|
|
|
24.2
|
%
|
Commissions
|
|
|
34.8
|
%
|
|
|
39.7
|
%
|
|
|
37.9
|
%
|
|
|
48.6
|
%
|
|
|
47.3
|
%
|
|
|
|
48.7
|
%
|
Personnel costs
|
|
|
18.1
|
%
|
|
|
16.3
|
%
|
|
|
16.9
|
%
|
|
|
13.0
|
%
|
|
|
11.2
|
%
|
|
|
|
10.7
|
%
|
Other operating expenses
|
|
|
11.4
|
%
|
|
|
12.2
|
%
|
|
|
12.0
|
%
|
|
|
7.3
|
%
|
|
|
8.9
|
%
|
|
|
|
8.1
|
%
|
Depreciation and amortization
|
|
|
2.2
|
%
|
|
|
1.8
|
%
|
|
|
1.9
|
%
|
|
|
1.6
|
%
|
|
|
1.3
|
%
|
|
|
|
0.3
|
%
|
Interest expense
|
|
|
4.0
|
%
|
|
|
4.2
|
%
|
|
|
4.2
|
%
|
|
|
4.3
|
%
|
|
|
4.3
|
%
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
88.0
|
%
|
|
|
92.3
|
%
|
|
|
90.3
|
%
|
|
|
92.7
|
%
|
|
|
94.3
|
%
|
|
|
|
93.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
12.0
|
%
|
|
|
7.7
|
%
|
|
|
9.7
|
%
|
|
|
7.3
|
%
|
|
|
5.7
|
%
|
|
|
|
6.7
|
%
|
Income taxes
|
|
|
4.5
|
%
|
|
|
2.9
|
%
|
|
|
3.5
|
%
|
|
|
2.5
|
%
|
|
|
1.8
|
%
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before non-controlling interest
|
|
|
7.6
|
%
|
|
|
4.8
|
%
|
|
|
6.2
|
%
|
|
|
4.8
|
%
|
|
|
3.9
|
%
|
|
|
|
4.4
|
%
|
Less: net income (loss) attributable to non-controlling interest
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7.6
|
%
|
|
|
4.7
|
%
|
|
|
6.2
|
%
|
|
|
4.8
|
%
|
|
|
3.8
|
%
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2010 to Nine Months Ended
September 30, 2009
Service and administrative fees increased $2.8 million, or
12.0%, to $26.0 million for the nine months ended
September 30, 2010 from $23.2 million for the nine
months ended September 30, 2009. The increase was due to a
$2.3 million increase in administrative fees from our
Payment Protection segment, including $1.9 million from our
acquisition of Continental Car Club in May 2010 and
$0.5 million from our most recent acquisition of United
Motor Club in September 2010, in addition to $0.6 million from
the acquisition of South Bay Acceptance Corporation offset by a
reduction in our BPO segment of $0.1 million.
Wholesale brokerage commissions and fees increased
$8.1 million, or 72.6%, to $19.2 million for the nine
months ended September 30, 2010 from $11.1 million for
the nine months ended September 30, 2009. This increase
resulted from a full nine month period of results for
Bliss & Glennon in 2010 not reflected in 2009 due to
the acquisition of the company on April 15, 2009. Wholesale
brokerage commissions and fees for the nine months ended
September 30, 2010 included $17.9 million in standard
commissions plus $1.3 million in profit commissions.
Wholesale brokerage commissions and fees for the nine months
ended September 30, 2009 included $10.8 million in
standard commissions plus $0.3 million in profit
commissions.
61
Ceding commissions increased $4.2 million, or 22.9%, to
$22.5 million for the nine months ended
September 30, 2010 from $18.3 million for the
nine months ended September 30, 2009. This increase was
primarily due to favorable loss experience in incurred
involuntary unemployment insurance claims of $2.4 million
and $2.0 million gain from the sale of assets held in trust
for our benefit. Ceding commissions for the nine months ended
September 30, 2010 included $15.0 million in service and
administrative fees, $4.5 million in experience refunds and
$3.0 million in net investment income.
Net earned premium increased $1.1 million, or 1.3%, to
$83.4 million for the nine months ended September 30,
2010 from $82.3 million for the nine months ended
September 30, 2009. Direct and assumed earned premium
increased $3.9 million resulting from growth in net written
premium due to an increase in new customers distributing our
credit insurance and warranty products. Ceded earned premiums
increase $2.8 million, or 2.0%, comparable to the increase
in direct and assumed earned premium of $3.9 million, or
1.7%. On average, we maintained a 63% overall cession rate of
direct and assumed earned premium for the nine months ended
September 30, 2010 and 2009.
Net investment income decreased $0.9 million, or 23.4%, to
$2.8 million for the nine months ended September 30,
2010 from $3.7 million for the nine months ended
September 30, 2009. This decrease was due to lower
prevailing interest rates on our cash and cash equivalent
balances where the yield has declined 13 basis points from
0.33% for the nine months ended September 30, 2009 to 0.20%
for the nine months ended September 30, 2010 and fixed
maturity security yields have fallen 65 basis points from
4.94% for the nine months ended September 30, 2009 to 4.29%
for the nine months ended September 30, 2010.
Net realized gains increased $0.9 million, or 118.6%, to $0.2
million for the nine months ended September 30, 2010 from a loss
of $0.8 million for the nine months ended September 30, 2009.
This increase was primarily due to a non-recurring loss during
2009 of $0.8 million related to the disposition of a bond.
Other income decreased $0.6 million, or 83.1%, to
$0.1 million for the nine months ended September 30, 2010
from $0.7 million for nine months ended September 30,
2009. The 2009 revenue consisted of a non-recurring reserve
adjustment on Bliss & Glennons receivables of
$0.3 million. Our Payment Protection segment had a decrease
in supplemental services for producer owned reinsurance
arrangements of $0.2 million.
Commissions decreased $1.3 million, or 2.4%, to
$53.6 million for the nine months ended September 30,
2010 from $54.9 million for the nine months ended
September 30, 2009. The decrease in our commission expense
resulted from a $1.1 million decrease in commissions paid
for the production of credit insurance policy premiums and a
$0.6 million decrease in retrospective commission expense
to $7.3 million for the nine months ended
September 30, 2009 from $7.9 million for the nine
months ended September 30, 2010 due to an increase in net
losses and loss adjustment expenses. These decreases were offset
in part by a $0.4 million reduction in deferred policy
acquisition cost amortization.
Personnel costs increased $5.3 million, or 23.6%, to
$27.9 million for the nine months ended September 30,
2010 from $22.6 million for the nine months ended
September 30, 2009. This increase was primarily
attributable to the Bliss & Glennon acquisition, which
added personnel costs of $4.2 million, the Continental Car
Club and United Motor Club acquisitions which added
$0.4 million, contractor expenses of $0.2 million and
increased benefits costs of $0.4 million associated with
employee health savings account funding in 2010.
Net losses and loss adjustment expense increased losses and loss
adjustment expenses $2.1 million to $27.1 million for
the nine months ended September 30, 2010 from
$25.0 million for the nine months ended September 30,
2009. Direct and assumed losses and loss adjustment expenses
decreased $0.7 million resulting primarily from a favorable
loss development. Ceded losses and loss adjustment expenses
62
decreased $2.8 million, or 8.0%, as compared to a decrease
in direct and assumed losses and loss adjustment expenses of
$0.7 million, or 1.3%. On average, we maintained a 55%
overall cession rate of direct and assumed losses and loss
adjustment expenses for the nine months ended September 30,
2010 and 59% for the nine months ended September 30, 2009.
Other operating expenses increased $0.6 million, or 3.3%,
to $17.5 million for the nine months ended
September 30, 2010 from $16.9 million for the nine
months ended September 30, 2009. This increase resulted
primarily from acquisitions within the Wholesale Brokerage
segment for South Bay Acceptance Corporation, a full year of
Bliss & Glennon expenses of $1.9 million, the
Continental Car Club and United Motor Club acquisitions which
added $0.3 million, the BPO segment increase of
$0.4 million for processing and fulfillment of policies and
call center expenses offset by a reduction of $1.7 million
in our core Payment Protection business.
Depreciation and amortization expenses increased
$0.8 million, or 32.4%, to $3.3 million for the nine
months ended September 30, 2010 from $2.5 million for
the nine months ended September 30, 2009. The increase was
primarily due to the amortization of other intangible assets
aggregating $0.4 million relating to the acquisition of
Bliss & Glennon and the depreciation and amortization
on purchased equipment and developed software.
Interest expense increased $0.3 million, or 4.6%, to
$6.1 million for the nine months ended September 30,
2010 from $5.9 million for the nine months ended
September 30, 2009. This increase was attributable to the
increased borrowings under our lines of credit due to the
acquisition of Bliss & Glennon, Continental Car Club
and United Motor Club.
Income tax expense was $6.9 million and $4.0 million
for the nine months ended September 30, 2010 and 2009,
respectively. The effective tax rate was 37.1% and 37.8% for the
nine months ended September 30, 2010 and 2009,
respectively. The effective tax rate increased due to the phase
out of the tax deduction in our statutory life insurance
companies and increased state income taxes from the
Bliss & Glennon acquisition.
Net income increased $5.1 million, or 77.7%, to
$11.7 million for the nine months ended September 30,
2010 from $6.6 million for the nine months ended
September 30, 2009.
Year
Ended December 31, 2009 to Year Ended December 31,
2008
Service and administrative fees increased $7.5 million, or
31.1%, to $31.8 million for the year ended
December 31, 2009 from $24.3 million for the year
ended December 31, 2008. The increase was due to organic
growth in our BPO segment that generated an additional
$9.6 million in service fee revenue offset, in part, by a
$2.1 million decrease in service and administrative fees in
our Payment Protection segment.
Wholesale brokerage commissions and fees were $16.3 million
for the year ended December 31, 2009, and relate to
Bliss & Glennon, which we acquired in April 2009. We
did not have a Wholesale Brokerage segment prior to the
acquisition of Bliss & Glennon. Wholesale brokerage
commissions and fees in 2009 include standard commissions and
fees of $16.0 million and profit commissions of
$0.3 million.
Ceding commissions decreased $2.1 million, or 8.2%, to
$24.1 million for the year ended December 31, 2009
from $26.2 million for the year ended December 31,
2008. This decrease primarily resulted from lower credit
insurance premium production in 2009. In 2008, we assumed two
blocks of credit insurance business that increased credit
insurance premium during that period. No such transaction was
completed in 2009. Ceding commissions for the year ended
December 31, 2009 included $17.3 million in service
and administrative fees, $4.8 million in experience refunds
and $2.0 million in net investment income.
63
Net earned premium decreased $4.7 million, or 4.1%, to
$108.1 million for the year ended December 31, 2009
from $112.8 million for the year ended December 31,
2008. Direct and assumed earned premium decreased
$15.3 million due to the run-off of two of our
clients credit insurance programs ($22.4 million),
offset primarily by growth in our other Payment Protection
products. One of our clients migrated its program to a debt
cancellation program, which is administered by us, and the other
client cancelled its program. Ceded earned premium decreased by
$10.6 million, or 5.3%, which was comparable to the
decrease in direct and assumed earned premium of $15.3 million,
or 4.9%. On average, we maintained a 64% overall cession rate of
direct and assumed earned premium in 2009 and 2008.
Net investment income decreased $0.8 million, or 14.4%, to
$4.8 million for the year ended December 31, 2009 from
$5.6 million for the year ended December 31, 2008. The
decrease resulted from lower prevailing interest rates on our
cash and cash equivalents, which decreased our overall yield by
93 basis points from 4.12% for the year ended
December 31, 2008, to 3.19% for the year ended
December 31, 2009.
For the year ended December 31, 2009, our net realized gain
was $0.1 million and included a realized loss of
$0.8 million on a sale of a bond for a distressed company,
which was offset by a $0.8 million gain on the sale of
various fixed income and equity securities. Net realized losses
as of December 31, 2008 reflected a $1.9 million
write-down of an other-than-temporary impairment of a separate
bond investment of $1.2 million and 15 equity securities of
$0.7 million.
Other income increased $0.8 million to $1.0 million
for the year ended December 31, 2009 from $0.2 million
for the year ended December 31, 2008. The increase was
driven by the reversal of a cancellation reserve that was no
longer deemed to be applicable subsequent to our acquisition of
Bliss & Glennon in April 2009 that resulted in the
recognition of $0.5 million in revenues and miscellaneous
income generated by our Payment Protection segment.
Commissions decreased $10.8 million, or 13.3%, to
$70.4 million for the year ended December 31, 2009
from $81.2 million for the year ended December 31,
2008. The decrease resulted from a $8.1 million decrease in
our commission expense that resulted from a decline in net
written credit insurance premium and an unfavorable loss
development that decreased our retrospective commission expense
by $7.4 million to $9.8 million in 2009 from
$17.2 million in 2008. These decreases were offset in part
by a $4.7 million reduction in deferred policy acquisition
cost amortization.
Personnel costs increased $9.7 million, or 44.3%, to
$31.4 million for the year ended December 31, 2009,
from $21.7 million for the year ended December 31,
2008. This increase is attributable to the growth in headcount
associated with the acquisition of Bliss & Glennon,
which produced an increase of $10.3 million, partially
offset by an $0.8 million decrease in personnel costs in
our other business segments.
Net losses and loss adjustment expense increased
$2.7 million, or 9.1%, to $32.6 million for the year
ended December 31, 2009 from $29.9 million for the
year ended December 31, 2008. Direct and assumed losses and
loss adjustment expenses increased $4.3 million, or 5.7%,
resulting primarily from the unfavorable loss development in the
involuntary unemployment insurance programs ($5.7 million).
Ceded losses and loss adjustment expenses increased
$1.5 million, or 3.5%. On average, we maintained a 61%
overall cession rate of direct and assumed losses and loss
adjustment expenses in 2009 as compared to a 59% rate in 2008.
Other operating expenses increased $10.1 million, or 82.3%,
to $22.3 million for the year ended December 31, 2009,
from $12.2 million for the year ended December 31,
2008. This increase resulted from the acquisition of
Bliss & Glennon, which accounted for
$2.9 million, increased costs associated with other
acquisitions of $0.7 million, and increased variable
expenses resulting from the growth in our BPO segment of
$4.2 million.
64
Depreciation and amortization increased $0.9 million, or
33.4%, to $3.5 million for the year ended December 31,
2009, from $2.6 million for the year ended
December 31, 2008. This increase resulted primarily from
the amortization of other intangible assets of $1.0 million
related to the acquisition of Bliss & Glennon.
Interest expense increased $0.5 million, or 7.5%, to
$7.8 million for the year ended December 31, 2009,
from $7.3 million for the year ended December 31,
2008. This increase was driven by $11.5 million of
increased indebtedness incurred in connection with our
acquisition of Bliss & Glennon, which was offset in
part by lower interest rates on our indebtedness.
Income tax expense was $6.6 million and $4.2 million
for the years ended December 31, 2009 and 2008,
respectively. Our effective tax rate was 36% and 35% for the
years ended December 31, 2009 and 2008, respectively. The
increase in our effective tax rate was due to higher applicable
state tax rates resulting from our acquisition of
Bliss & Glennon, which conducts business in
California, and the decrease in the federal small life deduction
applicable to our statutory life insurance companies as a result
of increased business by those insurance companies.
Net income increased $3.5 million, or 44.0%, to
$11.6 million for the year ended December 31, 2009
from $8.0 million for the year ended December 31, 2008.
Year
Ended December 31, 2008 to Year Ended December 31,
2007
Service and administrative fees increased $5.4 million, or
28.8%, to $24.3 million for the year ended
December 31, 2008 from $18.9 million for the year
ended December 31, 2007. The increase primarily resulted
from growth in service and administrative fee revenue of
$4.5 million in our BPO segment and $0.9 million in
our Payment Protection segment.
Ceding commissions increased $1.7 million, or 7.1% to
$26.2 million for the year ended December 31, 2008
from $24.5 million for the year ended December 31,
2007. This increase primarily resulted from growth in credit
insurance premium production in 2008. In 2008, we assumed two
blocks of credit insurance business that increased credit
insurance premium during that period. No such transaction was
completed in 2007. Ceding commissions for the year ended
December 31, 2008 included $18.4 million in service
and administrative fees, $6.3 million in experience refunds
and $1.5 million in net investment income.
Net earned premium decreased $20.4 million, or 15.3%, to
$112.8 million for the year ended December 31, 2008
from $133.1 million for the year ended December 31,
2007. Ceded earned premiums increased $45.2 million in 2008
to $202.8 million from $157.6 million in 2007
resulting in a corresponding decrease of net earned premium of
$45.2 million. In 2008, we maintained a 64% overall cession
rate of direct and assumed earned premium as compared to a 54%
rate in 2007. The 2007 cession rate was impacted by two
acquisitions and the associated direct earned premium that was
not ceded to a reinsurer. Direct and assumed earned premium
increased $24.8 million resulting from an increase in net
written premium due to an increase in new customers distributing
our credit insurance products and assumption of two blocks of
credit insurance business offset by the run-off of two of our
clients credit insurance programs. One of our clients
migrated its program to a debt cancellation program, which is
administered by us, and the other client cancelled its credit
insurance.
Net investment income decreased $0.7 million, or 12.2%, to
$5.6 million for the year ended December 31, 2008 from
$6.3 million for the year ended December 31, 2007.
This decrease primarily resulted from lower prevailing interest
rates on our cash and cash equivalents, which decreased our
overall yield by 84 basis points from 4.96% for the year
ended December 31, 2007 to 4.12% for the year ended
December 31, 2008.
65
Commissions decreased $6.7 million, 7.6%, to
$81.2 million for the year ended December 31, 2008
from $87.9 million for the year ended December 31,
2007. The decrease resulted from a $4.4 million decrease in
our commission expense that resulted from a decrease in net
written premium and a $3.6 million decrease in
retrospective commission expense to $17.2 million in 2008
from $20.8 million in 2007. These decreases were offset in
part by a $1.3 million increase in deferred policy
acquisition costs amortized.
Personnel costs increased $1.6 million, or 8.0%, to
$21.7 million for the year ended December 31, 2008
from $20.1 million for the year ended December 31,
2007. The increase was due to increased staffing to support
growth in our BPO segment, which was offset in part by a
reduction of $0.7 million of expenses in our Payment
Protection segment, primarily as a result of a reduction in
headcount.
Net losses and loss adjustment expense decreased
$11.7 million, or 28.1%, to $29.9 million for the year
ended December 31, 2008 from $41.5 million for the
year ended December 31, 2007. Direct and assumed losses and
loss adjustment expenses decreased $15.1 million resulting
primarily from the favorable loss development in the property
lines. Ceded losses and loss adjustment expenses decreased
$3.4 million because we maintained a 61% overall cession
rate in 2008 and a 54% overall cession rate in 2007.
Other operating expenses decreased $3.4 million, or 21.8%,
to $12.2 million for the year ended December 31, 2008
from $15.6 million for the year ended December 31,
2007. These expenses were lower due to one-time costs
experienced in 2007 related to the Summit Partners Transactions
of $2.3 million, $2.4 million in expense reductions in
2008 associated with increased efficiencies realized in our
Payment Protection operations, as well as the reduction of
operating expenses after the consummation of the Summit Partners
Transactions and $1.8 million of additional deferred
acquisition costs in 2008 reflecting our investment in marketing
efforts for our Payment Protection segment. These expense
reductions were offset by $2.0 million in transaction
expenses in 2008 for acquisitions that were not consummated.
Depreciation and amortization increased $1.1 million, or
73.8%, to $2.6 million for the year ended December 31,
2008 from $1.5 million for the year ended December 31,
2007. The increase resulted primarily from the full year
recognition of other intangible assets amortization due to the
Summit Partners Transactions. The full year amortization of
intangible assets was $2.1 million in 2008, as compared to
the half year total in 2007 of $1.0 million. The
controlling interest of the company was purchased in the Summit
Partners Transactions on June 20, 2007.
Interest expense increased $2.0 million, or 36.9%, to
$7.3 million for the year ended December 31, 2008 from
$5.3 million for the year ended December 31, 2007. The
increase was primarily due to a higher average of principal
outstanding, which was attributable to the Summit Partners
Transactions.
Income tax expense was $4.2 million and $3.7 million
for the years ended December 31, 2008 and 2007,
respectively. The effective tax rate was 35% and 33% for the
years ended December 31, 2008 and 2007, respectively. The
increase in tax rate was due to the reduction in the available
federal small life deduction as a result of increased business
in our statutory life insurance companies.
Net income increased $0.6 million, or 7.5%, to
$8.0 million for the year ended December 31, 2008 from
$7.5 million for the year ended December 31, 2007.
Segment
Results
We conduct our business through three business segments:
(i) Payment Protection; (ii) BPO; and
(iii) Wholesale Brokerage. The revenue for each segment is
presented to reflect the operating
66
characteristics of the segment. In managing our Payment
Protection business, we review the performance of our Payment
Protection credit insurance business on the basis of net
underwriting revenue, which is comprised of net earned premium
less net losses and loss adjustment expenses and commissions.
Notably, the presentation of net underwriting revenue in our
Payment Protection segment is intended to reflect the limited
underwriting risk assumed by us. In the presentation, we include
net losses and loss adjustment expenses and commission costs as
contra-revenue items. We write a significant portion of our
insurance contracts under reinsurance agreements with PORCs or
on a retrospective commission basis. The reinsurance agreements
with PORCs allow us to cede the entire risk of the credit
insurance policies to the producer. The retrospective commission
arrangements allow us to adjust commissions based on claims
experience and transfer the underwriting gain or loss to our
client net of a specified allowance to us that is reflected in
our net underwriting revenue.
Additionally, we do not allocate certain revenues and costs to
our segments. These items primarily consist of corporate-related
income, transaction related costs, executive stock compensation
and other overhead expenses, which are reflected as
Corporate in the following table. We measure the
profitability of our business segments without allocation of
Corporate income and expenses and without taking into account
amortization, depreciation, interest expense and income taxes.
We refer to these performance measures as segment EBITDA
(earnings before interest, taxes, depreciation and amortization)
and segment EBITDA margin (segment EBITDA divided by segment net
revenues). The variability of our segment EBITDA and segment
EBITDA margin is significantly affected by our segment net
revenues because a large portion of our operating expenses are
fixed. For additional information regarding segment net revenues
and operating expenses, refer to Note 18 to the
Consolidated Financial Statements included elsewhere in this
prospectus.
The following table reconciles segment information to our
consolidated statements of income and provides a summary of
other key financial information for each of our segments on an
unaudited basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 20,
|
|
|
|
January 1,
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
2007 to
|
|
|
|
2007 to
|
|
|
|
September 30,
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Payment Protection:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service & administrative fees
|
|
$
|
8,572
|
|
|
$
|
6,280
|
|
|
$
|
8,355
|
|
|
$
|
10,375
|
|
|
$
|
5,574
|
|
|
|
$
|
3,858
|
|
Ceding commission
|
|
|
22,468
|
|
|
|
18,275
|
|
|
|
24,075
|
|
|
|
26,215
|
|
|
|
13,733
|
|
|
|
|
10,753
|
|
Net investment income
|
|
|
2,799
|
|
|
|
3,652
|
|
|
|
4,759
|
|
|
|
5,560
|
|
|
|
3,411
|
|
|
|
|
2,918
|
|
Net realized gains (losses)
|
|
|
156
|
|
|
|
(787
|
)
|
|
|
54
|
|
|
|
(1,921
|
)
|
|
|
(348
|
)
|
|
|
|
516
|
|
Other income
|
|
|
64
|
|
|
|
408
|
|
|
|
462
|
|
|
|
178
|
|
|
|
28
|
|
|
|
|
353
|
|
Net earned premium
|
|
|
83,417
|
|
|
|
82,350
|
|
|
|
108,116
|
|
|
|
112,774
|
|
|
|
68,219
|
|
|
|
|
64,906
|
|
Net losses and loss adjustment expenses
|
|
|
(27,086
|
)
|
|
|
(25,010
|
)
|
|
|
(32,566
|
)
|
|
|
(29,854
|
)
|
|
|
(20,324
|
)
|
|
|
|
(21,224
|
)
|
Commissions
|
|
|
(53,631
|
)
|
|
|
(54,938
|
)
|
|
|
(70,449
|
)
|
|
|
(81,226
|
)
|
|
|
(45,275
|
)
|
|
|
|
(42,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection revenue
|
|
|
36,759
|
|
|
|
30,230
|
|
|
|
42,806
|
|
|
|
42,101
|
|
|
|
25,018
|
|
|
|
|
19,442
|
|
Operating expenses
|
|
|
17,720
|
|
|
|
18,992
|
|
|
|
23,814
|
|
|
|
24,676
|
|
|
|
14,443
|
|
|
|
|
12,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
19,039
|
|
|
|
11,238
|
|
|
|
18,992
|
|
|
|
17,425
|
|
|
|
10,575
|
|
|
|
|
7,155
|
|
EBITDA margin
|
|
|
51.8
|
%
|
|
|
37.2
|
%
|
|
|
44.4
|
%
|
|
|
41.4
|
%
|
|
|
42.3
|
%
|
|
|
|
36.8
|
%
|
Depreciation and amortization
|
|
|
1,382
|
|
|
|
1,280
|
|
|
|
1,815
|
|
|
|
2,164
|
|
|
|
994
|
|
|
|
|
170
|
|
Interest
|
|
|
5,238
|
|
|
|
5,050
|
|
|
|
6,709
|
|
|
|
6,252
|
|
|
|
3,577
|
|
|
|
|
979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
12,419
|
|
|
|
4,908
|
|
|
|
10,468
|
|
|
|
9,009
|
|
|
|
6,004
|
|
|
|
|
6,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 20,
|
|
|
|
January 1,
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
2007 to
|
|
|
|
2007 to
|
|
|
|
September 30,
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
|
(in thousands)
|
|
BPO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPO revenue
|
|
|
16,881
|
|
|
|
17,003
|
|
|
|
23,521
|
|
|
|
13,904
|
|
|
|
5,112
|
|
|
|
|
4,307
|
|
Operating expenses
|
|
|
10,853
|
|
|
|
9,986
|
|
|
|
13,753
|
|
|
|
7,136
|
|
|
|
2,128
|
|
|
|
|
2,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
6,028
|
|
|
|
7,017
|
|
|
|
9,768
|
|
|
|
6,768
|
|
|
|
2,984
|
|
|
|
|
1,811
|
|
EBITDA margin
|
|
|
35.7
|
%
|
|
|
41.3
|
%
|
|
|
41.5
|
%
|
|
|
48.7
|
%
|
|
|
58.4
|
%
|
|
|
|
42.0
|
%
|
Depreciation and amortization
|
|
|
745
|
|
|
|
505
|
|
|
|
566
|
|
|
|
465
|
|
|
|
298
|
|
|
|
|
51
|
|
Interest
|
|
|
324
|
|
|
|
320
|
|
|
|
428
|
|
|
|
1,003
|
|
|
|
553
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
4,959
|
|
|
|
6,192
|
|
|
|
8,774
|
|
|
|
5,300
|
|
|
|
2,133
|
|
|
|
|
1,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Brokerage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Brokerage revenue
|
|
|
19,818
|
|
|
|
11,373
|
|
|
|
16,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
14,831
|
|
|
|
8,552
|
|
|
|
12,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
4,987
|
|
|
|
2,821
|
|
|
|
3,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA margin
|
|
|
25.2
|
%
|
|
|
24.8
|
%
|
|
|
23.4
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
0.0
|
%
|
Depreciation and amortization
|
|
|
1,209
|
|
|
|
735
|
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
560
|
|
|
|
482
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
3,218
|
|
|
|
1,604
|
|
|
|
2,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate revenue
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
2,062
|
|
|
|
2,047
|
|
|
|
3,199
|
|
|
|
2,155
|
|
|
|
2,659
|
|
|
|
|
1,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(2,062
|
)
|
|
|
(2,047
|
)
|
|
|
(3,248
|
)
|
|
|
(2,155
|
)
|
|
|
(2,659
|
)
|
|
|
|
(1,744
|
)
|
EBITDA margin
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
0.0
|
%
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
(2,062
|
)
|
|
|
(2,047
|
)
|
|
|
(3,248
|
)
|
|
|
(2,155
|
)
|
|
|
(2,659
|
)
|
|
|
|
(1,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue
|
|
|
73,458
|
|
|
|
58,606
|
|
|
|
83,098
|
|
|
|
56,005
|
|
|
|
30,130
|
|
|
|
|
23,749
|
|
Net losses and loss adjustment expenses
|
|
|
27,086
|
|
|
|
25,010
|
|
|
|
32,566
|
|
|
|
29,854
|
|
|
|
20,324
|
|
|
|
|
21,224
|
|
Commissions
|
|
|
53,631
|
|
|
|
54,938
|
|
|
|
70,449
|
|
|
|
81,226
|
|
|
|
45,275
|
|
|
|
|
42,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
154,175
|
|
|
|
138,554
|
|
|
|
186,113
|
|
|
|
167,085
|
|
|
|
95,729
|
|
|
|
|
87,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 20,
|
|
|
|
January 1,
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
2007 to
|
|
|
|
2007 to
|
|
|
|
September 30,
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Segment operating expenses
|
|
|
45,466
|
|
|
|
39,577
|
|
|
|
53,656
|
|
|
|
33,967
|
|
|
|
19,230
|
|
|
|
|
16,527
|
|
Net losses and loss adjustment expenses
|
|
|
27,086
|
|
|
|
25,010
|
|
|
|
32,566
|
|
|
|
29,854
|
|
|
|
20,324
|
|
|
|
|
21,224
|
|
Commissions
|
|
|
53,631
|
|
|
|
54,938
|
|
|
|
70,449
|
|
|
|
81,226
|
|
|
|
45,275
|
|
|
|
|
42,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses before depreciation, amortization and interest
|
|
|
126,183
|
|
|
|
119,525
|
|
|
|
156,671
|
|
|
|
145,047
|
|
|
|
84,829
|
|
|
|
|
80,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EBITDA
|
|
|
27,992
|
|
|
|
19,029
|
|
|
|
29,442
|
|
|
|
22,038
|
|
|
|
10,900
|
|
|
|
|
7,222
|
|
Depreciation and amortization
|
|
|
3,336
|
|
|
|
2,520
|
|
|
|
3,507
|
|
|
|
2,629
|
|
|
|
1,292
|
|
|
|
|
221
|
|
Interest
|
|
|
6,122
|
|
|
|
5,852
|
|
|
|
7,800
|
|
|
|
7,255
|
|
|
|
4,130
|
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before taxes and non-controlling interest
|
|
|
18,534
|
|
|
|
10,657
|
|
|
|
18,135
|
|
|
|
12,154
|
|
|
|
5,478
|
|
|
|
|
5,832
|
|
Income taxes
|
|
|
(6,872
|
)
|
|
|
(4,031
|
)
|
|
|
(6,551
|
)
|
|
|
(4,208
|
)
|
|
|
(1,761
|
)
|
|
|
|
(1,983
|
)
|
Less: non-controlling interest
|
|
|
(31
|
)
|
|
|
46
|
|
|
|
26
|
|
|
|
(82
|
)
|
|
|
64
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,693
|
|
|
$
|
6,580
|
|
|
$
|
11,558
|
|
|
$
|
8,028
|
|
|
$
|
3,653
|
|
|
|
$
|
3,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2010 to Nine Months Ended
September 30, 2009
Payment Protection. Revenues increased
$6.5 million, or 21.6%, to $36.8 million for the nine
months ended September 30, 2010 from $30.2 million for
the nine months ended September 30, 2009. The increase
resulted from the acquisitions of Continental Car Club and
United Motor Club, which added $2.3 million of revenue, along
with increased ceding commission revenue of $4.2 million due to
favorable involuntary unemployment insurance claims expense and
a realized gain on the sale of assets held in trust for our
benefit.
Operating expenses decreased $1.3 million, or 6.7%, to
$17.7 million for the nine months ended September 30,
2010 from $19.0 million for the nine months ended
September 30, 2009. The year over year decrease in
operating expenses resulted primarily from a $1.2 million
increase in deferred acquisition cost expenses to reflect an
adjustment of the deferred acquisition costs to match costs with
the corresponding revenue. In addition, our Payment Protection
segment incurred operating costs of $0.7 million associated
with the 2010 acquisitions of Continental Car Club and United
Motor Club, offset partially by reduced personnel costs in the
other areas of the Payment Protection segment which resulted
from personnel reductions implemented in 2009.
EBITDA increased $7.8 million, or 69.4%, to
$19.0 million for the nine months ended September 30,
2010 from $11.2 million for the nine months ended
September 30, 2009. As a result, EBITDA margin for our
Payment Protection segment was 51.8% for the nine months ended
September 30, 2010 compared to 37.2% for the nine months
ended September 30, 2009.
BPO. Revenues of $16.9 million for
the nine months ended September 30, 2010 were comparable to
$17.0 million for the nine months ended September 30,
2009. The decrease was driven by lower service and
administrative fees on debt cancellation programs of credit card
companies and a decrease in asset
69
recovery services, partially offset by increased service and
administrative fees for our insurance company clients.
Segment operating expenses increased $0.9 million, or 8.7%,
to $10.9 million for the nine months ended
September 30, 2010 from $10.0 million for the nine
months ended September 30, 2009. This increase primarily
resulted from $0.4 million in increased variable costs for
processing and fulfillment of policies and $0.6 million of
investment in sales staff (salaries, benefits and travel) growth
initiatives.
EBITDA decreased $1.0 million, or 14.1%, to
$6.0 million for the nine months ended September 30,
2010 from $7.0 million for the nine months ended
September 30, 2009. As a result, EBITDA margin for our BPO
segment was 35.7% for the nine months ended September 30,
2010 compared to 41.3% for the nine months ended
September 30, 2009.
Wholesale Brokerage. We acquired our Wholesale
Brokerage segment in April 2009, and therefore, period to
period comparisons are not meaningful.
Revenues of $19.8 million for the nine months ended
September 30, 2010 were comprised of $17.9 million in
standard commissions plus $1.3 million in profit
commissions. Wholesale brokerage commissions and fees for the
nine months ended September 30, 2009 included
$10.8 million in standard commissions plus
$0.3 million in profit commissions.
Operating expenses for the nine months ended September 30,
2010 were $14.8 million. The majority of our expenses in
this segment were personnel costs, which totaled
$11.0 million, or 74.3%, of total operating expenses.
Operating expenses for the nine months ended September 30,
2009 were $8.6 million. The majority of our expenses were
related to personnel costs, which total $6.8 million, or
79.1%, of total operating expenses.
EBITDA for the nine months ended September 30, 2010 and
2009 was $5.0 million and $2.8 million, respectively.
As a result, EBITDA margin for our Wholesale Brokerage segment
was 25.2% and 24.8% for the nine months ended September 30,
2010 and 2009, respectively.
Corporate. We did not attribute any revenues to
Corporate during these periods.
Operating expenses attributed to Corporate were
$2.1 million and $2.0 million for the nine months
ended September 30, 2010 and 2009, respectively. Segment
operating expenses for the nine months ended September 30,
2010 were attributable to a combination of acquisition and
re-audit professional fees and travel costs. Segment operating
expenses for the nine months ended September 30, 2009 were
primarily attributable to acquisition-related professional fees
and travel costs.
Year
Ended December 31, 2009 to Year Ended December 31,
2008
Payment Protection. Revenues increased
$0.7 million, or 1.7%, to $42.8 million for the year
ended December 31, 2009 from $42.1 million for the
year ended December 31, 2008. The increase was due to
increased net underwriting revenue of $3.4 million and a
positive change in realized gains of $2.0 million, offset
by lower service and administrative fees of $2.0 million,
ceding commissions of $2.1 million and investment income of
$0.8 million. The improvement in net underwriting revenue
was primarily due to reduced commissions resulting from a change
in product mix sold by our clients. The increase in realized
gains resulted from one time write-downs in 2008 of a
$1.2 million bond investment and 15 equity securities
of $0.7 million that were classified as other
than-temporarily impaired securities. There were no such
write-downs in 2009. The service and administrative fee decline
was due, in part, to lower credit insurance premium production
in 2009. In 2008, we assumed two blocks of credit
70
insurance business that increased credit insurance premium
during that period. No such transaction was completed in 2009.
The investment income decline was due to lower yields on our
investment portfolio.
Operating expenses decreased $0.9 million, or 3.5%, to
$23.8 million for the year ended December 31, 2009
from $24.7 million for the year ended December 31,
2008. The decrease primarily resulted from a $2.8 million
reduction in personnel costs and other operating expenses due to
cost cutting initiatives and a $0.3 million tax savings
related to the re-domestication to Delaware of one of our
P&C insurance companies. The savings was offset by an
increase in the amortization of deferred acquisition costs of
$1.6 million which was caused by an increase in marketing
and sales expenses in prior periods.
EBITDA increased $1.6 million, or 9.0%, to
$19.0 million for the year ended December 31, 2009
from $17.4 million for the year ended December 31,
2008.
BPO. Revenues increased
$9.6 million, or 69.2%, to $23.5 million for the year
ended December 31, 2009 from $13.9 million for the
year ended December 31, 2008. The increase was due to
incremental growth in our administrative services for insurance
companies of $6.3 million and administrative fees for asset
recovery services of $3.3 million.
Segment operating expenses increased $6.7 million, or
92.7%, to $13.8 million for the year ended
December 31, 2009 from $7.1 million for the year ended
December 31, 2008. The key factors driving this result were
increased call center expenses of $1.8 million for claims
and marketing initiatives, a $2.2 million increase in
salaries and benefits related to the addition of employees to
support the growth of our BPO segment and a $1.6 million
increase in investigation fees for our asset recovery business.
EBITDA increased $3.0 million, or 44.3%, to
$9.8 million for the year ended December 31, 2009 from
$6.8 million for the year ended December 31, 2008.
Wholesale Brokerage. We acquired our
Wholesale Brokerage segment in April 2009 and, as a result,
period-to-period
comparisons are not meaningful.
Revenues were $16.8 million for the year ended
December 31, 2009 and were comprised of $16.0 million
of standard commission and $0.3 million of profit
commission revenue. In addition, we recorded a reserve reversal
of $0.5 million in 2009 for cancelled policy commission
reserves that were deemed excessive.
Operating expenses were $12.9 million for the year ended
December 31, 2009. The majority of our operating expenses
in our Wholesale Brokerage segment are personnel costs, which
totaled $10.3 million or 80% of total operating expenses.
Corporate. Operating expenses
attributable to Corporate were $3.2 million and
$2.2 million for the years ended December 31, 2009 and
2008, respectively. The 2009 expenses were primarily for the
acquisition of Bliss & Glennon in April 2009, other
miscellaneous acquisitions costs and executive stock
compensation expense not allocated back to business segments.
The 2008 expenses were for acquisition related professional fees
for non-consummated acquisitions and executive stock
compensation expense not allocated back to individual business
segments.
Year
Ended December 31, 2008 to Year Ended December 31,
2007
Payment Protection. Revenues decreased
$2.4 million, or 5.3%, to $42.1 million for the year
ended December 31, 2008 from $44.5 million for the
year ended December 31, 2007. The decrease was primarily
the result of $0.8 million decrease in investment income,
$2.0 million decrease in underwriting revenues, $1.6
million increase in net realized losses, which was offset by a
$1.7 million increase in
71
ceding commissions and a $0.9 million increase in service
and administrative fees. The ceding commission increase was due
to growth in credit insurance premium. This growth was the
result of the assumption of two blocks of credit insurance
business in 2008. The decrease in investment income was due to
lower yields on our investment portfolio. The decrease in
underwriting revenue resulted from a reduction in net earned
premium of $20.4 million, offset by lower net losses and
loss adjustment expenses of $11.7 million and decreased
commissions of $6.7 million. The increase in realized
losses resulted from one time write-downs in 2008 of a
$1.2 million bond investment and 15 equity securities
of $0.7 million that were classified as other
than-temporarily impaired securities. In 2007, there were
14 equity securities that were written-down and classified
as other than-temporarily impaired securities totaling
$0.3 million.
Segment operating expenses decreased $2.0 million, or 7.7%,
to $24.7 million for the year ended December 31, 2008
from $26.7 million for the year ended December 31,
2007. This decrease reflected a $0.3 million reduction of
compensation expenses and a $1.8 million decrease in
deferred acquisition costs caused by an initial deferral of
marketing and sales expenses.
EBITDA decreased $0.3 million, or 1.7%, to $17.4 million
for the year ended December 31, 2008 from
$17.7 million for the year ended December 31, 2007.
BPO. Revenues increased
$4.5 million, or 47.6%, to $13.9 million for the year
ended December 31, 2008 from $9.4 million for the year
ended December 31, 2007. The increase was primarily the
result of increased services provided to our largest customer
and expansion of our debt cancellation programs to our credit
card company customers.
Segment operating expenses increased $2.5 million, or
54.3%, to $7.1 million for the year ended December 31,
2008 from $4.6 million for the year ended December 31,
2007. This increase resulted predominantly from salaries and
benefits related to additional headcount of $0.9 million
and $1.3 million of increased variable costs to support
growth in our BPO segment.
EBITDA increased $2.0 million, or 41.1%, to
$6.8 million for the year ended December 31, 2008 from
$4.8 million for the year ended December 31, 2007.
Corporate. Segment operating expenses
were $2.2 million and $4.4 million for the years ended
December 31, 2008 and 2007, respectively. The 2008 expenses
were for acquisition related costs of non-consummated company
acquisitions and executive stock compensation expense not
allocated back to business segments. The 2007 expenses were
primarily for professional fees for the Summit Partners
Transactions in the amount of $2.3 million and
$2.4 million in reduced other operating expenses.
Critical
Accounting Policies
The preparation of our consolidated financial statements in
accordance with U.S. generally accepted accounting
principals (GAAP) requires management to make estimates that
affect the reported amounts of our assets, liabilities, revenues
and expenses. Significant accounting policies employed by us,
including the use of estimates, are presented in the Notes to
Consolidated Financial Statements contained elsewhere in this
prospectus. We periodically evaluate our estimates, which are
based on historical experience and on various other assumptions
that management believes to be reasonable under the
circumstances. Critical accounting policies are those that are
most important to the portrayal of our financial condition and
results of operations and require managements most
difficult, subjective or complex judgments, as a result of the
need to make estimates about the effect of matters that are
inherently uncertain. If actual performance should differ from
historical experience or if the underlying assumptions were to
change, our financial condition and results of operations may be
materially impacted. In addition, some accounting policies
require significant judgment to apply complex principles
72
of accounting to certain transactions, such as acquisitions, in
determining the most appropriate accounting treatment. We
believe that the significant accounting estimates and policies
described below are material to our financial reporting and are
subject to a degree of subjectivity
and/or
complexity.
Investments
We regularly monitor our investment portfolio to ensure
investments that may be
other-than-temporarily
impaired are identified in a timely fashion, properly valued,
and charged against earnings in the proper period. The
determination that a security has incurred an
other-than-temporary
decline in value requires the judgment of management. We
evaluate our investment portfolio on a regular basis to identify
securities that may be other-than-temporarily impaired. When
such impairments occur, the decrease in fair value is reported
in net income as a realized investment loss and a new cost basis
is established. The analysis takes into account relevant
factors, both quantitative and qualitative in nature. Among the
factors considered are the following:
|
|
|
the length of time and the extent to which fair value has been
less than cost;
|
|
|
issuer-specific considerations, including an issuers
short-term prospects and financial condition, recent news that
may have an adverse impact on its results, and an event of
missed or late payment or default;
|
|
|
the occurrence of a significant economic event that may affect
the industry in which an issuer participates; and
|
|
|
for loan-backed and structured securities, the undiscounted
estimated future cash flows as compared to the current book
value.
|
With respect to securities where the decline in fair value is
determined to be temporary and the securitys value is not
written down, a subsequent decision may be made to sell that
security and realize a loss. If we do not expect for a
securitys decline in fair value to be fully recovered
prior to the expected time of sale, we would record an
other-than-temporary impairment in the period in which the
decision to sell is made.
There are inherent risks and uncertainties involved in making
these judgments. Changes in circumstances and critical
assumptions such as a continued weak economy, a more pronounced
economic downturn or unforeseen events which affect one or more
companies, industry sectors or countries could result in
additional impairments in future periods for
other-than-temporary
declines in value. See also Note 3 to the Consolidated
Financial Statements included elsewhere in this prospectus and
Risk Factors Risks Related to Our Payment
Protection Business Our investment portfolio is
subject to several risks that may diminish the value of our
invested assets and affect our business and profitability
and Liquidity and Capital Resources
Invested Assets contained elsewhere in this prospectus.
Reinsurance
Reinsurance receivables include amounts related to paid benefits
and estimated amounts related to unpaid policy and contract
claims, future policyholder benefits and policyholder contract
deposits. The cost of reinsurance is accounted for over the
terms of the underlying reinsured policies using assumptions
consistent with those used to account for the policies. Amounts
recoverable from reinsurers are estimated in a manner consistent
with claim and claim adjustment expense reserves or future
policy benefits reserves and are reported in our consolidated
balance sheets.
73
In the ordinary course of business, we are involved in both the
assumption and cession of reinsurance with non-affiliated
companies, including reinsurance companies owned by our clients.
The following table provides details of the reinsurance
receivables balance as of December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Ceded unearned premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
$
|
60,281
|
|
|
$
|
82,358
|
|
|
$
|
92,157
|
|
Accident and health
|
|
|
29,844
|
|
|
|
32,980
|
|
|
|
25,155
|
|
Property
|
|
|
57,379
|
|
|
|
53,160
|
|
|
|
45,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ceded unearned premiums
|
|
|
147,504
|
|
|
|
168,498
|
|
|
|
162,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded claim reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
1,929
|
|
|
|
2,089
|
|
|
|
2,050
|
|
Accident and health
|
|
|
9,981
|
|
|
|
8,616
|
|
|
|
7,767
|
|
Property
|
|
|
10,608
|
|
|
|
12,697
|
|
|
|
11,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ceded claim reserves recoverable
|
|
|
22,518
|
|
|
|
23,402
|
|
|
|
21,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other reinsurance settlements recoverable
|
|
|
3,776
|
|
|
|
7,123
|
|
|
|
3,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivables
|
|
$
|
173,798
|
|
|
$
|
199,023
|
|
|
$
|
187,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We utilize reinsurance for loss protection and capital
management. See Risk Factors Risks Related to
Our Payment Protection Business Reinsurance may not
be available or adequate to protect us against losses, and we
are subject to credit risk of reinsurers.
Deferred
Policy Acquisition Costs
The costs of acquiring new business and retaining existing
business, principally commissions, premium taxes and certain
underwriting and marketing costs that vary with and are
primarily related to the processing of new business, have been
deferred and are amortized as the related premium is earned.
Amortization of deferred policy acquisition costs for the nine
months ended September 30, 2010, the years ended
December 31, 2009 and 2008, the 2007 successor period and
the 2007 predecessor period totaled $44.2 million,
$57.7 million, $60.6 million, $28.2 million and
$15.0 million, respectively. We consider investment income in
determining whether deferred acquisition costs are recoverable
at year-end. No write-offs for unrecoverable deferred
acquisition costs were recognized during the nine months ended
September 30, 2010 or the years ended December 31,
2009 and 2008 or during the 2007 successor period and the 2007
predecessor period.
The amortization of deferred policy acquisition costs are
recorded in commissions expense or other operating expense in
our consolidated statements of income. The amortization of
deferred policy acquisition costs related to commissions are
classified as commission expense. The amortization of deferred
policy acquisition costs related to premium taxes and certain
underwriting and marketing costs are classified as other
operating expenses.
Property
and Equipment
Property and equipment are carried at cost, net of accumulated
depreciation. Gains and losses on sales and disposals of
property and equipment are based on the net book value of the
related asset at the disposal date using the specific
identification method. Maintenance and repairs, which do not
materially extend asset useful life and minor replacements, are
charged to earnings when incurred. We recognize depreciation
expense using the straight-line method over the estimated useful
lives of the respective assets with three years for computers
and five years for furniture and fixtures, equipment and
software. Leasehold improvements and capitalized leases are
depreciated over the remaining life of the lease.
We capitalize internally developed software costs on a
project-by-project
basis in accordance with Accounting Standards Codification
(ASC)
350-40,
Intangibles Goodwill and Other:
Internal-Use
Software. All costs to establish the technological
feasibility of computer software development is
74
expensed to operations when incurred. Internally developed
software development costs are carried at the lower of
unamortized cost or net realizable value and are amortized based
on the current and estimated useful life of the software.
Amortization over the estimated useful life of five years begins
when the software is ready for its intended use.
Goodwill
and Other Intangible Assets
Goodwill resulting from the Summit Partners Transactions and
from acquisitions of other businesses is carried as an asset on
the balance sheet and is not amortized, but is evaluated at
least once a year to determine whether impairment exists.
Management assessed goodwill as of December 31, 2009 and
2008 and determined that no impairment existed as of those
dates. During the third quarter of 2008, the amount of goodwill
recognized as part of the Summit Partners Transactions was
determined to be $31.7 million as part of the remeasurement
period. During 2008, we recognized approximately
$0.6 million of goodwill related to our acquisition of
Darby & Associates, Inc. and approximately
$1.3 million related to our acquisition of CIRG. As part of
the purchase of Bliss & Glennon in April 2009, we
recognized $29.9 million of goodwill and $8.7 million
of other intangible assets. As part of the purchase of South Bay
Acceptance Corporation in February 2010, we recognized
$0.5 million of goodwill. As part of the purchase of
Continental Car Club in May 2010, we recorded $11.5 million
of goodwill and $0.05 million of other intangible assets.
In addition, we recorded $9.0 million of goodwill and
$0.4 million of other intangible assets associated with the
purchase of United Motor Club in September 2010. We recorded
amortization expense of $2.3 million, $2.7 million,
$2.1 million and $1.0 million during the nine months
ended September 30, 2010, the years ended December 31,
2009 and 2008 and the 2007 successor period, respectively,
related to other intangible assets.
Goodwill and other intangible assets represented
$112.7 million, $93.6 million and $57.7 million
of our total assets as of September 30, 2010 and
December 31, 2009 and 2008, respectively. We review our
goodwill annually in the fourth quarter for impairment or more
frequently if indicators of impairment exist. We regularly
assess whether any indicators of impairment exist. Such
indicators include, but are not limited to, a sustained
significant decline in our market value or a significant decline
in our expected future cash flows due to changes in
company-specific factors or the broader business climate. The
evaluation of such factors requires considerable judgment by
management. Any adverse change in these factors could have a
significant impact on the recoverability of goodwill and could
have a material impact on our consolidated financial statements.
When required, we test goodwill for impairment at the reporting
unit level. Following the goodwill guidance, which is included
within ASC Topic 350, Intangibles Goodwill and
Other, we have concluded that our reporting units for
goodwill testing are equivalent to our reported business
segments, excluding the corporate segment.
75
The following table illustrates the amount of goodwill assigned
to each business segment as of December 31, 2009:
|
|
|
|
|
|
|
Goodwill Assigned
|
|
|
|
by Segment
|
|
|
|
(in thousands)
|
|
|
Payment Protection:
|
|
|
|
|
Summit Partners Transactions
|
|
$
|
22,763
|
|
Darby & Associates
|
|
|
642
|
|
|
|
|
|
|
Total Payment Protection
|
|
|
23,405
|
|
|
|
|
|
|
BPO:
|
|
|
|
|
Summit Partners Transactions
|
|
|
8,902
|
|
CIRG
|
|
|
1,337
|
|
|
|
|
|
|
Total BPO
|
|
|
10,239
|
|
|
|
|
|
|
Wholesale Brokerage:
|
|
|
|
|
Bliss & Glennon
|
|
|
29,917
|
|
|
|
|
|
|
Total Wholesale Brokerage
|
|
|
29,917
|
|
|
|
|
|
|
Total Goodwill
|
|
$
|
63,561
|
|
|
|
|
|
|
Unpaid
Claims
Unpaid claims are reserve estimates that are established in
accordance with GAAP using generally accepted actuarial methods.
Credit life, credit disability and AD&D unpaid claims
reserves include claims in the course of settlement and IBNR.
For all other product lines, unpaid claims reserves are bulk
reserves and are entirely IBNR. We use a number of algorithms in
establishing our unpaid claims reserves. These algorithms are
used to calculate unpaid claims as a function of paid losses,
earned premium, target loss ratios, in force amounts, unearned
premium reserves, industry recognized morbidity tables or a
combination of these factors. The factors used to develop the
IBNR vary by product line. However, in general terms, the factor
used to develop IBNR for credit life insurance is a function of
the amount of life insurance in force. The factor can vary from
$0.60 to $1.00 per $1,000 of in force coverage. The factor used
to develop IBNR for credit disability is a function of the
pro-rata unearned premium reserve and is typically 5% of
unearned premium reserve. Finally, IBNR for AD&D policies
is a function of in force coverage and is currently $0.11 per
$1,000 of in force coverage.
In accordance with applicable statutory insurance company
regulations, our unpaid claims reserves are evaluated by
appointed actuaries. The appointed actuaries perform this
function in compliance with the Standards of Practice and Codes
of Conduct of the American Academy of Actuaries. The appointed
actuaries perform their actuarial analyses each year and prepare
opinions, statements and reports documenting their
determinations.
The appointed actuaries conduct their actuarial analysis on a
basis gross of reinsurance. The same estimates used as a basis
in calculating the gross unpaid claims reserves are then used as
the basis for calculating the net unpaid claims reserves, which
take into account the impact of reinsurance.
Anticipated future loss development patterns form a key
assumption underlying these analyses. Our claims are generally
reported and settled quickly resulting in a consistent
historical loss development pattern. From the anticipated loss
development patterns, a variety of actuarial loss projection
techniques are employed, such as chain ladder method, the
Bornhuetter-Ferguson method and expected loss ratio method.
76
Our unpaid claims reserves do not represent an exact calculation
of exposure, but instead represent our best estimates, generally
involving actuarial projections at a given time. The process
used in determining our unpaid claims reserves cannot be exact
since actual claim costs are dependent upon a number of complex
factors such as changes in doctrines of legal liabilities and
damage awards. These factors are not directly quantifiable,
particularly on a prospective basis. We periodically review and
update our methods of making such unpaid claims reserve
estimates and establishing the related liabilities based on our
actual experience. We have not made any changes to our
methodologies for determining unpaid claims reserves in the
periods presented.
For further information about our reserving methodology, see
Note 17 to our consolidated financial statements included
elsewhere in this prospectus.
The following table provides unpaid claims reserve information
by Payment Protection product line as of September 30, 2010
and December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
In Course
|
|
|
|
|
|
Total
|
|
|
In Course
|
|
|
|
|
|
Total
|
|
|
In Course
|
|
|
|
|
|
Total
|
|
|
|
of
|
|
|
|
|
|
Claim
|
|
|
of
|
|
|
|
|
|
Claim
|
|
|
of
|
|
|
|
|
|
Claim
|
|
Product Type
|
|
Settlement(1)
|
|
|
IBNR(2)
|
|
|
Reserve
|
|
|
Settlement(1)
|
|
|
IBNR(2)
|
|
|
Reserve
|
|
|
Settlement(1)
|
|
|
IBNR(2)
|
|
|
Reserve
|
|
|
|
(in thousands)
|
|
|
Property
|
|
$
|
|
|
|
$
|
1,440
|
|
|
$
|
1,440
|
|
|
$
|
|
|
|
$
|
2,090
|
|
|
$
|
2,090
|
|
|
$
|
|
|
|
$
|
1,985
|
|
|
$
|
1,985
|
|
Surety
|
|
|
|
|
|
|
441
|
|
|
|
441
|
|
|
|
|
|
|
|
740
|
|
|
|
740
|
|
|
|
|
|
|
|
693
|
|
|
|
693
|
|
General
liability(3)
|
|
|
|
|
|
|
2,076
|
|
|
|
2,076
|
|
|
|
|
|
|
|
2,773
|
|
|
|
2,773
|
|
|
|
|
|
|
|
2,679
|
|
|
|
2,679
|
|
Credit life
|
|
|
708
|
|
|
|
1,837
|
|
|
|
2,545
|
|
|
|
1,029
|
|
|
|
2,170
|
|
|
|
3,199
|
|
|
|
1,101
|
|
|
|
1,907
|
|
|
|
3,008
|
|
Credit disability
|
|
|
115
|
|
|
|
4,044
|
|
|
|
4,159
|
|
|
|
135
|
|
|
|
4,175
|
|
|
|
4,310
|
|
|
|
155
|
|
|
|
4,093
|
|
|
|
4,248
|
|
AD&D
|
|
|
398
|
|
|
|
444
|
|
|
|
842
|
|
|
|
59
|
|
|
|
430
|
|
|
|
489
|
|
|
|
60
|
|
|
|
273
|
|
|
|
333
|
|
Other
|
|
|
|
|
|
|
844
|
|
|
|
844
|
|
|
|
|
|
|
|
32
|
|
|
|
32
|
|
|
|
|
|
|
|
16
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,221
|
|
|
$
|
11,126
|
|
|
$
|
12,347
|
|
|
$
|
1,223
|
|
|
$
|
12,410
|
|
|
$
|
13,633
|
|
|
$
|
1,316
|
|
|
$
|
11,646
|
|
|
$
|
12,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In Course of Settlement represents amounts reserved
to pay claims known but are not yet paid.
|
|
(2)
|
IBNR reserves represent amounts reserved to pay claims where the
insured event has occurred and has not yet been reported. IBNR
reserves for credit disability also include the net present
value of future claims payment of $1,118, $1,159 and $1,201 as
of September 30, 2010, December 31, 2009 and
December 31, 2008, respectively.
|
|
(3)
|
General liability primarily represents amounts reserved to pay
claims on contractual liability policies behind debt
cancellation products.
|
Prior years incurred claims decreased $0.6 million
during 2009 due to the favorable development in payment patterns
for the credit property lines of business in 2009. The
$2.3 million decrease in 2008 primarily resulted from a
single bank customer that assumed the exposure on their block of
business during that period.
Most of our credit insurance business is written on a
retrospective commission basis, which permits management to
adjust commissions based on claims experience. Thus, any
adjustment to prior years incurred claims in this line of
business is partially offset by a change in retrospective
commissions.
While management has used its best judgment in establishing the
estimate of required unpaid claims, different assumptions and
variables could lead to significantly different unpaid claims
estimates. Two key measures of loss activity are loss frequency,
which is a measure of the number of claims per unit of insured
exposure, and loss severity, which is based on the average size
of claims. Factors affecting loss frequency and loss severity
include changes in claims reporting patterns, claims settlement
patterns, judicial decisions, legislation, economic conditions,
morbidity patterns and the attitudes of claimants
77
towards settlements. The adequacy of our unpaid claims reserves
will be impacted by future trends that impact these factors.
While our cost of claims has not varied significantly from our
reserves in prior periods, if the actual level of loss frequency
and severity are higher or lower than expected, our paid claims
will be different than managements estimate. We believe
that, based on our actuarial analysis, an aggregate change that
is greater than ± 10% (or 5% for each of loss frequency and
severity) is not probable. The effect of higher and lower levels
of loss frequency and severity levels on our ultimate cost for
claims occurring in 2009 would be as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
Sensitivity Change in Both Loss
|
|
|
|
|
Frequency and Severity For All
|
|
Claims
|
|
Change in
|
Payment Protection Products
|
|
Cost
|
|
Claims Cost
|
|
5% higher
|
|
$
|
15,035
|
|
|
$
|
1,398
|
|
3% higher
|
|
|
14,468
|
|
|
|
830
|
|
1% higher
|
|
|
13,911
|
|
|
|
274
|
|
Base scenario
|
|
|
13,633
|
|
|
|
0
|
|
1% lower
|
|
|
13,363
|
|
|
|
(274
|
)
|
3% lower
|
|
|
12,807
|
|
|
|
(830
|
)
|
5% lower
|
|
|
12,239
|
|
|
|
(1,398
|
)
|
Adjustments to our unpaid claims reserves, both positive and
negative, are reflected in our statement of income for the
period in which such estimates are updated. Because the
establishment of our unpaid claims reserves is an inherently
uncertain process involving estimates of future losses, there
can be no certainty that ultimate losses will not exceed
existing claims reserves. Future loss development could require
our reserves to be increased, which could have a material
adverse effect on our earnings in the periods in which such
increases are made.
Unearned
Premiums
Premiums written are earned over the period that coverage is
provided. Unearned premiums represent the portion of premiums
that will be earned in the future and are generally calculated
using the pro rata method. A premium deficiency reserve is
recorded if anticipated losses, loss adjustment expenses and
maintenance costs exceed the recorded unearned premium reserve
and anticipated investment income. As of December 31, 2009,
2008 and 2007, no reserve was recorded.
Income
Taxes
We file a consolidated federal income tax return with all
majority owned subsidiaries except for Triangle Life Insurance
Company which files a separate federal income tax return. We
have a tax sharing agreement with our subsidiaries where each
company is apportioned the amount of tax equal to that which
would be reported on a separate company basis. Income taxes are
recorded in accordance with the asset and liability method.
Under the asset and liability method, deferred tax assets and
liabilities are recorded based on the difference between the tax
basis of assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as temporary
differences.
Deferred income taxes are recorded for temporary differences
between the financial reporting and income tax bases of assets
and liabilities, based on enacted tax laws and statutory tax
rates applicable to the periods in which we expect the temporary
differences to reverse. A valuation allowance is established for
deferred tax assets when it is more likely than not that an
amount will not be realized. The detailed components of our
deferred tax assets and liabilities are included in Note 12
to the Consolidated Financial Statements.
78
ASC Topic 740 states that a deferred tax asset should be
reduced by a valuation allowance if, based on the weight of all
available evidence, it is more likely than not that some portion
or all of the deferred tax asset will not be realized. The
valuation allowance should be sufficient to reduce the deferred
tax asset to the amount that is more likely than not to be
realized. In determining whether our deferred tax asset is
realizable, we considered all available evidence, including both
positive and negative evidence. The realization of deferred tax
assets depends upon the existence of sufficient taxable income
of the same character during the carry-back or carry-forward
period. We considered all sources of taxable income available to
realize the deferred tax asset, including the future reversal of
existing temporary differences, future taxable income exclusive
of reversing temporary differences and carry forwards, taxable
income in carry-back years and tax-planning strategies.
We believe it is more likely than not that our deferred tax
assets will be realized in the foreseeable future. Accordingly,
a valuation allowance has not been established.
Contingencies
We follow the requirements of the contingencies guidance, which
is included within ASC Topic 450, Contingencies. This
requires management to evaluate each contingent matter
separately. A loss is reported if reasonably estimable and
probable. We establish reserves for these contingencies at the
best estimate, or, if no one estimated number within the range
of possible losses is more probable than any other, we report an
estimated reserve at the midpoint of the estimated range.
Contingencies affecting us include litigation matters which are
inherently difficult to evaluate and are subject to significant
changes.
Service
and Administrative Fees
We earn service and administrative fees for a variety of
activities. This includes providing administrative services for
other insurance companies, debt cancellation programs,
collateral tracking and asset recovery services.
The Payment Protection administrative service revenue is
recognized consistent with the earnings recognition pattern of
the underlying insurance policy or debt cancellation contract
being administered. For example, if the credit instrument is
36 months in duration, the credit insurance policy or debt
cancellation contract is also 36 months. Because we provide
administrative services over the life of the policy or debt
cancellation contract, we recognize service and administrative
fees over the life of the insurance policy or debt cancellation
contract. Accordingly, if there is a pre-term cancellation, no
funds would be due to our customer. As a result, we have had no
changes in earnings patterns, resulting in no prior period
adjustments to total revenues or net income.
The BPO service fee revenue is recognized as the services are
performed. These services include fulfillment, BPO software
development and claims handling for our customers. Collateral
tracking fee income is recognized when the service is performed
and billed. Asset recovery service revenue is recognized upon
the location of a recovered unit. Management reviews the
financial results under each significant BPO contract on a
monthly basis. Any losses that may occur due to a specific
contract would be recognized in the period in which the loss
occurs. For the periods presented, we have not incurred a loss
with respect to a specific significant BPO contract.
Wholesale
Brokerage Commissions and Fees
We earn wholesale brokerage commission and fee income by
providing wholesale brokerage services to retail insurance
brokers and agents and insurance companies. Wholesale brokerage
commission income is primarily recognized when the underlying
insurance policies are issued. A portion of the wholesale
brokerage commission income is derived from profit agreements
with insurance carriers. These
79
commissions are received from carriers based upon the underlying
underwriting profitability of the business that we place with
those carriers. Profit commission income is generally recognized
as revenue on the receipt of cash based on the terms of the
respective carrier contracts. In certain instances, profit
commission income may be recognized in advance of cash receipt
where the profit commission income due to be received has been
calculated or has been confirmed by the insurance carrier. We
had profit commissions of $1.2 million, $1.2 million
and $1.3 million for the nine months ended
September 30, 2010 and 2009 and the year ended
December 31, 2009, respectively.
See Components of Revenues and
Expenses Revenues Wholesale
Brokerage Commissions and Fees for a discussion of various
factors that impact our wholesale brokerage commissions and fees.
Ceding
Commissions
Ceding commissions earned under coinsurance agreements are based
on contractual formulas that take into account, in part,
underwriting performance and investment returns experienced by
the assuming companies. As experience changes, adjustments to
the ceding commissions are reflected in the period incurred.
Experience adjustments are based on the claim experience of the
related policy. The adjustment is calculated by adding the
earned premium and investment income from the assets held in
trust for our benefit less earned commissions, incurred claims
and the reinsurers fee for the coverage.
Our experience adjustments, exclusive of investment income, were
(in thousands):
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Successor
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|
|
|
|
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|
|
|
|
|
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Predecessor
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Period of
|
|
|
|
Period of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 20,
|
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|
|
January 1,
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
2007
|
|
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|
2007
|
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Nine Months Ended
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to
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to
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September 30,
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Years Ended
|
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December 31,
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June 19,
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2010
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2009
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2009
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2008
|
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2007
|
|
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|
2007
|
|
Experience adjustments
|
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$
|
4,521
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|
$
|
3,809
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|
|
$
|
4,775
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|
$
|
6,280
|
|
|
$
|
2,944
|
|
|
|
$
|
2,159
|
|
See Components of Revenues and
Expenses Revenues Ceding
Commissions for a discussion of various factors that
impact our ceding commissions.
Net
Earned Premium
Direct and assumed earned premium consists of revenue generated
from the direct sale of Payment Protection insurance policies by
our distributors or premiums written for Payment Protection
insurance policies by another carrier and assumed by us. Whether
direct or assumed, the premium is earned over the life of the
respective policy. Direct and assumed earned premium are offset
by premiums ceded to our reinsurers, including PORCs. The amount
ceded is proportional to the amount of risk assumed by the
reinsurer.
Commissions
The commission costs include the commissions paid to the
distributors for selling the policy. The commission costs also
include retrospective commission adjustments. These
retrospective commission adjustments are payments made or
adjustments to future commission expense based on claims
experience. Under these retrospective commission arrangements,
the commissions paid are adjusted based on actual losses
incurred compared to premium earned after a specified net
allowance retained by us.
80
Net
Investment Income
Net investment income consists of investment income from our
invested assets portfolio. We recognize investment income from
interest payments and dividends less portfolio management
expenses. Our investment portfolio is primarily invested in
fixed maturity securities. Investment income can be
significantly impacted by changes in interest rates. Interest
rate volatility can increase or reduce unrealized gains or
unrealized losses in our portfolios. Interest rates are highly
sensitive to many factors, including governmental monetary
policies, domestic and international economic and political
conditions and other factors beyond our control. Fluctuations in
interest rates affect our returns on, and the market value of,
fixed maturity and short-term investments.
The fair market value of the fixed maturity securities in our
portfolio and the investment income from these securities
fluctuate depending on general economic and market conditions.
The fair market value generally increases or decreases in an
inverse relationship with fluctuations in interest rates. We
also have investments that carry prepayment risk, such as
mortgage-backed and asset-backed securities. Actual net
investment income
and/or cash
flows from investments that carry prepayment risk may differ
from estimates at the time of investment as a result of interest
rate fluctuations. In periods of declining interest rates,
mortgage prepayments generally increase and mortgage-backed
securities, commercial mortgage obligations and bonds are more
likely to be prepaid or redeemed as borrowers seek to borrow at
lower interest rates. Therefore, we may be required to reinvest
those funds in lower interest-bearing investments.
Stock-Based
Compensation
ASC 718 Compensation Stock
Compensation, addresses accounting for share-based awards,
including stock options, with compensation expense measured
using fair value and recorded over the requisite service or
performance period of the awards.
We have outstanding options under our Key Employee Stock Option
Plan (1995) and 2005 Equity Incentive Plan. In addition, we
have outstanding options that were granted outside of those
plans.
The Key Employee Stock Option Plan (1995), which was effective
January 26, 1995, permits awards of incentive stock options
and nonqualified stock options. We were permitted to issue up to
210,000 shares under this plan. Each option granted under
this plan has a maximum contractual term of 10 years. The
1995 plan (but not the outstanding options granted under the
plan) terminated on January 25, 2005. As of
December 31, 2009, there were 52,200 options outstanding
under the 1995 plan.
The 2005 Equity Incentive Plan was established on
October 18, 2005 and permits awards of (i) Incentive
Stock Options, (ii) Nonqualified Stock Options,
(iii) Stock Appreciation Rights, (iv) Restricted Stock
and (v) Restricted Stock Units. We were permitted to issue
up to 250,000 shares under this plan. Each option granted
under this plan has a maximum contractual term of 10 years.
As of December 31, 2009, there were 250,000 options
outstanding under the 2005 plan.
We also have 69,907 options outstanding as of
December 31, 2009 that were issued outside of our existing
plans.
During 2009, no options were granted, while in 2008, and the
2007 successor period, 7,972 and 161,935 options were
granted, respectively. No options were granted during the 2007
predecessor period.
We measure
stock-based
compensation using the calculated value method. Under that
method, we estimate the fair value of each option on the grant
date using the Black-Scholes valuation model incorporating the
assumptions noted in the following table. We used historical
data to estimate expected employee behavior related to stock
award exercises and forfeitures. Since there is not an active
internal market for shares of our stock, we have chosen to
estimate its volatility by using the volatility of a similar
publicly traded company operating in the same industry. Expected
dividends are based on the
81
assumption that no dividends were expected to be distributed in
the near future. The risk-free rate is based on the
U.S. Treasury yield curve in effect at the time of grant
for periods corresponding with the expected life of the options.
Assumptions related to stock option awards:
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Successor
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Predecessor
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Period of
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Period of
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June 20,
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January 1,
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2007 to
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2007 to
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Years Ended
|
|
December 31,
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June 19,
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|
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2009
|
|
2008
|
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2007
|
|
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2007
|
Expected term (years)
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*
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5.0
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5.0
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*
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Expected volatility
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*
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32.87
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%
|
|
|
22.43
|
%
|
|
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*
|
Expected dividends
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*
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$
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$
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*
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Risk-free rate
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*
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4.96
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%
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5.24
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%
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*
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*
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|
No options were granted during 2009
or the period of January 1, 2007 to June 19, 2007.
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A summary of options granted, exercised and cancelled under
these agreements for the years ended December 31, 2009 and
2008 are as follows:
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Options
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Exercise
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Options
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Outstanding
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Price
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Exercisable
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Exercise Price
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Balance, December 31, 2007
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472,135
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$
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13.64
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220,200
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$
|
10.21
|
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Granted
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7,972
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23.11
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Vested
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90,220
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16.69
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Exercised
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(105,000
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)
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7.99
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(105,000
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)
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7.99
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Cancelled
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|
Balance, December 31, 2008
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|
375,107
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|
|
|
15.42
|
|
|
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205,420
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|
14.16
|
|
Granted
|
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Vested
|
|
|
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73,639
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|
|
|
16.86
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|
Exercised
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|
|
(3,000
|
)
|
|
|
8.12
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|
|
|
(3,000
|
)
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|
8.12
|
|
Cancelled
|
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|
|
|
|
|
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|
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|
Balance, December 31, 2009
|
|
|
372,107
|
|
|
$
|
15.48
|
|
|
|
276,059
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|
|
$
|
14.95
|
|
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|
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|
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|
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|
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Weighted-average remaining contractual term at
December 31, 2009 (years)
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|
6.12
|
|
|
|
|
|
|
|
5.73
|
|
|
|
|
|
82
Additional information regarding options granted, vested and
exercised is presented below:
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|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period of
|
|
|
Period of
|
|
|
|
|
|
|
June 20,
|
|
|
January 1,
|
|
|
Years Ended
|
|
2007 to
|
|
|
2007 to
|
|
|
December 31,
|
|
December 31,
|
|
|
June 19,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
2007
|
|
|
(in thousands except weighted-average fair values)
|
|
|
|
Weighted-average grant date fair value of options granted
|
|
|
*
|
|
|
$
|
7.90
|
|
|
$
|
4.69
|
|
|
|
|
*
|
|
Total fair value of options vested during the year
|
|
$
|
209
|
|
|
$
|
244
|
|
|
$
|
56
|
|
|
|
$
|
2
|
|
Total intrinsic value of options exercised
|
|
$
|
112
|
|
|
$
|
1,327
|
|
|
$
|
|
|
|
|
$
|
1,890
|
|
Cash received from option exercises
|
|
$
|
24
|
|
|
$
|
846
|
|
|
$
|
|
|
|
|
$
|
1,044
|
|
Tax benefits realized from exercised stock options
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
Cash used to settle equity instruments granted under stock-based
compensation awards
|
|
$
|
|
|
|
$
|
2,069
|
|
|
$
|
1,400
|
|
|
|
$
|
|
|
|
|
|
*
|
|
No options were granted during 2009
or the period of January 1, 2007 to June 19, 2007.
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The intrinsic value reported above is calculated as the
difference between the market value as of the exercise date and
the exercise price of the shares.
Our policy is to issue new shares upon the exercise of stock
options. Shares of Company stock issued upon the exercise of
stock options in 2009, 2008, the 2007 successor period and the
2007 predecessor period were 3,000, 105,000, 129,400 and 0,
respectively.
Stock-based compensation cost is measured at the grant date
based on the fair value of the award and is typically recognized
as expense on a straight-line basis over the requisite service
period, which is the vesting period. Total stock-based
compensation recognized on the consolidated statements of income
was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period of
|
|
|
|
Period of
|
|
|
|
|
|
|
|
|
|
June 20,
|
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
|
2007 to
|
|
|
|
2007 to
|
|
|
|
Years Ended
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
Other operating expenses
|
|
$
|
209
|
|
|
$
|
244
|
|
|
$
|
56
|
|
|
|
$
|
2
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net share-based compensation
|
|
$
|
209
|
|
|
$
|
244
|
|
|
$
|
56
|
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized compensation cost related to non-vested share
based compensation at December 31, 2009 was $327 with a
weighted-average recognition period of 1.4 years.
Liquidity
and Capital Resources
Liquidity
Liquidity describes the ability of a company to generate
sufficient cash flows to meet the cash requirements of its
business operations, including working capital needs, capital
expenditures, debt
83
service, acquisitions and other commitments and contractual
obligations. We historically have derived our liquidity from our
invested assets, cash flow from operations, ordinary and
extraordinary dividend capacity from our insurance companies,
our credit facilities and additional equity investments. When
considering our liquidity, it is important to note that we hold
cash in a fiduciary capacity as a result of premiums received
from insured parties that have not yet been paid to insurance
carriers. The fiduciary cash is recorded as an asset on our
balance sheet with a corresponding liability, net of our
commissions, to insurance carriers.
Our primary cash requirements include the payment of our
operating expenses, interest and principal payments on our debt,
and capital expenditures. We also have used cash for
acquisitions and to make dividend payments and tax-related
distributions to our equity holders. We may also incur
unexpected costs and operating expenses related to any
unforeseen disruptions to our facilities and equipment, the loss
of key personnel or changes in the credit markets and interest
rates, which could increase our immediate cash requirements or
otherwise impact our liquidity. Dividends and other
distributions from our subsidiaries are our principal sources of
cash to meet these obligations. See Revolving
Credit Facilities Revolving Credit Facility
and Revolving Credit Facilities South
Bay Acceptance Corporation Loan and Security Facility for
details about restrictions on the payment of dividends and other
distributions by our subsidiaries.
Our primary sources of liquidity are our invested assets, our
cash and cash equivalent balances and availability under our
revolving credit facilities. At September 30, 2010, we had
invested assets of $94.2 million, cash and cash equivalents
of $17.8 million and $7.0 million of availability
under our two revolving credit facilities. Our total
indebtedness and redeemable preferred stock was
$94.5 million at September 30, 2010. At
December 31, 2009, we had total invested assets of
$84.4 million, cash and cash equivalents of
$29.9 million and $18.5 million of availability under
our two revolving credit facilities. Our total indebtedness and
redeemable preferred stock was $78.0 million at
December 31, 2009. After giving effect to the application
of our net proceeds from this offering as set forth under
Use of Proceeds, our total indebtedness is expected
to be $ million. We believe that
our cash flow from operations and our availability under our
credit facilities combined with our low capital expenditure
requirements will provide us with sufficient capital to continue
to grow our business, but we will use a portion of our cash flow
to pay interest on our outstanding debt, limiting the amount
available for working capital, capital expenditures and other
general corporate purposes. As we continue to expand our
business and make acquisitions, we may in the future require
additional working capital for increased costs.
We anticipate that cash flow from operations, the funds
available under our revolving credit facilities and the net
proceeds that we receive from this offering, will be sufficient
to meet our working capital requirements and to finance capital
expenditures over the next several years. There can be no
assurance, however, that cash resources will be available to us
in an amount sufficient to enable us to service our indebtedness
or to fund our other liquidity needs. Our ability to meet our
debt service obligations and other capital requirements,
including capital expenditures and acquisitions, will depend
upon our future results of operations and our ability to obtain
additional debt or equity capital and our ability to stay in
compliance with our financial covenants, which, in turn, will be
subject to general economic, financial, business, competitive,
legislative, regulatory and other conditions, many of which are
beyond our control. We may also need to obtain additional funds
to finance acquisitions, which may be in the form of additional
debt or equity. Although we believe we have sufficient liquidity
under our revolving credit facilities, as discussed above, under
extreme market conditions or in the event of a default under
either of our revolving credit facilities, there can be no
assurance that such funds would be available or sufficient, and
in such a case, we may not be able to successfully obtain
additional financing on favorable terms, or at all. See
Risk Factors Risks Related to Our
Indebtedness.
84
Regulatory
Requirements
We are a holding company and have limited direct operations. Our
holding company assets consist primarily of the capital stock of
our subsidiaries. Accordingly, our future cash flows depend upon
the availability of dividends and other payments from our
subsidiaries, including statutorily permissible payments from
our insurance company subsidiaries, as well as payments under
our tax allocation agreement and management agreements with our
subsidiaries. The ability of our insurance company subsidiaries
to pay such dividends and to make such other payments will be
limited by applicable laws and regulations of the states in
which our subsidiaries are domiciled, which vary from state to
state and by type of insurance provided by the applicable
subsidiary. These laws and regulations require, among other
things, our insurance subsidiaries to maintain minimum solvency
requirements and limit the amount of dividends these
subsidiaries can pay to the holding company. Along with solvency
regulations, the primary factor in determining the amount of
capital available for potential dividends is the level of
capital needed to maintain desired financial strength ratings
from A.M. Best for our insurance company subsidiaries.
Given recent economic events that have affected the insurance
industry, both regulators and rating agencies could become more
conservative in their methodology and criteria, including
increasing capital requirements for our insurance subsidiaries
which, in turn, could negatively affect our capital resources.
For 2010, based on financial information for Life of the South
Insurance Company; Southern Financial Life Insurance Company;
Bankers Life of Louisiana; Lyndon Southern Insurance Company;
and Insurance Company of the South, the maximum amount of
distributions our insurance company subsidiaries could pay,
under applicable laws and regulations without prior regulatory
approval, would be approximately $11.7 million.
The following table sets forth the ordinary and extraordinary
dividends paid to us by our insurance company subsidiaries for
the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
June 20,
|
|
|
January 1,
|
|
|
|
|
2007 to
|
|
|
2007 to
|
|
|
Years Ended December 31,
|
|
December 31,
|
|
|
June 19,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
|
Ordinary dividends
|
|
$
|
2,432
|
|
|
$
|
3,124
|
|
|
$
|
|
|
|
|
$
|
|
|
Extraordinary dividends
|
|
|
16,293
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends
|
|
$
|
18,725
|
|
|
$
|
11,124
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facilities
Revolving
Credit Facility
In June 2010, we entered into a $35.0 million revolving
credit facility with SunTrust Bank, as administrative agent,
which matures in June 2013. We may, so long as no default is
continuing under the revolving credit facility, request that the
existing lenders or, with the consent of the administrative
agent, new lenders increase the revolving commitment by an
additional $50.0 million. Any increase will be subject to
the consent of (i) the new or existing lenders actually
providing such increased or additional commitments, as the case
may be, and (ii) to the extent any additional commitment is
provided by a new lender, the administrative agent.
The obligations under our revolving credit facility are
unconditional and are guaranteed by substantially all of our
domestic subsidiaries, other than South Bay Acceptance
Corporation and our regulated insurance subsidiaries. The
revolving credit facility and related guarantees are secured by
a perfected first priority security interest (subject to liens
permitted under the revolving credit facility) in substantially
all property and assets, subject to certain exceptions, owned by
us, LOTS Intermediate Co., our
85
co-borrower under the revolving credit facility, and the
subsidiary guarantors, including a pledge of all the capital
stock of LOTS Intermediate Co. and, when the indenture governing
the preferred trust securities described below is no longer in
effect, all other capital stock owned by us, LOTS Intermediate
Co. or any guarantor.
In the case of base rate loans, borrowings under the revolving
credit facility bear interest at the highest of (i) the per
annum rate announced by the administrative agent as its prime
lending rate, (ii) the federal funds rate plus 0.50% per
annum and (iii) the adjusted LIBO rate (as defined below)
for a period of one month plus 1.00% per annum, in each case,
plus the applicable margin. The applicable margin for base rate
loans is 3.00% per annum when our total leverage ratio (as
defined in the revolving credit agreement) is greater than or
equal to 2.50 to 1.00 (leverage level 1), 2.75%
per annum when our total leverage ratio is less than 2.50 to
1.00 but greater than or equal to 2.00 to 1.00 (leverage
level 2), 2.50% per annum when our total leverage
ratio is less than 2.00 to 1.00 but greater than or equal to
1.50 to 1.00 (leverage level 3) and 2.25% per
annum when our total leverage ratio is less than 1.50 to 1.00
(leverage level 4).
In the case of Eurodollar loans, borrowings under the revolving
credit facility bear interest at a rate (the adjusted LIBO
rate) determined by dividing (i) LIBOR for such
period by (ii) a percentage equal to 1.00 minus the
Eurodollar reserve percentage, plus 4.00% per annum in the case
of leverage level 1, 3.75% per annum in the case of
leverage level 2, 3.50% per annum in the case of leverage
level 3 and 3.25% per annum in the case of leverage
level 4. If we default on the payment of any amounts due
under our revolving credit facility, or another event of default
has occurred and is continuing, we will be obligated to pay
default interest on all outstanding obligations. The default
interest rate will equal the interest rate then in effect with
respect to the applicable loan or, in the case of obligations
other than loans, base rate loans plus 2.00% per annum.
In addition, we are required to pay a commitment fee at a rate
equal to 0.60% per annum in the case of leverage level 1,
0.55% per annum in the case of leverage level 2, 0.50% per
annum in the case of leverage level 3 and 0.45% per annum
in the case of leverage level 4 on the unused commitments
available to be drawn under the facility.
We are generally required to prepay borrowings under the
revolving credit facility with (i) 100% of net cash
proceeds from certain asset sales or insurance proceeds as a
result of casualty or condemnation and (ii) 50% of the net
cash proceeds from issuances of debt or equity securities (other
than proceeds of certain issuances permitted under the revolving
credit agreement, including proceeds from the issuance of equity
securities that are applied to repayment of the subordinated
debentures and redeemable preferred stock described below).
Notwithstanding the foregoing, we are not required to make
mandatory prepayments with proceeds from issuances of debt or
equity securities if our total leverage ratio, on a pro forma
basis after giving effect to the use of proceeds from such
issuance, is less than or equal to 2.50 to 1.00.
The revolving credit facility requires us and LOTS Intermediate
Co. to maintain certain financial ratios, including a total
leverage ratio (based upon the ratio of consolidated total debt
to consolidated adjusted EBITDA, in each case of us, LOTS
Intermediate Co. and our restricted subsidiaries (as defined in
the revolving credit agreement)), a senior leverage ratio (based
upon the ratio of consolidated senior debt to consolidated
adjusted EBITDA, in each case of us, LOTS Intermediate Co. and
our restricted subsidiaries), a fixed charge coverage ratio
(based upon consolidated adjusted EBITDA less the actual amount
paid in cash on account of capital expenditures, less cash
taxes, to consolidated fixed charges, in each case of us, LOTS
Intermediate Co. and our restricted subsidiaries) and a
reinsurance ratio (based upon the aggregate amounts recoverable
from reinsurers divided by the sum of (i) policy and claim
liabilities plus (ii) unearned premiums, in accordance with
GAAP, in each case of us, LOTS Intermediate Co. and our
restricted subsidiaries), each of which is tested quarterly.
Based upon the formulas set forth under the revolving credit
facility, we are required to maintain a total leverage ratio of
no more than 3.50 to
86
1.00, a senior leverage ratio of no more than 2.50 to 1.00, a
fixed charge coverage ratio of not less than 1.25 to 1.00 and a
reinsurance ratio of not less than 60%. As of September 30,
2010, we were in compliance with such requirements.
The revolving credit facility contains a number of affirmative
and restrictive covenants, including limitations on the
incurrence of additional indebtedness, liens on property, sale
and leaseback transactions, investments, loans and advances,
mergers, consolidations or dissolutions, asset sales,
acquisitions, transactions with affiliates, prepayments of
subordinated indebtedness, restricted payments, hedging
transactions, modifications to certain material documents, lease
obligations (including obligations under operating leases) and
ERISA events. Under the revolving credit facility, our
subsidiaries are permitted to make distributions to us if no
default or event of default has occurred and is continuing at
the time of such distribution. As of September 30, 2010 we
were in compliance with such requirements.
Our obligations under the revolving credit facility may be
accelerated or the commitments terminated upon the occurrence of
an event of default under the revolving credit facility,
including payment defaults, defaults in the performance of
affirmative and negative covenants, the inaccuracy of
representations or warranties, bankruptcy and insolvency related
defaults, cross defaults to other material indebtedness,
defaults arising in connection with changes in control and other
customary events of default.
We entered into our revolving credit facility on June 16,
2010. As of September 30, 2010, we had approximately
$28.0 million in principal amount of debt outstanding under
the revolving credit facility and the interest rate was 6.0%. On
November 30, 2010, CB&T, a division of Synovus Bank,
entered into a joinder agreement to the revolving credit
facility and became a new lender under the revolving credit
facility with a revolving commitment of $20.0 million,
which increased the size of the revolving credit facility to
$55.0 million.
CB&T
Lines of Credit
We had one $15.0 million and one $6.0 million line of
credit with Columbus Bank and Trust Company
(CB&T) that were terminated when we entered
into the $35.0 million revolving credit facility described
above. The lines of credit with CB&T were secured with
pledges of stock of various subsidiaries. Under both lines of
credit, we could not assign, sell, transfer or dispose of any
collateral or effectuate certain changes to our capital
structure and the capital structure of our subsidiaries without
CB&Ts prior consent. The purpose of the lines were
for working capital and acquisitions. In connection with the
refinancing of the CB&T lines of credit, Lyndon Southern
Insurance Company posted $2.0 million of cash collateral to
secure our reimbursement obligations (and those of certain of
our subsidiaries) in respect of four letters of credit that were
secured under the line of credit entered into in 2007, the face
of which currently total $5.1 million. We entered into one
of the revolving lines of credit at the time of the Summit
Partners Transactions ($15.0 million, the 2007 line
of credit) and the other line of credit in April 2009
($15.0 million, which was reduced to $6.4 million, the
2009 line of credit). The interest rate, in the case
of the 2007 line of credit, was based on CB&Ts prime
lending rate and, in the case of the 2009 line of credit, was
based on CB&Ts prime lending rate plus 1.0%, with a
minimum interest rate threshold of 5.0%. In June 2010, we paid
off the $11.5 million balance and closed the line of credit.
South Bay
Acceptance Corporation Loan and Security Facility
On June 10, 2010, our subsidiary South Bay Acceptance
Corporation entered into a loan and security agreement with
Wells Fargo Capital Finance, LLC, for a $40.0 million
revolving credit facility. The loan and security facility is
guaranteed by us, but only to the extent of losses incurred by
Wells Fargo as a result of fraudulent activity by South Bay
Acceptance Corporation or any of its affiliates, and is secured
by substantially all of South Bay Acceptance Corporations
tangible and intangible assets, subject to exceptions. The loan
and security facility bears interest, with respect to LIBOR rate
loans, at a rate
87
determined by reference to the LIBOR rate plus 3.0% and, with
respect to base rate loans, at a rate equal to, the greatest of
(i) the federal funds rate plus 0.50%, and (ii) the
rate of interest announced by Wells Fargo as its prime rate plus
3.0%. The default interest rate applicable to the obligations
outstanding under the facility will equal the interest rate
applicable to the relevant obligation plus 2.0% per annum. Under
the loan and security agreement, South Bay Acceptance
Corporation is generally prohibited from making dividend
payments or other distributions. However, South Bay Acceptance
Corporation is permitted to make quarterly distributions on its
stock if (i) both prior to and after such payment no
default or event of default has occurred or is continuing or
would result from such payment and (ii) it has provided the
lender under such facility its financial statements for the most
recently completed quarter and certified to the lender that
condition (i) above is satisfied.
Preferred
Trust Securities
In connection with the Summit Partners Transactions, LOTS
Intermediate Co. issued $35.0 million of fixed/floating
rate preferred trust securities due 2037. The preferred trust
securities bear interest at a rate of 9.61% per annum until the
June 2012 interest payment date. Thereafter, interest on the
preferred trust securities will be at a rate of
3-month
LIBOR plus 4.10% for each interest rate period.
We are not permitted to redeem the preferred trust securities
until after the June 2012 interest payment date. After such
date, we may redeem the preferred trust securities, in whole or
in part, at a price equal to 100% of the principal amount of
such preferred trust securities outstanding plus accrued and
unpaid interest. Interest is payable quarterly.
The indenture governing the preferred trust securities contains
various affirmative and negative covenants, including
limitations on the sale of capital stock of our significant
subsidiaries, mergers and consolidations and the ability to
grant a lien on the capital stock of our significant
subsidiaries unless such security interests are secured
indebtedness of not more than $20 million, in the aggregate, at
any one time. The limitation on the ability to issue, sell or
dispose of the capital stock of significant subsidiaries are not
applicable if such transactions are made at fair value and we
retain at least 80% of the ownership of such subsidiary.
The indenture governing the preferred trust securities also
contains customary events of default, including failure to pay
any principal or interest when due, failure to comply with
covenants or agreements contained in the indenture or preferred
trust securities, cross defaults with other indebtedness of
payment of principal or acceleration of principal payments and
bankruptcy events.
Subordinated
Debentures
In connection with the Summit Partners Transactions, LOTS
Intermediate Co. also issued $20.0 million of subordinated
debentures to affiliates of Summit Partners. The subordinated
debentures mature on December 13, 2013 and bear interest at
14% per annum of the principal amount of such subordinated
debentures.
We may redeem the subordinated debentures, in whole or in part,
at a price equal to 100% of the principal amount of such
subordinated debentures outstanding plus accrued and unpaid
interest.
The agreement governing the subordinated debentures contains
customary events of default, including failure to pay any
principal or interest when due; failure to comply with covenants
or agreements contained in the agreement or subordinated
debentures, cross defaults with other indebtedness of payment of
principal or acceleration of principal payments, unsatisfied
judgments and bankruptcy events.
We intend to use a portion of the proceeds from this offering to
redeem all of our outstanding subordinated debentures.
88
Redeemable
Preferred Stock
As of both September 30, 2010 and December 31, 2009,
we had $11.4 million and $11.5 million outstanding of
each of our Series A, B and C redeemable preferred stock,
respectively. Our Series A and C redeemable preferred stock
each accrue cumulative cash dividends at a rate of 8.25% per
annum of the liquidation preference of $1,000 per share of such
series of redeemable preferred stock. Our Series B
redeemable preferred stock accrues cash dividends at a rate per
annum of 4.0% plus 90 day LIBOR times the liquidation
preference of $1,000 per share of Series B redeemable
preferred stock. As of September 30, 2010 and
December 31, 2009, the dividend rate on our Series B
redeemable preferred stock was 4.53% and 4.25%, respectively, of
the liquidation preference. We pay dividends on our
Series A, B and C stock quarterly in arrears. Any
outstanding Series A and B redeemable preferred stock must
be redeemed in full on December 31, 2034 and any
outstanding Series C redeemable preferred stock must be
redeemed in full on December 31, 2035.
We intend to use a portion of the net proceeds from this
offering to redeem all of our outstanding Series A, B and C
redeemable preferred stock.
Invested
Assets
Our invested assets consist in large part of high quality
(minimum of AA rating), fixed maturity securities and short-term
investments with a smaller allocation to common and preferred
equity securities. We believe that prudent levels of investments
in equity securities within our investment portfolio are likely
to enhance long term after-tax total returns without
significantly increasing the risk profile of the portfolio. We
regularly review our entire portfolio in the context of
macroeconomic and capital market conditions.
Regulatory
Requirements
Our investments must comply with applicable laws and regulations
which prescribe the kind, quality and concentration of
investments. In general, these laws and regulations permit
investments, within specified limits and subject to some
qualifications, in federal, state and municipal obligations,
corporate bonds, preferred and common equity securities,
mortgage loans, real estate and some other investments.
Investment
Strategy
Our investment strategy seeks long-term returns through
disciplined security selection, portfolio diversity and an
integrated approach to risk management. We select and monitor
investments to balance the goals of safety, stability,
liquidity, growth and after-tax total return with the need to
comply with regulatory investment requirements. Our investment
portfolio is managed by Conning Asset Management, a third-party
provider of asset management services to the insurance sector.
Asset liability management is accomplished by setting an asset
target duration range that is influenced by the following
factors: (i) the estimated reserve payout pattern,
(ii) the inclusion of our tactical capital market views
into the investment decision making process and (iii) our
overall risk tolerance. We aim to achieve a relatively safe and
stable income stream by maintaining a broad-based portfolio of
investment grade fixed maturity securities. These holdings are
supplemented by investments in additional asset types with the
objective of further enhancing the portfolios
diversification and expected returns. These additional asset
types include common and redeemable preferred stock. We manage
our investment risks through consideration of duration of
liabilities, diversification, credit limits, careful analytic
review of each investment decision, and comprehensive risk
assessments of the overall portfolio.
Our investment policy and strategy are reviewed and approved by
the board of directors of each of our insurance subsidiaries,
which meet on a regular basis to review and consider investment
activities, tactics and new investment classes.
89
The following table summarizes our net investment income for the
years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
June 20,
|
|
|
|
January 1,
|
|
|
|
Years Ended
|
|
|
2007 to
|
|
|
|
2007 to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Fixed income securities
|
|
$
|
4,520
|
|
|
$
|
4,600
|
|
|
$
|
1,757
|
|
|
|
$
|
1,412
|
|
Cash on hand and on deposit
|
|
|
557
|
|
|
|
1,035
|
|
|
|
1,631
|
|
|
|
|
947
|
|
Common and preferred stock dividends
|
|
|
28
|
|
|
|
77
|
|
|
|
40
|
|
|
|
|
135
|
|
Debenture interest
|
|
|
162
|
|
|
|
247
|
|
|
|
206
|
|
|
|
|
302
|
|
Other income
|
|
|
2
|
|
|
|
124
|
|
|
|
(101
|
)
|
|
|
|
223
|
|
Investment expenses
|
|
|
(510
|
)
|
|
|
(523
|
)
|
|
|
(122
|
)
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
4,759
|
|
|
$
|
5,560
|
|
|
$
|
3,411
|
|
|
|
$
|
2,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our invested assets at fair value
by asset category as of December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Obligations of the U.S. Treasury and other U.S. Government
agencies
|
|
$
|
19,480
|
|
|
$
|
27,809
|
|
|
$
|
30,255
|
|
Municipal securities
|
|
|
14,582
|
|
|
|
16,048
|
|
|
|
10,626
|
|
Corporate securities
|
|
|
36,511
|
|
|
|
36,848
|
|
|
|
18,882
|
|
Mortgage-backed securities
|
|
|
5,691
|
|
|
|
7,496
|
|
|
|
13,607
|
|
Asset-backed securities
|
|
|
4,684
|
|
|
|
8,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
80,948
|
|
|
$
|
96,405
|
|
|
$
|
73,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock publicly traded
|
|
$
|
369
|
|
|
$
|
423
|
|
|
$
|
1,298
|
|
Preferred stock publicly traded
|
|
|
177
|
|
|
|
155
|
|
|
|
50
|
|
Common stock non-publicly traded
|
|
|
662
|
|
|
|
586
|
|
|
|
706
|
|
Preferred stock non-publicly traded
|
|
|
1,002
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
2,210
|
|
|
$
|
1,174
|
|
|
$
|
2,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
The following table summarizes our allocation of fixed
maturities by maturity date as of December 31, 2009, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Due in one year or less
|
|
$
|
2,384
|
|
|
$
|
7,058
|
|
|
$
|
17,140
|
|
Due after one year through five years
|
|
|
19,290
|
|
|
|
16,800
|
|
|
|
24,229
|
|
Due after five years through ten years
|
|
|
30,973
|
|
|
|
34,517
|
|
|
|
16,381
|
|
Due after ten years through twenty years
|
|
|
3,898
|
|
|
|
4,020
|
|
|
|
2,013
|
|
Due after twenty years
|
|
|
14,028
|
|
|
|
18,310
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
5,691
|
|
|
|
7,496
|
|
|
|
13,607
|
|
Asset-backed securities
|
|
|
4,684
|
|
|
|
8,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
80,948
|
|
|
$
|
96,405
|
|
|
$
|
73,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize our net realized investment gains
(losses) for the years ended December 31, 2009, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 20,
|
|
|
|
January 1,
|
|
|
|
Years Ended
|
|
|
2007 to
|
|
|
|
2007 to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Realized gains on sales of fixed maturity securities
|
|
$
|
824
|
|
|
$
|
30
|
|
|
$
|
|
|
|
|
$
|
23
|
|
Realized losses on sales of fixed maturity securities
|
|
|
(787
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
Realized gains on sales of equity securities
|
|
|
70
|
|
|
|
14
|
|
|
|
|
|
|
|
|
493
|
|
Realized losses on sales of equity securities
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment write-downs
(Other-than-temporarily
impaired)
|
|
|
|
|
|
|
(1,951
|
)
|
|
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains (losses)
|
|
$
|
54
|
|
|
$
|
(1,921
|
)
|
|
$
|
(348
|
)
|
|
|
$
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, there were no impairment write-downs. During 2008,
we determined the decline in fair value of our investment in a
bond of a distressed company to be
other-than-temporarily
impaired. This resulted in recording an impairment write-down of
$1.2 million as part of net realized losses on investments.
In addition, we recorded an impairment write-down of $0.8
million on 15 publicly traded equity securities. For the 2007
successor period, we recorded an impairment write-down of $0.3
million on 16 publicly traded equity securities.
On January 1, 2008, we adopted accounting guidance for
reporting fair values. There were no adjustments required to the
fair value of investments as a result of adopting the new
guidance. The market approach was the valuation technique used
to measure fair value of the investment portfolio. The market
approach uses prices and other relevant information generated by
market transactions involving identical or comparable assets.
The guidance establishes a three-level hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value. The fair value hierarchy gives the highest priority
to quoted prices in active
91
markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable
inputs (Level 3). If the inputs used to measure the assets
or liabilities fall within different levels of the hierarchy,
the classification is based on the lowest level input that is
significant to the fair value measurement of the asset or
liability. Classification of assets and liabilities within the
hierarchy considers the markets in which the assets and
liabilities are traded and the reliability and transparency of
the assumptions used to determine fair value. The hierarchy
requires the use of observable market data when available. The
levels of the hierarchy and those investments included in each
are as follows:
Level 1 Inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities traded in active markets.
Level 2 Inputs to the valuation
methodology include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the
asset or liability and market-corroborated inputs.
Level 3 Inputs to the valuation
methodology are unobservable for the asset or liability and are
significant to the fair value measurement. Pricing is derived
from sources such as Interactive Data Corporation, Bloomberg
L.P., private placement matrices, broker quotes and internal
calculations.
The following table presents our investment securities within
the fair value hierarchy, and the related inputs used to measure
those securities at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Security (Fair Value)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in thousands)
|
|
|
Fixed maturity securities
|
|
$
|
80,948
|
|
|
$
|
|
|
|
$
|
79,440
|
|
|
$
|
1,508
|
|
Common stock, marketable
|
|
|
369
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
Preferred stock, marketable
|
|
|
177
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
Common stock, other
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
662
|
|
Preferred stock, other
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
Short-term investments
|
|
|
1,220
|
|
|
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84,378
|
|
|
$
|
1,766
|
|
|
$
|
79,440
|
|
|
$
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our use of Level 3 of unobservable inputs
included 19 securities that accounted for 3.8% of total
investments at December 31, 2009.
The following table presents our investment securities within
the fair value hierarchy and the related inputs used to measure
those securities at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Security (Fair Value)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in thousands)
|
|
|
Fixed maturity securities
|
|
$
|
96,405
|
|
|
$
|
|
|
|
$
|
96,405
|
|
|
|
|
|
Common stock, marketable
|
|
|
423
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
Preferred stock, marketable
|
|
|
155
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
Common stock, other
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
586
|
|
Preferred stock, other
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Short-term investments
|
|
|
2,180
|
|
|
|
2,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
99,759
|
|
|
$
|
2,758
|
|
|
$
|
96,405
|
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our use of Level 3 of unobservable inputs
included 23 securities that accounted for less than 2% of total
investments at December 31, 2008.
92
The following table summarizes changes in Level 3 assets
measured at fair value for the years ended December 31,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Beginning balance
|
|
$
|
596
|
|
|
$
|
608
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
Included in net income
|
|
|
16
|
|
|
|
|
|
Included in comprehensive loss
|
|
|
367
|
|
|
|
(163
|
)
|
Amortization/accretion
|
|
|
|
|
|
|
7
|
|
Purchases, issuance and settlements
|
|
|
862
|
|
|
|
39
|
|
Net transfers into Level 3
|
|
|
1,331
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,172
|
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows
We monitor cash flows at the consolidated, holding company and
subsidiary levels. Cash flow forecasts at the consolidated and
subsidiary levels are provided on a monthly basis, and we use
trend and variance analyses to project future cash needs making
adjustments to the forecasts when needed.
The table below shows our cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
Nine Months
|
|
|
|
Years Ended
|
|
|
|
June 20 to
|
|
|
|
January 1, 2007
|
|
|
|
|
Ended September 30,
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
to June 19,
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Cash provided by
(used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
$
|
2,844
|
|
|
|
$
|
7,274
|
|
|
|
$
|
13,393
|
|
|
|
$
|
12,998
|
|
|
|
$
|
10,265
|
|
|
|
$
|
2,518
|
|
Investing activities
|
|
|
|
(29,780
|
)
|
|
|
|
(39,326
|
)
|
|
|
|
(26,532
|
)
|
|
|
|
(26,069
|
)
|
|
|
|
(10,297
|
)
|
|
|
|
22,424
|
|
Financing activities
|
|
|
|
14,839
|
|
|
|
|
31,573
|
|
|
|
|
20,997
|
|
|
|
|
(1,875
|
)
|
|
|
|
(571
|
)
|
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
$
|
(12,097
|
)
|
|
|
$
|
(479
|
)
|
|
|
$
|
7,858
|
|
|
|
$
|
(14,946
|
)
|
|
|
$
|
(603
|
)
|
|
|
$
|
24,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash provided by operating activities was $2.8 million
for the nine months ended September 30, 2010 and
$7.3 million for the nine months ended September 30,
2009. The decrease in our cash flow from operations resulted
from increased capitalized costs in connection with our proposed
initial public offering of $0.6 million, prepaid corporate
insurance of $0.4 million, a $3.0 million payment of
commissions to a large producer, which were held as collateral
in a segregated account for business that was in run-off, and an
increase of $2.9 million in income taxes paid. Also
affecting cash provided by operating activities for the nine
months ended September 30, 2010 were receivables relating
to the development of our warranty program and to our BPO
operations, totalling $2.5 million.
Net cash provided by operating activities was
$13.4 million, $13.0 million, $10.3 million and
$2.5 million for the years ended December 31, 2009 and
2008, the 2007 successor period and the 2007
93
predecessor period, respectively. In 2009, our net cash provided
by operating activities reflected our net income and reinsurance
receivables offset in part by policy liabilities and commissions
payable. In 2008, the successor period from June 20, 2007
through December 31, 2007 and the predecessor period from
January 1, 2007 through June 19, 2007, our net cash
provided by operating activities reflected our net income and
policy liabilities offset by growth in our reinsurance
receivables.
Investing
Activities
Net cash used in investing activities was $(29.8) million
for the nine months ended September 30, 2010 and
$(39.3) million for the nine months ended
September 30, 2009. Net cash used in investing activities
was $(26.5) million, $(26.1) million,
$(10.3) million and $22.4 million for the years ended
December 31, 2009 and 2008, the 2007 successor period and
the 2007 predecessor period, respectively. For the nine months
ended September 30, 2010, net cash used in investing
activities primarily reflected cash used for purchases of fixed
maturity securities, the acquisitions of South Bay Acceptance
Corporation, Continental Car Club and United Motor Club and
purchases of property, equipment and other non-operating assets
and change in restricted cash. For the nine months ended
September 30, 2009, net cash used in investing activities
primarily reflected the maturity of fixed maturity securities
offset by the acquisition of Bliss & Glennon,
purchases of property, equipment and other non-operating assets
and change in restricted cash. In 2009, net cash used in
investing activities primarily reflected the use of cash for
acquisitions and change in restricted cash offset in part by
cash from the sale or maturity of our securities investments. In
2008, net cash used in investing activities primarily reflected
the increased purchases of investment securities that was only
partially offset by the receipt of proceeds from the maturity of
investment securities and change in restricted cash. For the
2007 successor period, net cash used in investing activities
primarily reflected the increased purchase of investment
securities and change in restricted cash that was only partially
offset by the receipt of proceeds from the maturity of our
investment securities. For the 2007 predecessor period, the net
cash provided by investing activities primarily reflected the
proceeds derived from the maturity of investments and repayment
on the mortgage loan, offset partially by the purchase of
investments and change in restricted cash.
Financing
Activities
Net cash provided by (used in) financing activities was
$14.8 million for the nine months ended September 30,
2010 and $31.6 million for the nine months ended
September 30, 2009. Net cash provided by (used in)
financing activities was $21.0 million,
$(1.9) million, $(0.6) million and $(0.5) million
for the years ended December 31, 2009 and 2008, the 2007
successor period and the 2007 predecessor period, respectively.
For the nine months ended September 30, 2010, net cash
provided by financing activities reflected additional borrowings
under our lines of credit offset by the redemption of a
preferred security. For the nine months ended September 30,
2009, net cash provided by financing activities reflected
additional borrowings under our lines of credit and the issuance
of common and treasury stock. In 2009, net cash provided by
financing activities reflected additional borrowings under our
lines of credit offset in part by repayments of other
indebtedness, proceeds from the issuance of equity securities.
In 2008, net cash used in financing activities reflected our
purchase of equity securities and the repayment of indebtedness.
For the successor period from June 20, 2007 through
December 31, 2007, cash provided by financing activities
reflected additional borrowings under our lines of credit,
preferred trust securities and subordinated debentures, offset
in part by repayments to prior shareholders as well as proceeds
from the issuance of equity securities. For the 2007 predecessor
period, the cash used in financing activities primarily reflects
dividends paid on common stock.
94
Contractual
Obligations and Other Commitments
We have obligations and commitments to third parties as a result
of our operations.
These obligations and commitments, as of December 31, 2009,
are detailed in the table below by maturity date as of the dates
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Long-term debt
|
|
$
|
78,027
|
|
|
$
|
5,087
|
|
|
$
|
26,400
|
|
|
$
|
|
|
|
$
|
46,540
|
|
Operating leases
|
|
|
7,694
|
|
|
|
2,924
|
|
|
|
4,760
|
|
|
|
10
|
|
|
|
|
|
Unpaid
claims(1)
|
|
|
36,152
|
|
|
|
31,476
|
|
|
|
4,253
|
|
|
|
395
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
121,873
|
|
|
$
|
39,487
|
|
|
$
|
35,413
|
|
|
$
|
405
|
|
|
$
|
46,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Estimated. See Unpaid Claims. Net unpaid
claims are: total $13,633; less than 1 year $11,869;
1-3 years $1,604; 3-5 years 149; and more than
5 years $11.
|
We intend to apply certain net proceeds from the offering to
repay debt as described in Use of Proceeds.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that are
reasonably likely to have a material effect on our financial
condition, results of operations, liquidity, or capital
resources.
Qualitative
and Quantitative Disclosures About Market Risk
Effective risk management is fundamental to our ability to
protect both our customers and stockholders
interests. We are exposed to potential loss from various market
risks, in particular interest rate risk and credit risk.
Additionally, we are exposed to inflation risk, concentration
risk and to a lesser extent foreign currency risk.
Interest rate risk is the possibility that the fair value of
liabilities will change more or less than the market value of
investments in response to changes in interest rates, including
changes in the slope or shape of the yield curve and changes in
spreads due to credit risks and other factors.
Credit risk is the possibility that counterparties may not be
able to meet payment obligations when they become due. We assume
counterparty credit risk in many forms. A counterparty is any
person or entity from which cash or other forms of consideration
are expected to extinguish a liability or obligation to us.
Primarily, our credit risk exposure is concentrated in our fixed
maturity investment portfolio and, to a lesser extent, in our
reinsurance receivables.
Inflation risk is the possibility that a change in domestic
price levels produces an adverse effect on earnings. This
typically happens when either invested assets or liabilities,
but not both are indexed to inflation.
Interest
Rate Risk
Interest rate risk arises as we invest substantial funds in
interest-sensitive fixed income assets, such as fixed maturity
securities, mortgage-backed and asset-backed securities and
commercial mortgage loans, primarily in the United States. There
are two forms of interest rate risk: price risk and reinvestment
risk. Price risk occurs when fluctuations in interest rates have
a direct impact on the market valuation of these investments. As
interest rates rise, the market value of these investments
falls, and conversely, as
95
interest rates fall, the market value of these investments
rises. Reinvestment risk occurs when fluctuations in interest
rates have a direct impact on expected cash flows from
mortgage-backed and asset-backed securities. As interest rates
fall, an increase in prepayments on these assets results in
earlier than expected receipt of cash flows forcing us to
reinvest the proceeds in an unfavorable lower interest rate
environment. Conversely, as interest rates rise, a decrease in
prepayments on these assets results in later than expected
receipt of cash flows forcing us to forgo reinvesting in a
favorable higher interest rate environment.
We manage interest rate risk by selecting investments with
characteristics such as duration, yield, currency and liquidity
tailored to the anticipated cash outflow characteristics of our
insurance and reinsurance liabilities.
Increases in interest rates could also increase interest payable
under our variable rate indebtedness and redeemable preferred
stock. As of December 31, 2009, we had $11.5 million
of senior unsubordinated debt tied to the prime interest rate;
$5.1 million of this $11.5 million had an interest
rate floor of 5%. As of September 30, 2010, we had
$28.0 million outstanding under our revolving facility with
SunTrust at an interest rate of 6.0%, which is based on an
adjusted LIBOR rate. CB&T became a new lender under the
revolving credit facility on November 30, 2010. As of
December 31, 2009 and September 30, 2010, we had
$2.1 million of Series B redeemable preferred stock
outstanding. Our Series B redeemable preferred stock accrues
cash dividends quarterly at a rate per annum of 4.0% plus
90 day LIBOR. The interest rate in effect during the
quarter ended September 30, 2010 was 4.5%.
We intend to use a portion of the proceeds from this offering to
redeem all of our outstanding redeemable preferred stock.
Credit
Risk
We have exposure to credit risk primarily from customers, as a
holder of fixed maturity securities and by entering into
reinsurance cessions.
Our risk management strategy and investment policy is to invest
in debt instruments of high credit quality issuers and to limit
the amount of credit exposure with respect to any one issuer. We
attempt to limit our credit exposure by imposing fixed maturity
portfolio limits on individual issuers based upon credit quality.
We are also exposed to the credit risk of our reinsurers. When
we reinsure, we are still liable to our insureds regardless of
whether we get reimbursed by our reinsurer. As part of our
overall risk and capacity management strategy, we purchase
reinsurance for certain risks underwritten by our various
business segments as described above under Critical
Accounting Policies Reinsurance.
For 71.7% of our $173.8 million of reinsurance receivables
at December 31, 2009, we are protected from the credit risk
by using various types of risk mitigation mechanisms such as
collateral trusts, letters of credit or by withholding the
assets in a modified coinsurance or co-funds-withheld
arrangement. For recoverables that are not protected by these
mechanisms, we are dependent solely on the ability of the
reinsurer to satisfy claims. Occasionally, the creditworthiness
of the reinsurer becomes questionable. The majority of our
reinsurance exposure has been ceded to companies rated A- or
better by A.M. Best. For a discussion of reinsurance
related risks, see Risk Factors Risks Related
to Our Payment Protection Business Reinsurance may
not be available or adequate to protect us against losses, and
we are subject to the credit risk of reinsurers.
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Concentration
Risk
A significant portion (56.8% for the year ended
December 31, 2009) of our BPO revenues are
attributable to one client, National Union Fire Insurance
Company of Pittsburgh, PA, and any loss of business from or
change in our relationship with this client could have a
material adverse effect on our business. To mitigate this risk,
we intend to expand our BPO client base.
We have two additional forms of concentration risk:
(a) geographic (almost two-thirds of our Wholesale
Brokerage segment is in California) and (b) channel
distribution risk (almost half of our Payment Protection revenue
is in the consumer finance distribution channel). Our risk
mitigation strategies are to expand geographically (in our
Wholesale Brokerage segment) and increase the volume of business
through other distribution channels (in our Payment Protection
segment).
Effects
of Inflation
Inflation has not had a material impact on our results of
operations in the periods presented in our consolidated
financial statements.
Recently
Issued Accounting Pronouncements
On April 1, 2009, we adopted the new guidance ASC Topic
105, GAAP. The new guidance establishes a single source
of authoritative accounting and reporting guidance recognized by
the FASB for nongovernmental entities (the
Codification). The Codification does not change
current GAAP, but is intended to simplify user access to all
authoritative GAAP by providing all the authoritative literature
related to a particular topic in one place. All existing
accounting standard documents will be superseded and all other
accounting literature not included in the Codification will be
considered non-authoritative. The adoption of the new guidance
did not have an impact on our financial position, results of
operations or cash flows. References to accounting guidance
contained in our consolidated financial statements and
disclosures have been updated to reflect terminology consistent
with the Codification. Plain English references to the
accounting guidance have been made along with references to the
ASC topic number and name.
On December 31, 2009, we adopted the new guidance on
measuring the fair value of liabilities, which is within ASC
Topic 820. When the quoted price in an active market for an
identical liability is not available, this new guidance requires
that either the quoted price of the identical or similar
liability when traded as an asset or another valuation technique
that is consistent with the fair value measurements and
disclosures guidance be used to fair value the liability. The
adoption of this new guidance did not have an impact on our
financial position, results of operations or cash flows.
On December 31, 2009, we adopted the new subsequent events
guidance, which is within ASC Topic 855, Subsequent Events.
This new guidance establishes general standards of
accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. The adoption of the new guidance did
not have an impact on our financial position, results of
operations or cash flows. See Note 2 to the Consolidated
Financial Statements included elsewhere in this prospectus.
On December 31, 2009, we adopted the new
other-than-temporary
impairments (OTTI) guidance, which is within ASC
Topic 320. This new guidance amends the previous guidance for
debt securities and modifies the presentation and disclosure
requirements for debt and equity securities. In addition, it
amends the requirement for an entity to positively assert the
intent and ability to hold a debt security to recovery to
determine whether an OTTI exists and replaces this provision
with the assertion that an entity does not intend to sell or it
is not more likely than not that the entity will be required to
sell a security prior to recovery of its amortized cost basis.
Additionally, this new guidance modifies the presentation of
certain OTTI debt securities to only present the impairment loss
within the results of
97
operations that represents the credit loss associated with the
OTTI with the remaining impairment loss being presented within
other comprehensive income (loss) (OCI). At
adoption, there was no cumulative effect adjustment to
reclassify the non-credit component. See Note 2 to the
Consolidated Financial Statements included elsewhere in this
prospectus for further information.
On January 1, 2008, we adopted the new guidance on
determining fair value in illiquid markets, which is within ASC
Topic 820. This new guidance clarifies how to estimate fair
value when the volume and level of activity for an asset or
liability have significantly decreased. This new guidance also
clarifies how to identify circumstances indicating that a
transaction is not orderly. Under this new guidance, significant
decreases in the volume and level of activity of an asset or
liability, in relation to normal market activity, requires
further evaluation of transactions or quoted prices and exercise
of significant judgment in arriving at fair values. This new
guidance also requires additional interim and annual
disclosures. The adoption of this new guidance did not have an
impact on our financial position, results of operations or cash
flows.
On January 1, 2008, we adopted the new fair value of
financial instruments guidance, which is within ASC Topic 825,
Financial Instruments. This new guidance requires
disclosure of the methods and assumptions used to estimate fair
value. The adoption of this new guidance did not have an impact
on our financial position, results of operations or cash flows.
See Note 6 to the Consolidated Financial Statements for
further information.
On January 1, 2009, we adopted the revised business
combinations guidance, which is within ASC Topic 805,
Business Combinations. The revised guidance retains the
fundamental requirements of the previous guidance in that the
acquisition method of accounting is used for all business
combinations, that an acquirer be identified for each business
combination and for goodwill to be recognized and measured as a
residual. The revised guidance expands the definition of
transactions and events that qualify as business combinations to
all transactions and other events in which one entity obtains
control over one or more other businesses. The revised guidance
broadens the fair value measurement and recognition of assets
acquired, liabilities assumed and interests transferred as a
result of business combinations. It also increases the
disclosure requirements for business combinations in the
consolidated financial statements. The adoption of the revised
guidance did not have an impact on our financial position,
results of operations or cash flows. However, for any business
combination in 2010 or beyond, our financial position, results
of operations or cash flows could incur a significantly
different impact than had it recorded the acquisition under the
previous business combinations guidance. Earnings volatility
could result, depending on the terms of the acquisition.
On January 1, 2009, we adopted the new consolidations
guidance, which is within ASC Topic 810, Consolidation.
The new guidance requires that a non-controlling interest in a
subsidiary be separately reported within equity and the amount
of consolidated net income attributable to the non-controlling
interest be presented in the statement of income. The new
guidance also calls for consistency in reporting changes in the
parents ownership interest in a subsidiary and
necessitates fair value measurement of any non-controlling
equity investment retained in a deconsolidation. The adoption of
the new guidance did not have an impact on our financial
position, results of operations or cash flows.
On December 31, 2009, we applied the fair value
measurements and disclosures guidance, which is within ASC Topic
820, Fair Value Measurements and Disclosures, for all
non-financial assets and liabilities measured at fair value on a
non-recurring basis. The application of this guidance for those
assets and liabilities did not have an impact on our financial
position, results of operations or cash flows. Our non-financial
assets measured at fair value on a non-recurring basis include
goodwill and intangible assets. In a business combination, the
non-financial assets and liabilities of the acquired company
would be measured at fair value in accordance with the fair
value measurements and disclosures guidance. The requirements of
this guidance include using an exit price based on an orderly
transaction between market participants at the measurement date
assuming the highest and best use of the asset by market
participants. To perform a market valuation, we are required to
use a market, income or cost approach valuation technique(s). We
98
performed our annual impairment analyses of goodwill and
indefinite-lived intangible assets in the fourth quarter of
2009. There was no impairment of intangible assets for 2008 and
2009.
In September 2009, the FASB issued new guidance on multiple
deliverable revenue arrangements, which is within ASC Topic 605,
Revenue Recognition. This new guidance requires entities
to use their best estimate of the selling price of a deliverable
within a multiple deliverable revenue arrangement if the entity
and other entities do not sell the deliverable separate from the
other deliverables within the arrangement. This new guidance
requires both qualitative and quantitative disclosures. This new
guidance will be effective for new or materially modified
arrangements in fiscal years beginning on or after June 15,
2010. Earlier application is permitted as of the beginning of a
fiscal year. Assuming we do not apply the guidance early, we are
required to adopt this new guidance on January 1, 2011. We
are currently evaluating the requirements of this new guidance
and the potential impact, if any, on our financial position,
results of operations and cash flows.
99
INDUSTRY
Industry
and Market Data
This prospectus includes industry and market data that we
obtained from periodic industry publications, third-party
studies and surveys, filings of public companies in our industry
and internal company surveys. These sources include
A.M. Best, Business Insurance, Celent, the Consumer Credit
Industry Association and the Surplus Lines Association of
California. We have received permission to include the
A.M. Best data provided herein. Industry publications and
surveys generally state that the information contained therein
has been obtained from sources believed to be reliable.
Market
Overview
We operate in the insurance, consumer finance and commercial
finance industries in the United States, offering our services
and products through the brands and distribution bases of our
clients. Insurance, lending and other financial products are
developed, marketed, underwritten or managed by financial
services companies, retailers and manufacturers in the United
States. We provide a range of specialized product development,
marketing and distribution and administration services to these
companies with a focus on the following specific markets.
Payment
Protection
Payment protection products provide protection for borrowers
from debt payments and other financial obligations upon the
occurrence of certain unanticipated events, as well as credit
enhancement to the corresponding lenders. Payment protection
products include regulated insurance products such as credit
insurance and other financial products, including debt
cancellation and warranty products, as well as car club
memberships.
Financial services companies, such as finance companies and
banks, market specialized credit insurance products to their
customers in connection with consumer loan transactions. These
products enable consumers to meet their credit obligations if
specific life events occur, such as death, disability or
unemployment. Non-insurance products, including product
warranties, debt cancellation contracts and car club memberships
are also marketed to consumers by retailers and consumer lenders
in connection with product purchases and loan transactions.
Payment protection products provide consumer lenders and
retailers with complementary products that can increase the
revenue and profitability of consumer transactions.
Credit Insurance. Credit insurance products,
including credit-related property, life, disability, accident
and health insurance, involve the issuance of insurance coverage
to consumers to provide protection against the loss of loan
collateral or the inability of a borrower to repay an
outstanding loan due to the occurrence of a specific event such
as death or disability. On the occurrence of such an event, the
insured partys scheduled debt payments are paid under the
insurance policy. The premium rates for credit insurance
products are typically determined by state insurance regulators
and usually do not vary significantly between insurers or
insured parties. Premium rates are typically expressed as the
amount of premium to be paid per $100 of outstanding debt. Thus,
in the case of revolving credit accounts, the amount of premium
paid by a consumer varies, based on the consumers
outstanding debt. Credit insurance premium rates are generally
not subject to market or competitive pressures.
Credit property insurance provides protection against the loss
of the value of loan collateral due to physical damage to or
disappearance of property. Credit property insurance may be
required by a consumer lender if the borrower does not have
adequate insurance or other assets sufficient to repay the
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loan if the collateral is impaired. The amount of the benefit
paid upon the occurrence of a loss of property value is
typically limited to the outstanding amount of the loan.
Credit involuntary unemployment insurance provides a level
monthly benefit that allows a borrower to continue to make
consumer loan payments if the insured becomes involuntarily
unemployed. The monthly benefit typically equals the monthly
loan payment and is paid for a pre-determined number of months
as long as the insured party remains on involuntary unemployment.
Credit life and credit disability products are typically sold in
conjunction with consumer loans. Credit life insurance pays a
benefit equal to the outstanding loan balance to the lender in
the event the borrower dies during the term of the loan. Credit
disability insurance provides a benefit equal to the monthly
loan payments to the lender if the borrower becomes disabled for
the amount of time that the borrower remains disabled or for the
term of the loan.
Credit insurance is often purchased by uninsured or underinsured
borrowers that have limited liquid assets and are assuming a
financial obligation that they may not be able to repay in the
event of death, disability, unemployment or damage to the
underlying collateral. In some cases obtaining adequate credit
insurance may be a pre-requisite for receiving a consumer loan.
Credit insurance also provides consumer lenders with additional
protection that enhances the credit of their consumer
receivables.
Credit insurance is a regulated insurance product that can only
be provided by licensed insurance companies. Most consumer
lenders and retailers choose to offer credit insurance through
third-party insurance companies to avoid the cost and regulatory
complexities of operating state-licensed insurance companies.
Consumer lenders and retailers generally retain the majority of
the revenue, losses and profits from credit insurance products
that they sell to their customers. Some companies operate
offshore reinsurers, called producer owned reinsurance companies
(PORCs), which assume the credit insurance premiums that they
originate in exchange for ceding commissions that are paid to a
licensed primary insurer. PORCs typically pay all losses
associated with the insurance policies that they assume, but are
administered by a third-party administrator that also manages
the assets of the PORC.
Consumer lenders and retailers that do not own PORCs typically
retain the profits from credit insurance products through
retrospective commission arrangements with primary insurance
companies that receive the insurance premiums and administer the
policies. Under retrospective commission arrangements the
producer of the insurance policies receives a variable
commission that is equal to the profits from the insurance
policies after the payment of claims and an administrative fee
to the primary insurance company.
According to the Consumer Credit Industry Association, net
written premium for credit-related insurance was
$6.2 billion in the United States in 2009, compared to
$4.9 billion of net premium that was written in 2003.
Debt Cancellation. Debt cancellation plans
provide benefits that are similar to credit insurance products.
Similar to credit insurance, debt cancellation plans provide
protection to borrowers if certain events occur that could
impact the ability of a borrower to repay their loan
obligations. Debt cancellation plans stipulate that the lender
will defer, suspend or cancel certain debt payments, or in some
cases the principal balance, without increasing interest or
fees, if a covered event occurs. Covered events may include
death, disability, involuntary unemployment, total loss of a
vehicle and other contingencies.
Debt cancellation plans offered by lenders may be customized to
include combinations of debt deferment, debt suspension or debt
cancellation to suit a specific customer base. These plans can
be highly customized to provide individual consumers with the
specific benefits that they want. Similar to
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credit insurance, debt cancellation plans provide financial
security to borrowers if certain events occur that could impair
a borrowers ability to meet their financial obligations.
Community banks, state chartered banks, credit unions and
thrifts are permitted to offer debt cancellation plans without
being subject to insurance regulations. In most states debt
cancellation plans can be offered directly by lenders as part of
certain credit products, such as credit cards, lines of credit
and installment loans, without a requirement that the lending
company be an insurance company. Certain consumer lenders now
offer debt cancellation plans to their customers instead of
credit insurance. For example, most large credit card lenders
provide debt cancellation plans to their borrowers. Because of
the specific capabilities required to administer debt
cancellation plans, consumer lenders often contract with
insurance services companies to manage these plans on their
behalf.
Warranty Products. Warranty products provide
consumers with product repair, replacement or refund in the
event of product defect, damage or failure. Warranty products
must expressly exclude coverage of damage or failure due to
accidental events in order for such products not to be regulated
as insurance. Manufacturers warranties provide consumers
with basic protection covering parts and labor costs for periods
typically ranging from one to two years and are typically
included as part of the cost of the consumer product. Extended
service and product replacement plans are offered to consumers
to enhance and extend the manufacturers warranty
protection on consumer products. These products are offered by
third-party providers and retailers and typically provide parts
and labor coverage or product replacement for between one and
five years beyond a manufacturers warranty. The scope of
the coverage offered by extended service plans usually exceeds
that offered by a manufacturers warranty and typically
covers accidental damage and damage that is not covered by the
original manufacturers warranty.
Extended warranties are marketed and distributed to consumers by
retailers, insurance companies, manufacturers and warranty
administrators. Retailers and manufacturers that offer extended
warranty products typically contract with a warranty
administrator to manage the administration of the product.
Warranty administrators manage the program design, marketing
strategy, contract administration, claims handling, billing and
collection, reinsurance processing and reporting of warranty
products on behalf of marketers and distributors. These products
are sold to consumers either in connection with the product
purchase or after the product has been purchased. Third-party
warranty products typically have a single upfront fee to provide
protection against product failures and damage over the term of
the warranty. Extended warranty products provide retailers and
manufacturers with incremental revenues and increase the
profitability of consumer retail transactions and product
purchases.
Car Clubs. Car club memberships are generally
sold by consumer finance companies as part of a consumer finance
transaction. Car club memberships typically last one year and
can extend for longer periods depending on state regulations.
These memberships provide towing reimbursement and other
roadside assistance services, depending on the package purchased
by the consumer.
Business
Process Outsourcing
The U.S. financial services industry faces significant
operating challenges and increasing complexity arising from
various economic, competitive and regulatory factors. Financial
services companies continue to look for ways to grow revenue,
improve operational efficiencies and increase profitability
while meeting the needs and expectations of customers and
distributors. Due to market-based pricing pressures, many
insurance carriers are particularly focused on controlling costs
and gaining market share to maintain profitability and
acceptable returns on capital.
One of the primary benefits of outsourcing business processes
for financial services companies is the ability to pay a
variable fee based on the amount of services used instead of
building and managing internal operations with a fixed cost
structure. Business process outsourcing providers are generally
also
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able to provide these services at a lower cost because they have
larger scale operations that serve many clients. In addition to
reducing overall costs and increasing financial flexibility,
financial services companies use business process outsourcing
services to improve new business and origination cycle times,
improve the quality of processing, ensure consistency of service
quality, accelerate product development and reduce the time to
market for new products. By outsourcing certain business
processes, we believe that financial services companies can
focus on product innovation and leveraging specific core
competencies to differentiate themselves from competitors in the
market.
Within the financial services market, there are a wide range of
services that often can be better managed by business process
outsourcing vendors. Business process outsourcing providers
typically offer integrated solutions designed to perform a
specific business process, such as:
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product engineering;
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new product development;
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direct and mass marketing;
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data management and analysis;
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claims processing;
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policy administration and billing;
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customer service and technical support;
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call center management;
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payment and settlement management;
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collection of receivables;
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finance and accounting; and
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document management.
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Financial services companies often outsource certain technical,
administrative and support functions so that they can focus
their financial and operational resources on core business
functions such as developing and managing customer
relationships, designing and pricing new products and managing
risk. The outsourcing of certain business processes to more
efficient providers with more advanced capabilities also often
enhances the ability of financial services companies to serve
customers through better access to information, more effective
customer support and increased responsiveness. Business process
outsourcing also allows companies to decrease the capital
expenditures and fixed operating costs typically required to
design, develop and operate sophisticated information technology
systems. The time, effort and cost required to operate disparate
information technology systems at an acceptable level of
performance often creates operational inefficiencies and
additional costs that adversely impact financial performance.
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Wholesale
Insurance Brokerage
Commercial insurance products, including property and casualty
and life and health insurance, are generally marketed and sold
by retail insurance brokers and agents and insurance companies.
Property and casualty insurance carriers in the United States
that are licensed in a state in which the insured risk is
located are otherwise known as admitted carriers.
Admitted insurance carriers generally offer standard insurance
products with rates and forms that are regulated and coverages
that are relatively uniform. Businesses that are unable to
obtain insurance coverage from admitted insurance carriers
because of their risk profile or their unique size or nature can
typically seek to obtain insurance coverage in the surplus lines
market. Surplus lines (also known as non-admitted)
insurance carriers sell specialty insurance products that are
not subject to the same degree of regulation of prices or
coverage. To access and obtain insurance in the surplus lines
market, state insurance regulations often require parties
seeking insurance for a particular type of risk to first be
declined by three or more admitted carriers.
Surplus lines insurance carriers generally cover irregular,
unique and unusual risks that often have limited loss experience
and data. Less stringent policy form and rate regulation allows
surplus lines insurance carriers to tailor insurance products
and premium rates to the specific needs of the insured party.
Insurance carriers in the surplus lines market maintain coverage
and rate flexibility that enables them to be responsive to the
needs of insured parties and react quickly to changes and
opportunities in the marketplace. The surplus lines market
provides insured parties with the following benefits:
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acceptance of unfamiliar and new business risks;
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availability of coverage when the standard market declines the
risk;
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flexibility to tailor coverage to meet the needs of
policyholders;
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a stable market with new products to cover specialized risk
exposures;
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a competitive and voluntary alternative to residual insurance
markets;
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additional capacity for property and casualty exposures; and
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insurance products that are responsive to market needs.
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Surplus lines insurance carriers generally depend on licensed
wholesale and retail insurance brokers and agents to distribute
their products to insured parties. Wholesale insurance brokers
often serve as an intermediary between insurance carriers and
retail insurance agents and brokers to facilitate the placement
of specialized, customized or complex commercial insurance
products. Wholesale insurance brokers typically focus on
specialty insurance products provided by
non-admitted carriers. Retail insurance agents rely
upon wholesale insurance brokers for placement expertise, access
to specific markets and other value-added services required to
obtain coverage for
hard-to-place
commercial risks in the surplus lines market. Retail insurance
agents select wholesale brokers based on their expertise with
specific risks and products, relationships with carriers and
market knowledge. Typically, the retail insurance brokers and
agents retain control of the relationship with the insured
party. Many specialty insurance carriers distribute products
primarily through wholesale insurance brokers to avoid the cost
and complexity of dealing directly with a large number of retail
insurance agents.
Wholesale insurance brokers can also operate as MGAs on behalf
of insurance carriers under binding authority agreements.
Binding authority agreements provide wholesale brokers with the
ability to quote, bind and issue policies on behalf of an
insurance carrier based on the carriers detailed
underwriting
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guidelines. In addition to underwriting guidelines, binding
authority agreements dictate policy pricing, commission rates
and the scope of the binding authority.
Market
Opportunity
The services that we provide help our clients meet the
challenges of operating in competitive and dynamic markets. We
believe that we are well positioned to capitalize on several key
industry trends.
Financial Performance of Financial Services Companies and
Retailers. Financial services companies and
retailers offer complementary services and products, including
payment protection and insurance-related services and products,
which we believe increase their revenue, enhance customer value
and loyalty and improve their profitability. We believe that
reduced insurance purchases, a generally soft
property and casualty (P&C) environment, declining payrolls
and decreasing sales have contributed to recent declines in
premium volumes and returns on capital in the P&C industry.
The revenue growth and profitability of consumer lenders,
including banks, finance companies and other lenders, has been
negatively impacted by declining lending activity and increased
losses on loans. In the retail industry, increased competition,
rising input costs, volatile customer traffic, high unemployment
and adverse economic conditions have constrained revenue growth
and profitability. As a result of these challenging market
conditions and declining financial performance, we believe that
financial services and retail companies will continue to focus
on offering complementary services and products to their
customers. Selling these products enables financial services and
retail companies to increase their revenues and improve their
profitability. According to the Consumer Credit Industry
Association, net written premium for credit-related insurance
was $6.2 billion in the United States in 2009, compared to
$4.9 billion of net premium that was written in 2003.
Growth of the Specialty Property and Casualty Insurance
Market. The market for specialty insurance
products has grown. We believe this market has grown as a result
of increased acceptance of these products by insured parties and
the development of new risk management products by insurance
carriers. Insurance carriers operating in the surplus lines
market generally distribute their products through wholesale
insurance brokers such as Bliss & Glennon, creating
growth opportunities for our business. According to
A.M. Best, the surplus lines market increased from
approximately 6.7% of total commercial P&C insurance
premiums in 1998 to approximately 13.8% in 2008, and premiums
written by surplus lines focused insurance carriers increased
from $9.9 billion to $34.4 billion over the same time
period. While this market fluctuates based on trends generally
affecting the insurance industry, we believe that demand for
surplus lines insurance will increase if economic conditions in
the United States improve.
Growth of Outsourcing in the Insurance
Industry. By outsourcing business functions that
can be more efficiently and cost effectively provided by
specialized service providers, we believe that insurance
companies can increase productivity, focus on core competencies
and reduce operating costs. Functions that are typically being
outsourced to third party service providers include product
distribution, program management, underwriting, claims
management and administration, loss mitigation and investment
management. In addition, we believe that many insurers are
outsourcing the implementation of business and product
development projects to avoid the associated startup costs.
According to Celent, the size of the North American insurance
outsourcing market is expected to grow from approximately
$2.0 billion in 2008 to over $4.0 billion in 2013,
representing a compounded annual growth rate of 14.9%. The
continued shift towards outsourced solutions will create growth
opportunities for our business.
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BUSINESS
Overview
We are an insurance services company that provides distribution
and administration services and insurance-related products to
insurance companies, insurance brokers and agents and other
financial services companies in the United States. We sell our
services and products directly to businesses rather than
directly to consumers.
We began nearly 30 years ago as a provider of credit insurance
products and, through our transformational efforts, have evolved
into a diversified insurance services company. We now leverage
our proprietary technology infrastructure, internally developed
best practices and access to specialty insurance markets to
provide our clients with distribution and administration
services and insurance-related products. Our services and
products complement consumer credit offerings, provide
outsourcing solutions designed to reduce the costs associated
with the administration of insurance and other financial
products and facilitate the distribution of excess and surplus
lines insurance products through insurance companies, brokers
and agents. These services and products are designed to increase
revenues, improve customer value and loyalty and reduce costs
for our clients.
We generally target market segments that are niche and specialty
in nature, which we believe are underserved by competitors and
have high barriers to entry. We focus on building quality client
relationships and emphasizing customer service. This focus,
along with our ability to help clients enhance revenue and
reduce costs, has enabled us to develop and maintain numerous
long-term client relationships. Over 80% of our clients have
been with us for more than five years.
Our fee-driven revenue model is focused on delivering a high
volume of recurring transactions through our clients and
producing attractive profit margins and operating cash flows.
Historically, our business has grown both organically and
through acquisitions of complementary businesses. Our total
revenues have grown 11.4% from $167.1 million for the year
ended December 31, 2008 to $186.1 million for the year
ended December 31, 2009. Our Adjusted EBITDA has grown
30.7% from $24.1 million for the year ended
December 31, 2008 to $31.5 million for the year ended
December 31, 2009. Our net income has grown 44.0% from
$8.0 million for the year ended December 31, 2008 to
$11.6 million for the year ended December 31, 2009.
Our
Competitive Strengths
Strong Value Proposition for Our Clients and Their
Customers. We believe that our services and
products enable our clients to generate high-margin, incremental
revenues, enter new markets without making significant capital
investments, mitigate risk and improve operating efficiencies.
Additionally, we believe that by using our services and
products, our clients benefit from enhanced customer loyalty,
which can lead to better customer retention, new customer
acquisitions and additional cross-selling opportunities. Our
comprehensive, turn-key solutions also manage all of the
essential aspects of insurance distribution and administration,
providing low-cost access to complex, often highly-regulated
markets. In our Payment Protection business, we facilitate the
marketing of financial products that increase the revenues and
profits that our clients earn from transactions with their
customers. Our BPO solutions assist our clients in developing,
marketing and administering insurance and other financial
products without requiring them to make significant capital
investments. Our Wholesale Brokerage business allows retail
insurance brokers and agents to provide insurance coverage to
their customers for risks that they otherwise might not be able
to secure. This provides our Wholesale Brokerage clients with
increased commission revenue, high customer satisfaction and
greater customer retention. We believe that facilitating
increased revenues and operating profits provides a strong value
proposition for our clients.
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Proprietary Technology and Low-Cost Operating
Platform. We use our proprietary technology
infrastructure to deliver low-cost, highly automated services to
our clients. Our customizable software platform integrates with
our clients businesses, providing them with access to
insurance products without significant up-front investments. Our
Payment Protection and BPO services, in particular, are highly
automated. We process most of our Payment Protection product
transactions electronically and also provide automated Payment
Protection product management tools to our clients. Our
Automated Insurance Reporting (AIR) technology provides single
point policy data entry and electronic underwriting data
transmission to our Payment Protection clients. In our BPO
business, we manage high volume direct marketing and product
distribution programs for a wide variety of insurance and other
financial products. Our proprietary BPO technology platform
automates many of these functions, including customer
solicitation, customer inquiry, policy form issuance and policy
underwriting. By utilizing our platform, clients can automate
core business processes and reduce their operating costs.
Our centralized hosted software platform provides services via
the Internet, which is more cost effective than systems that
require on-site installation and maintenance. The costs of our
corporate, finance and management functions are shared across
each of our business units, which results in lower operating
costs for each of our individual businesses than would be
possible if they operated on a stand-alone basis. As our
businesses grow and we acquire new businesses, we expect to be
able to continue to benefit from our low-cost operating platform.
Scalability. We believe that our
scalable and flexible technology infrastructure enables us to
add new clients and launch new services and products quickly and
easily without significant incremental expense. Our existing
investment in software systems and hardware, as well as our
highly trained and knowledgeable information technology
personnel and consultants provide us with substantial
capabilities to handle a significant increase in transaction
volume in each of our businesses. We have been able to increase
the number of specialty insurance distribution and
administration clients in each of the last three years without
incurring significant additional costs or capital expenditures.
High Barriers to Entry. We believe that
each of our businesses would be time consuming and expensive for
new market participants to replicate. We also have strong,
long-term relationships with clients and other market
participants and substantial experience in the markets that we
serve. In our Payment Protection business, we provide insurance
products on behalf of our clients through regulated entities
that are time consuming and expensive to establish. In addition,
we embed our information systems within our clients
business, and it would be costly, time consuming and disruptive
for our clients to replace our services with those of another
provider or to develop similar capabilities internally.
Experienced Management Team. We have an
experienced management team with extensive operating and
industry experience in the markets that we serve. As of
December 31, 2009, our named executive officers had a
combined 44 years of experience with us and our
subsidiaries and over 108 years of collective experience in
the insurance and other financial services industries. Our
management team has successfully developed profitable new
services and products and completed the acquisition of seven
complementary businesses since January 1, 2008. We believe
that the extensive operating and industry experience of our
management allows us to identify attractive market opportunities
and provides market expertise to our clients, giving us a
significant competitive advantage.
Key
Attributes of Our Business Model
We believe the following are the key attributes of our business
model:
Recurring Revenue Generation. Our
business model has historically generated substantial recurring
revenues, high profit margins and significant operating cash
flows. The services and products that we provide to our clients
are generally sold to their customers on a recurring monthly,
quarterly or annual
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basis. In addition, we have per unit contracts with clients that
provide additional recurring revenue opportunities with our
existing clients. By deploying our technology with many of our
clients, we become an integral part of their businesses and
systems and a key source of incremental revenues, which further
enhances our client relationships and supports our recurring
revenue streams.
Long-Term Customer Relationships. By
delivering value-added services and products to our
clients customers, we become an important part of their
businesses. We believe that by managing our clients
services and products we integrate our operations into theirs,
thereby increasing the value of our solutions and limiting our
clients desire and ability to change providers. In other
instances, particularly in our BPO business, we have fixed-term
contracts. Over 80% of our clients have been with us for more
than five years.
Wholesale Distribution. We provide most
of our services and products to businesses on a wholesale basis
rather than directly to consumers and businesses on a retail
basis. Our Payment Protection business provides services and
products through financial institutions and retailers who, in
turn, sell financial services and products on a retail basis to
their customers. Our BPO business provides services that
leverage third-party brands and distribution to allow our
clients to reach their customers more effectively. Our Wholesale
Brokerage business provides services and products through retail
insurance brokers and agents who sell to insurance buyers. This
sell-through model leverages the retail distribution
capabilities, brands and customer relationships of our clients
and limits our investment in the offices, staff, infrastructure
and brand development that would be required to support a retail
distribution model. Our wholesale distribution model also
provides us with opportunities to take advantage of economies of
scale.
Business Diversification. Our
businesses and results of operations are highly diversified. Our
Payment Protection, BPO and Wholesale Brokerage businesses
generated 57.7%, 48.4% and 11.8% of our
pre-tax
income in 2009, respectively offset by non-allocated Corporate
expenses of (17.9%). Each of our businesses has a separate and
distinct client base and generates revenue from both the
consumer and business sectors of the economy. We believe this
diversification positions us to take advantage of emerging
industry trends and to better manage business, economic and
insurance cycles than companies that operate in only one sector
of the financial services industry. We intend to continue to
invest in each of our businesses and to acquire additional
complementary businesses in order to enhance our diversification.
Our
Growth Strategy
Provide High Value Solutions. We intend
to continue to focus on servicing our clients through the
development of services and products that will allow them to
generate incremental revenues while reducing the costs of
providing insurance and other financial products. We intend to
accomplish this through the addition and enhancement of systems,
technologies and processes and by continuing to focus on more
closely integrating our operations with those of our clients.
One of our significant technology initiatives is our continued
refinement of our Automated Insurance Reporting (AIR)
technology, which eliminates the need for dual point data entry
by both us and our Payment Protection clients. Single point data
entry by our clients and the electronic transmission and
inputting of underwriting data has greatly increased our
scalability and efficiency and allowed us to reduce our
operating costs. We intend to continue to automate our claims
processing so that we will be completely automated in the
future, which would enhance accuracy in processing claims and
reduce our operating costs. We are continuing to develop the
technology and information systems necessary to support the mass
marketing and distribution of a broad range of insurance
products. These systems will allow us to distribute and
administer life and health insurance products and to more
effectively serve property and casualty insurers, agents and
reinsurers, as well as insurance companies providing term life,
universal life and specialty property and casualty products. We
expect that our continued investment in the technology in our
BPO business will create greater flexibility in our pricing
structure, which will create
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new market opportunities and allow us to better serve mid-size
life, health and property and casualty insurers.
Increase Revenue from Our Existing
Clients. We intend to leverage our
long-standing relationships with our existing clients by
providing them with additional services and products and
introducing new services and products for them to market to
their customers. By aggressively marketing our services and
products and expanding our service and product offering, we
believe we can increase revenue from existing clients in each of
our businesses. In our Wholesale Brokerage business, we are
seeking to offer our clients across the country access to more
services and products through the use of national practice
groups, which will allow us to generate additional revenues from
our existing retail insurance brokers and agents and insurance
companies by expanding the types of insurance products that they
can offer to their customers. As our clients businesses
grow due to improved economic conditions, increasing market
prices and premiums for our products and the introduction of new
services and products, we also expect to generate additional
revenue under our volume-based fee arrangements.
Expand Client Base in Existing
Markets. We believe that there is a
substantial opportunity to expand our client base in each of our
businesses. We intend to develop new client relationships
through the efforts of our direct sales force, from referrals
from existing clients and business partners, by responding to
requests for proposals and through our participation in industry
events. We will seek to continue to expand our client base and
our presence in our existing target markets by continually
developing new client relationships, increasing our sales force,
opening new offices and expanding our product and service
offerings. We expect to continue to develop new clients in our
Payment Protection business through increased penetration of
geographic markets that we have recently entered. Additionally,
we intend to enhance our existing information technology systems
and capabilities to allow us to effectively provide business
process outsourcing services to smaller clients in our existing
markets. In our Wholesale Brokerage business, we intend to add
specific market expertise in additional specialty product lines
and client industries, which we believe will provide new client
opportunities in our existing markets.
Enter New Geographic Markets. Our
Payment Protection and Wholesale Brokerage businesses have
historically targeted specific geographic markets in the United
States. We intend to expand our market presence into new
geographic markets in the United States and internationally, as
opportunities arise. Since 2003, we have obtained the requisite
licenses to support the expansion of our Payment Protection
business from eight states to over 40 states. We also
intend to continue to broaden the jurisdictions in which our
Payment Protection business operates by hiring new employees,
opening new offices, seeking additional licenses and regulatory
approvals and pursuing acquisition opportunities. Payment
protection services and products are available throughout the
world, and we believe there are significant opportunities to
market and sell our payment protection and warranty
administration services in international markets. We may
consider opening offices, obtaining approvals, acquiring
established complementary payment protection businesses, or
establishing strategic relationships in international markets,
such as Canada. We also intend to expand our Wholesale Brokerage
business into new states and markets to develop a national
presence. We are specifically targeting developing a presence in
the wholesale brokerage market in the New York City metropolitan
area, one of the largest excess and surplus lines insurance
markets in the United States, along with expanding in key
wholesale markets in California, Florida, Illinois and Texas. We
also expect to increase our BPO sales force in order to focus on
clients in new geographic areas.
Pursue Strategic Acquisitions. We have
a track record of successfully identifying, evaluating,
acquiring and integrating complementary businesses. Since
January 1, 2008, we have acquired seven businesses. We
believe that our centralized infrastructure and established
customer base enable us to enhance the revenue opportunities
from the businesses that we acquire. Specifically, in our
Payment Protection business, we are seeking to leverage our
experience and domain expertise by acquiring administration
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businesses that specialize in similar financial products,
including warranty products, identity theft prevention services
and automobile service contracts. We also intend to expand our
BPO business through strategic acquisitions of companies that
enable us to expand our service offering to include services
such as equipment subrogation and salvage and life and health
insurance claims management. We also expect to pursue
acquisitions of insurance distribution companies that have
underwriting and program management capabilities, provide new
product and industry expertise and expand the geographic
presence of our Wholesale Brokerage business.
Our
Businesses
We operate in three business segments. In each segment we
deliver services and products that generate incremental revenues
for our clients and utilize technology to reduce our operating
costs. Our businesses benefit from efficiencies created by
sharing accounting, compliance, legal, technology, human
resources and administrative services.
Payment
Protection
Our Payment Protection segment, marketed under our Life of the
South brand, delivers credit insurance, debt protection,
warranty, service contract and car club solutions along with
administrative services to consumer finance companies, regional
banks, community banks, retailers, small loan companies,
warranty administrators, automobile dealers, vacation ownership
developers and credit unions. Our clients then offer these
products to their customers in conjunction with consumer finance
transactions. Our Payment Protection segment specializes in
providing products that protect consumer lenders and their
borrowers from death, disability or other events that could
otherwise impair their borrowers ability to repay a debt.
By offering payment protection products to their customers
through our wholesale distribution platform, our clients are
able to generate additional revenue while mitigating their
credit risk and the risk of non-payment by borrowers. As of
September 30, 2010, our Payment Protection business had
124 full-time and part-time employees.
We own and operate insurance company subsidiaries to facilitate,
on behalf of our Payment Protection clients, the distribution of
credit insurance and payment protection services and products.
See Insurance Companies and Ratings.
This allows our clients to sell these services and products to
their customers without having to establish their own insurance
companies, which saves our clients the cost and time of
undertaking and complying with the substantial regulatory and
licensing requirements. Our clients typically retain the
underwriting risk related to such products either through
retrospective commission arrangements or fully-collateralized
reinsurance companies owned by them, which we administer on
their behalf. While the majority of our Payment Protection
revenue is fee-based, we assume insurance underwriting risk in
select instances to meet our clients needs and to enhance
our profitability.
Our Payment Protection business generates service and
administrative fees, net investment income earned on insurance
premiums collected. We also generate revenue from underwriting
our Payment Protection insurance policies, which is net earned
premium less commissions and claims, from the limited portion of
insurance premiums that we retain. For the year ended
December 31, 2009, service and administrative fees and
other income, ceding commissions, net investment income and net
earned premium represented 6.0%, 16.5%, 3.3% and 74.2%,
respectively of the revenues of our Payment Protection business.
In 2009, the Payment Protection business represented
approximately 57.7% of our pre-tax income.
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Products
and Services
The chart below highlights our Payment Protection products and
services:
|
|
|
Products
|
|
Services
|
|
Credit Property
|
|
Policy and Claims Administration
|
Credit Life & Credit Disability
|
|
Captive Reinsurance Management
|
Debt Cancellation
|
|
Training Products, Sales,
Compliance
|
Accidental Death &
Dismemberment (AD&D)
|
|
Transition Management
Policy Tracking Services
|
Car Club Membership
|
|
|
Warranty & Extended Service
Plans
|
|
|
Involuntary Unemployment
|
|
|
Collateral Protection
|
|
|
Single Interest Auto
|
|
|
We offer a wide range of regulated insurance products, including
credit property, credit life, credit disability, AD&D,
involuntary unemployment, collateral protection and single
interest auto. We offer administration services for similar
financial products that are not regulated as insurance products,
including debt cancellation plans, warranty products and car
club memberships. We also provide policy and claims
administration, captive reinsurance management, training,
transition management and policy tracking services to our
clients.
While we believe we are not dependent on any single payment
protection product, almost half of our Payment Protection
revenues are derived from consumer finance distribution channels.
Credit Insurance. Our credit insurance
products offer protection related to life events and
uncertainties that may occur following purchasing and borrowing
transactions. Credit insurance programs generally offer
consumers the option to protect an installment loan in the event
of death, involuntary unemployment, disability or loss or
impairment of collateral and are generally available to all
consumers without the underwriting restrictions that apply to
traditional insurance. We distribute our life, disability and
property and casualty credit insurance primarily through our
insurance company subsidiaries.
For our credit insurance products, our clients finance the
related premium for consumers and pay the premium to our
insurance companies, which administer the policies. We pay our
clients a commission for each of these policies. Most of our
credit insurance policies are written on a retrospective basis,
which permits us to adjust the commission that we pay to our
clients based on claims experience. We retain a specified
portion of the premium as a fee for administering such policies.
The administrative fees earned by us are recognized as service
and administrative fees. We may not be able to offset adverse
claims experience if our clients stop writing such policies or
cease operations, in which case we are at risk because we may
not be able to retrospectively adjust commissions to ensure that
we retain the portion of the premium as an administrative fee to
which we are entitled under the contractual relationship with
that client.
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Retrospective
Commission Arrangement
Our clients also own PORCs that assume the credit insurance
premiums and associated risk that they originate in exchange for
ceding commissions that are paid to our insurance companies. The
PORCs owned and controlled by our clients typically pay all
losses associated with the insurance policies that they assume.
We administer the PORCs on behalf of our clients and oversee the
investment assets of the PORCs. The ceding commissions paid to
our insurance companies are recognized as service and
administrative revenue.
Producer
Owned Reinsurance Companies
(PORCs)
We assume insurance underwriting risk on a limited portion of
our credit insurance policies and retain the related premiums
when our clients do not want or are unable to retain the risk.
Any policies that we underwrite fit within our risk management
policies. We cede a significant portion of these policies to
third-party reinsurers through quota share or coinsurance
arrangements. We also utilize reinsurance agreements to limit
our catastrophic exposure on the insurance underwriting risk
that we assume. Service and administrative fees that we receive
for administering the ceded credit insurance premiums and
investment income that we receive from the reserves maintained
in trust accounts are recognized as ceding commissions.
Experience refunds arising from our reinsurance arrangements are
also included in ceding commissions. In our Payment Protection
business segment, net premiums earned from our retained Payment
Protection products less the costs of settling claims and
commissions paid on such products is referred to as net
underwriting revenue. See Enterprise Risk
Management below.
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Retained
Premium
Debt Cancellation. Debt cancellation
plans are offered by lenders in conjunction with lines of
credit, installment loans and credit cards. Debt cancellation
plans waive or defer all or a portion of the monthly payments,
monthly interest or the actual debt for the account holder for a
covered event such as death, disability or job loss. These plans
are similar to credit life, disability and involuntary
unemployment insurance but, when provided by certain financial
institutions, are not required to be underwritten by an
insurance company. We earn fees for administering debt
cancellation plans and related services for our clients.
Warranties and Service
Contracts. Through relationships with
retailers, manufacturers, third party administrators and
authorized service providers, we provide insurance to warranty
administrators. These contracts provide consumers with coverage
on appliances, electronics, computers, mobile devices, furniture
and specialty products, protecting them from certain covered
losses. Under these contracts, our clients pay the cost of
repairing or replacing customers property in the event of
damages due to mechanical breakdown, accidental damage, and
casualty losses such as theft, fire, and water damage. We
provide services that facilitate the distribution and
administration of warranty or extended service contracts,
including program design and marketing strategy.
Car Club Memberships. Car club
memberships are generally sold by consumer finance companies as
part of a consumer finance transaction. Car club memberships
typically last one year and can extend for longer periods
depending on state regulations. These memberships provide towing
reimbursement and other roadside assistance services, depending
on the package purchased by the consumer. Under these contracts,
our clients earn a commission related to the sale of
memberships, and we earn fees related to the provision of
membership benefits over the term of each membership.
Marketing
and Distribution
We focus on establishing strong, long-term relationships with
our clients, which are the distributors of our Payment
Protection services and products, particularly lenders and
retailers in niche markets. We market our services and products
through a dedicated national sales team, which consisted of
13 people as of September 30, 2010, and general
agents. We work closely with general agents specializing in the
community bank and automotive markets who maintain relationships
with our existing clients and
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assist us in developing new client relationships in these
markets. As of September 30, 2010, we had life insurance
products licenses in 45 states and property and casualty
products licenses in 41 states.
Our marketing efforts typically involve a long selling cycle to
secure a new client. Our efforts may begin through our sales
efforts, referrals, a request for proposal or otherwise.
Clients
Our Payment Protection clients include consumer finance
companies, community banks, regional banks, retailers, small
loan companies, warranty administrators, automobile dealers,
vacation ownership developers and credit unions. We had 1,111
Payment Protection clients as of December 31, 2009. We
typically maintain long-term business relationships with our
clients. From 2005 to 2009, our annual client retention rates
averaged 95% in our Payment Protection business. Our Payment
Protection business is not dependent on a particular client. Our
top ten Payment Protection clients accounted for approximately
48.6% and 46.3% of our Payment Protection net revenues for the
years ended December 31, 2009 and 2008, respectively.
BPO
Our BPO segment, marketed under our Consecta brand, is a leading
provider of business process outsourcing services tailored to
insurance companies and commercial lenders. We previously
operated our BPO business under the LOTSolutions brand. In 2010,
we re-branded our BPO business to reflect our broader BPO
capabilities and to give it a distinct identity from our Life of
the South brand. Through our operating platform, which utilizes
our proprietary technology, we offer our clients versatile,
turn-key solutions that enable them to test, launch, distribute
and administer new insurance and other financial products at
lower costs than if our client performs these functions on its
own. Our proprietary administrative technology platform allows
our clients to outsource the fixed costs and complexity
associated with internal development and ongoing administration
of insurance products. As of September 30, 2010, our BPO
business had 62 full-time employees. We can also utilize up
to 30 independent contractors to support our BPO business based
on the needs of the business at any given time.
Insurance companies manage a wide variety of business functions
to develop, market, distribute and administer insurance
products. They also manage the regulatory, compliance and
capital requirements of being an insurance company, as well as
the assets and liabilities associated with their insurance
policies. Insurance companies typically distribute their
products to consumers through a variety of distribution
intermediaries, including retail agents and brokers, wholesale
brokers and MGAs. Insurance companies have traditionally managed
internally all or most of these business functions and
distribution partnerships.
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Traditional
Insurance Company Model
We provide a broad set of insurance administration services that
enable insurance companies to outsource many of these business
functions to us. Our services cover many phases of insurance
business processes including product development, sales and
marketing support, electronic underwriting, premium billing and
collections, policy administration, claims adjudication and call
center management.
We utilize our established, scalable infrastructure and
technological capabilities to provide our clients with low-cost
solutions that would otherwise be costly and time consuming for
our clients to replicate themselves or obtain through another
provider. Our technology platform and expertise allow us to
reach our clients end-customers in an efficient and
cost-effective manner. In addition, the scalability of our
operating platform allows us to add new clients or additional
services for clients without incurring incremental costs.
We use our analytics capabilities to help our clients devise new
models for underwriting, risk management and actuarial analysis.
While we have significant industry knowledge and experience that
is valuable to our BPO clients, we do not compete with them,
which is a key competitive factor. Our insurance company clients
manage many of the regulatory and compliance functions, and also
maintain responsibility for managing the assets, policy reserves
and capital of their insurance companies. We do not take any
insurance underwriting risk in our BPO business.
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Consecta
Insurance Company BPO Model
Our BPO solutions facilitate the implementation and
administration of integrated, multi-party insurance marketing
campaigns that provide incremental revenue opportunities and
enhance customer relationships. We distribute and administer
insurance and other financial products that are marketed to the
end-customers of large financial institutions. We typically
partner with leading insurance companies, financial service
companies and direct marketing services firms to deliver our
solutions. We work closely with these partners to develop and
implement an integrated solution.
In providing our solutions, we seek to address the needs of each
of these primary partners. The direct marketing services firms
with which we partner, develop and design the marketing strategy
for the insurance and other financial products that we
distribute and administer on behalf of insurance companies.
These mass marketing campaigns leverage the existing customer
relationships and brand names of large financial institutions to
provide new products and services to their customers, enhance
their customer relationships and increase the value of their
existing customer base. By partnering with these parties and
providing our services, we provide insurance companies with
access to new product distribution channels and create new
product opportunities.
BPO
Transaction Flow
Our BPO business generates service and administrative fees and
other income under
per-unit
priced contracts that typically have a term of between one and
three years. Our service and administrative fees for our BPO
business are based on the complexity and volume of business that
we manage on behalf of our clients. In 2009, the BPO business
represented approximately 48.4% of our pre-tax income.
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Services
Our BPO segment provides a number of outsourcing,
administrative, marketing and technology services. We market,
develop and administer insurance and other financial products on
behalf of our clients, including life and health insurance
products, debt cancellation, identity theft protection and fee
revenue programs and membership clubs.
Marketing and Strategy Execution. We
provide marketing consulting, statistical modeling and
segmentation, list processing, campaign execution and other
marketing services.
Enrollment and New Business
Processing. We can manage all aspects of our
clients enrollment and new business processing. Our
services include managing multiple customer response channels,
such as Web-based systems, inbound call centers, mail and
interactive voice response (IVR) systems.
Producer Services. We offer our clients
services and a flexible platform that manages all aspects of the
life insurance processing cycle, including licensing and
appointment and user defined compensation structures. Our
services include commissions processing, recoupment, chargeback
and adjustments.
Customer Materials. We manage
communications with our insurance company clients
customers, including the automated production and distribution
of policy delivery kits and receipts, welcome letters,
underwriting endorsements and amendments to comply with the
applicable regulatory requirements. We also manage
communications between policy owners and carriers.
Customer Care and Support. We manage
customer care and support on behalf of our clients. Our customer
care services include account servicing, handling queries,
general servicing and dispute resolution.
Billing and Premium Processing. We
provide a range of billing services that can be customized for
each client, which includes processing premium payments through
credit cards, electronic funds transfers, mortgage escrow and
direct billing.
Claims and Benefit Adjudication. We
utilize our proprietary, rules-based platforms to provide claim
and benefit adjudication for life insurance, health benefits,
debt cancellation and other programs on behalf of our clients.
Reporting and Business Intelligence. We
help our clients identify and manage valuable business data and
provide periodic business reviews with specific recommendations
for testing, strategies and business initiatives designed to
help clients improve efficiencies, production, customer care and
profitability.
Systems and Platforms. We have
proprietary and exclusively licensed processing platforms with
the capability to provide automated core insurance business
process outsourcing services, including but not limited to
product quotation and illustrations, binding new policies,
underwriting, billing, post issuance transactional activity,
qualified plan distributions and claim processing associated
with the administration of life insurance products.
Conversions. We utilize industry
knowledge, methodology and proprietary software to efficiently
and effectively convert our clients data to our platform.
Product Advisory. We advise clients in
the development and execution of new product ideas that enable
our clients to bring new products to market in an effective,
timely and efficient manner.
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Capital Advisory. We provide
comprehensive reviews of client capital structures and advise
our clients on alternate solutions to improve the economic
efficiency of runoff insurance operations. Once a particular
solution has been chosen, we assist our clients with the
structuring, implementation and execution of more efficient
capital solutions.
Asset Recovery and Commercial
Collections. Through our Universal Equipment
Recovery Group (UERG) brand, we provide pre-collection, asset
recovery, deficiency collection and repossession management
services to banks and commercial lending institutions.
Marketing
and Distribution
We market our BPO services to both existing and potential
clients through our dedicated sales team, which consisted of six
people as of September 30, 2010. In addition to adding new
clients, we also market new services and products to our
existing clients. We are licensed as a third party insurance
administrator in all 50 states.
We assign each of our clients a relationship manager who serves
as the primary point of contact, ensuring that our services are
being delivered effectively and that we are meeting or exceeding
client expectations. The relationship manager is supported by an
operations manager that has responsibility for all service
delivery and is an integral part of the establishment of
processes for a new client and a new product.
Our marketing efforts typically involve a relatively long
selling cycle in which it can take 12 to 18 months to
secure a new client. Our efforts may begin in response to a
perceived opportunity, referrals, a request for proposal or
otherwise. As our relationship with a client grows, the time
required to win an engagement for additional products or
services often gradually declines. In addition, as we become
more knowledgeable about a clients business and processes,
our ability to identify opportunities to create value for the
client typically increases. In particular, productivity benefits
and greater business impact can often be achieved by focusing on
processes that are upstream or
downstream from the processes we initially handle,
or by applying our analytical and technological capabilities to
re-engineer processes. In addition, we have the opportunity to
take over more complex and critical processes from our clients
as we demonstrate our capabilities.
Our strong relationships with leading financial services
companies and direct marketing services firms enable us to
provide our solutions to our clients. Leading financial services
companies, which are the companies that market the insurance and
other financial products that we distribute and administer to
their customers, rely on us to manage their customer information
and provide a high-level of service to their customers. We
enhance their customer relationships through our interaction
with their customers. We believe that our strong relationships
with these companies are an important component of our ability
to deliver our solutions to our clients. As of December 31,
2009, we worked with more than 500 financial services companies
to provide insurance and other financial services products to
their customers. We also maintain strong relationships with
direct marketing services firms that develop and design the
marketing strategy for our clients and financial services
company partners. Through our strong relationships with these
companies we are introduced to potential new clients and
business opportunities for our BPO business.
Our
Clients
Our BPO clients include leading insurance companies, finance
companies, banks and retailers. In 2009, we administered mass
marketing campaigns on behalf of clients that generated over
$184 million in gross written premium and net billed fees
for the administration of insurance and debt cancellation
programs. In 2009, our platform and technology enabled our team
of 35 individuals on a daily basis to
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bill approximately 38,000 customers, process and deliver
5,500 policies, fulfill approximately 900 customer
service calls and process approximately 900 claims.
We derive a substantial portion of our BPO business from
insurance companies. Our largest BPO client, National Union Fire
Insurance Company of Pittsburgh, PA (NUFIC), accounted for
approximately 56.8% and 52.4% of our BPO revenues for the years
ended December 31, 2009 and 2008, respectively.
We currently have two agreements with NUFIC. Both agreements
automatically renew for successive one year terms unless either
party elects not to renew and provide the required notice of
termination to the other party at least 180 days prior to
the expiration of the term.
The NUFIC agreements allow for earlier termination by either
party upon the occurrence of specified events, which vary by
agreement. Such termination provisions include events such as a
merger, change in control, bankruptcy or the suspension,
revocation or termination of necessary licenses. In addition,
one agreement contains force majeure termination provisions.
Both of these agreements contain provisions that would require
us to pay penalties or provide the client the right to terminate
the contract if we do not meet pre-agreed service level
requirements regarding such administrative functions, including
fulfillment, billing, telephone responsiveness, policyholder
inquiry/complaint handling, and claims handling, with
corresponding timeline
and/or
accuracy standards for each measurement.
For the term of one of the agreements and 18 months
thereafter, we have agreed not to develop, market, solicit or
offer any insurance programs or products that are similar to
certain insurance programs or products that NUFIC provides,
except for certain programs or products that we offered through
third parties at the time we entered into the agreements.
Wholesale
Brokerage
Our Wholesale Brokerage segment, marketed under our
Bliss & Glennon brand, uses a sell-through model to
sell specialty P&C and surplus lines insurance. We also
provide underwriting services for ancillary or niche insurance
products as a MGA for surplus lines and other specialty
insurance carriers. In April 2009, we acquired Bliss &
Glennon, founded in 1965, which was being divested by Willis
North America Inc. because it was a non-strategic business unit.
We purchased Bliss & Glennon, in order to diversify
our revenue at what we believed was an attractive time to enter
the wholesale brokerage business. We believe our emphasis on
customer service, rapid responsiveness to submissions and
underwriting integrity in this segment has resulted in high
customer satisfaction among retail insurance brokers and agents
and insurance companies. As of September 30, 2010, our
Wholesale Brokerage business had 184 full-time and
part-time employees, including 68 brokers.
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Wholesale
Brokerage
We receive applications for insurance directly from retail
insurance brokers and agents. If the insurance need fits our
binding authorities, we evaluate the price of available
insurance products, make underwriting decisions regarding the
risks that are covered, bind coverage and issue insurance
policies on behalf of an insurance carrier. If the insurance
need is complex or large and exceeds our binding authorities, we
seek quotes for coverage from carriers through our brokerage
arrangements. We believe that our ability to respond rapidly to
such submissions is a key competitive factor. In addition, we
aim to differentiate our Wholesale Brokerage services by
offering creative solutions, exceptional client service, access
to high quality insurance carriers and a full range of services
and products for hard to place risks. Our Wholesale Brokerage
business provides retail insurance agent and broker clients with
the ability to obtain various types of commercial insurance
coverages outside of the agent or brokers core areas of
focus, broader access to insurance markets and the expertise to
place complex risks. Without assistance from a wholesale broker
like Bliss & Glennon, many of the agents and brokers
that we support would not have access to these specialized types
of insurance policies. Moreover, we believe that insurance
carriers value their relationship with us because we provide
them with access to new markets without the need for costly
distribution infrastructure. We also utilize our technology
platforms to provide our clients with administrative services,
including policy underwriting, premium and claim administration
and actuarial analysis.
Our Wholesale Brokerage business is licensed to operate in
37 states with its principal operations in California, one
of the largest surplus lines markets in the United States by
premium volume. We are among the top 20 largest surplus lines
wholesalers in the United States and the seventh largest in
California. We also have offices in Texas, Florida, Illinois,
New Hampshire and Alabama. We have binding authority
relationships with 25 insurance carriers and have relationships
with over 130 insurance carriers.
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Our Wholesale Brokerage business earns wholesale brokerage
commissions and fees for the placement of specialty insurance
products. Following our acquisition of Bliss & Glennon
in April 2009, the Wholesale Brokerage business generated
$16.8 million in revenues and $2.1 million in pre-tax
income, which represented approximately 11.8% of our pre-tax
income for the year ended December 31, 2009. In 2009, net
commissions and fees income represented 94.7% of the Wholesale
Brokerage revenues and profit commissions represented 5.3% of
the Wholesale Brokerage revenues. In 2009, 52.6% of net
commissions and fees were from brokerages, 44.2% from binding
authority programs and 3.2% from underwriting personal lines.
Products
and Services
We offer a broad portfolio of specialty surplus lines and
property and casualty insurance products, as well as other
specialty coverages. Our surplus lines insurance products
include many insurance coverages for businesses, including
commercial property, liability, package, automobile, garage,
transportation and professional and management liability. In
addition, we offer insurance to individuals, including personal
liability and homeowners products. We provide underwriting
services to insurance carriers for niche insurance products
under binding authority agreements. We also provide insurance
premium financing services and products to our clients, which
they offer to their customers.
The chart below highlights our Wholesale Brokerage products and
services:
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Products and Services
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Professional &
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Management
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Personal
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Premium
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Commercial Property
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Casualty
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Construction
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Liability
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Transportation
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Lines
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Finance
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Earthquake/DIC
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Construction
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Business Owners Policies (BOPs)
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Errors & Omissions
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Commercial Auto
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Property
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Commercial Property & Casualty
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Wind
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Environmental & Pollution
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Multi-line Policies
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Directors & Officers
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Truck Liability
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Umbrella
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Personal Lines
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Flood
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General Liability
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Employment Practices Liability
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Cargo
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Large Layered
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Product Liability
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Fiduciary
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Garage
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Inland Marine
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Liquor Liability
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Umbrella & Excess
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Commercial Property. We offer property
insurance products and related risk management services,
including coverages that are difficult to insure in the standard
market. These include coverages for earthquake, wind, flood,
fire, difference in conditions, builders risk, vacant properties
and large layered accounts.
Casualty. We have substantial expertise
in providing strategically focused risk insurance products for
businesses, including general liability, product liability,
umbrella and excess liability and special events coverage. Our
general liability lines products cover risks that the standard
marketplace is often unwilling or unable to cover, such as
amusement parks, apartment buildings, artisan contractors,
clothing and cosmetic manufacturing, day care centers,
nightclubs, restaurants and bars, health/exercise clubs and
vacant buildings. Our product liability lines products focus on
liability exposure for local, regional, national and
multi-national businesses. We have expertise with large umbrella
and excess liability insurance risks. We also place insurance
for risks associated with special events, including sporting
events, theatrical performances, entertainment events, contests,
conventions and other large gatherings.
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Construction. We offer
construction-related surplus lines insurance products to general
and artisan contractors, including general liability, excess
liability, pollution, commercial/municipal, residential, owner
and contractor protection, self-insured retention coverage,
liability and workers compensation
wrap-up
policies for construction projects. We also provide owner or
contractor controlled liability insurance policies and other
construction project specific liability policies.
Professional and Management
Liability. We provide a broad range of
professional liability coverages, including errors and omissions
liability, director & officers liability, employment
practices liability, fiduciary liability, crime insurance and
fidelity bonds.
Environmental & Pollution. We
place policies that insure against a wide range of environmental
and pollution risks, including site pollution, construction
related pollution and underground storage tank risks.
Transportation. The transportation
related coverages that we place include garage insurance, inland
marine, cargo coverage and non-truck liability, as well as
commercial auto and truck liability and physical damage coverage.
Personal Lines. We provide personal
liability coverages to individuals, including umbrella coverage,
home business coverage, vacant dwelling insurance, fire
insurance, special events coverage and excess liability coverage.
Premium Finance. With each insurance
quote, we also automatically provide terms for financing the
related premium through our South Bay Acceptance Corporation
subsidiary. We offer retail brokers access to their finance
accounts through our website and through our customer service
call center. South Bay Acceptance Corporation also offers
financing through retail agents and brokers on other insurance
policies not provided through Bliss & Glennon.
Marketing
and Distribution
We develop and maintain relationships with retail insurance
brokers and agents of insurance carriers who underwrite the
products that we distribute. We have longstanding relationships
with our retail broker and agent clients as well as a variety of
leading insurance carriers. We are continually seeking to expand
our network of retail insurance brokers and agents and insurance
companies. Our wholesale brokers target retail insurance agents
who can benefit from our expertise and access to insurance
carriers.
Clients
During 2009, we placed business for retail insurance brokerage
firms of varying sizes, ranging from large, multinational and
domestic brokers such as Willis Group Holdings PLC, Arthur J.
Gallagher & Co., BB&T Corporation, Alliant
Insurance Services, Inc. and Brown & Brown, Inc., to
small, local agencies. Although we do business with many of the
large, national and regional retail insurance brokerage firms,
we derive a substantial part of our business from small to
mid-size retail insurance agencies. In 2009, our largest retail
insurance brokerage client, Willis, represented approximately
14% of our direct written premium placed. Our ten largest retail
insurance brokerage clients represented approximately 28.8% of
our direct written premium placed.
Willis accounted for approximately 11.1% and 11.3% of our
Wholesale Brokerage revenues for the years ended
December 31, 2009 and 2008, respectively.
We acquired Bliss & Glennon from Willis on
April 15, 2009. The purchase agreement governing this
acquisition included provisions for Bliss & Glennon to
remain an approved wholesale insurance broker for at least seven
years from the closing of the acquisition subject to our
compliance with various
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approved wholesaler requirements. In addition, the purchase
agreement provides certain other provisions that support a
long-term relationship with Willis. We are currently in
compliance with the approved wholesaler requirements and believe
we are in good standing with Willis.
Insurance
Carriers
We have commercial relationships with over 130 insurance
carriers, including large insurance carriers who distribute a
wide range of products and operate internationally as well as
smaller insurance carriers who focus on certain specialty niches
or products and who operate nationally or regionally in the
United States.
We act as an MGA under binding authority agreements for more
than 25 insurance carriers. Binding authority agreements provide
wholesale brokers with the ability to quote, bind and issue
policies on behalf of an insurance carrier based on the
carriers detailed underwriting guidelines. In addition to
underwriting guidelines, binding authority agreements dictate
policy pricing, commission rates and the scope of the binding
authority.
We monitor the financial strength ratings of the insurance
carriers with which we do business, and we generally advise our
Wholesale Brokerage clients to conduct business with insurance
carriers that maintain satisfactory financial strength ratings
from A.M. Best.
Enterprise
Risk Management
We manage risks by employing controls in our insurance,
investment and operational functions. These controls are
designed to both place limits on our operating activities and
provide information and reports that help identify any needed
adjustments to our existing controls. Senior management supports
the discussion and enforcement of risk controls in the
management of our businesses. In order to coordinate risk
management efforts and ensure alignment between our risk-taking
activities and our strategic objectives, we have an
enterprise-wide risk management program. As part of our risk
management program, we appointed a Chief Risk Officer who
reports directly to our Chief Executive Officer.
In the ordinary course of our Payment Protection business, we
enter into reinsurance agreements with reinsurers owned by our
clients, which are referred to as PORCs. Under these agreements,
the PORCs are liable to us to the extent of the reinsurance
ceded, or transferred, to them. However, we remain liable as the
direct insurer on all risks reinsured. We have established risk
management practices and policies to minimize our potential
exposure to PORCs. We typically require each PORC to hold cash
and cash equivalents as collateral in excess of any reinsurance
recoverable amount (i.e. the statutory credit reinsurance
requirement) in a trust account managed by us. This amount is
typically 110% of the statutory reserve. We also have the
ability to collect unpaid reinsurance receivables from PORCs by
withholding cash flows from future insurance policies.
We underwrite a limited portion of our credit-insurance policies
in our Payment Protection business and retain the related
premiums. We typically underwrite such policies when our clients
do not want to or are unable to retain the risk. All policies
that we underwrite are within our established underwriting
guidelines and risk management policies. We also purchase
reinsurance to further control our exposure to potential losses
and to protect the capital resources of our insurance
subsidiaries. We utilize a variety of reinsurance agreements to
control our exposure to large losses on individual insurance
policies and to limit our exposure to catastrophic events.
We purchase per risk excess of loss and catastrophe reinsurance
from high-quality, highly rated reinsurers. Our property per
risk excess of loss reinsurance covers losses up to as much as
$1.8 million above our $200,000 retention. Less than 5% of
the insurance policies that we underwrite have a policy
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limit that exceeds our retention of $200,000. We also purchase
property catastrophe reinsurance that covers 100% of aggregate
property losses up to $1.5 million in excess of our
$2.0 million retention, which we believe provides adequate
coverage for a 1-in-100 year catastrophic event at an
attractive cost. Our life per risk excess of loss reinsurance
covers losses in excess of $45,000 up to as much as $155,000. We
also purchase life catastrophe reinsurance that covers 100% of
aggregate life losses up to $2.0 million above our $135,000
retention. We believe that the life per risk excess of loss and
catastrophe reinsurance that we purchase provides adequate
coverage for the low policy limit credit insurance that we
underwrite.
The investments of our insurance company subsidiaries must
comply with applicable laws and regulations which prescribe the
kind, quality and concentration of investment. In general, these
laws and regulations permit investments, within specified limits
and subject to some qualifications, in federal, state and
municipal obligations, corporate bonds, preferred and common
equity securities, mortgage loans, real estate and some other
investments. Our enterprise risk management practices include
the determination of our investment strategy and management of
our formal investment policy. Our investment strategy seeks
long-term returns with asset price stability through disciplined
security selection and portfolio diversity. Our investment
policy and strategy are reviewed and approved by our board of
directors annually. Pursuant to our investment policy and the
terms of an investment management agreement, and with the
oversight of our senior management, Conning Asset Management
Company manages our insurance subsidiaries investment
portfolios with an experienced team of investment professionals.
For further information regarding our disaster recovery plans
for our technology systems, see Technology and
Operations Data Center and Network Facilities.
We also have plans in place to comply with privacy laws and
protect consumer data, which are described in further detail
under Regulation.
Competition
Our businesses focus on niche segments within broader insurance
markets. While we face competition in each of our businesses, we
believe that no single competitor competes against us in all of
our segments and the markets in which we operate are generally
characterized by a limited number of competitors. Competition in
our operating segments is based on many factors, including
price, industry knowledge, quality of client service, the
effectiveness of our sales force, technology platforms and
processes, the security and integrity of our information
systems, the financial strength ratings of our insurance
subsidiaries, office locations, breadth of product and services
and brand recognition and reputation. Some competitors may offer
a broader array of services and products, may have a greater
diversity of distribution resources, may have a better brand
recognition, may have lower cost structures or, with respect to
insurers, may have higher financial strength or claims paying
ratings. Some competitors also have larger client bases than we
do. In addition, new competitors could enter our markets in the
future. The relative importance of these factors varies by
product and market. The competitive landscape for each of the
businesses is described below.
In our Payment Protection business, we compete with insurance
companies, financial institutions and other insurance service
providers. The principal competitors for our Payment Protection
business include the payment protection groups of Aon
Corporation, Assurant, Inc., Asurion Corporation and smaller
regional companies. As a result of state and federal regulatory
developments and changes in prior years, certain financial
institutions are able to offer debt cancellation plans and are
also able to affiliate with other insurance companies in order
to offer services similar to those in our Payment Protection
business. As financial institutions gain experience with payment
protection programs, their reliance on our services and products
may diminish.
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Our BPO business competes with a variety of companies, including
large multinational firms that provide consulting, technology
and/or
business process services, off-shore business process service
providers in low-cost locations like India, and in-house
captives of potential clients. Our principal business process
outsourcing competitors include Aon Corporation, Computer
Sciences Corporation, Direct Response Insurance Administration
Services, Inc., Marsh & McLennan Companies, Inc.,
Perot Systems Corporation (a subsidiary of Dell, Inc.) and
Unisys Corporation. The trend toward outsourcing and
technological changes may also result in new and different
competitors entering our markets. There could also be newer
competitors with strong competitive positions as a result of
strategic consolidation of smaller competitors or of companies
that each provide different services or serve different
industries. In addition, a client or potential client may choose
not to outsource its business, including by setting up captive
outsourcing operations or by performing formerly outsourced
services themselves.
Our Wholesale Brokerage business competes with numerous firms
for retail insurance clients, including AmWINS Group, Inc.,
Arthur J. Gallagher & Co., Brown & Brown,
Inc. and The Swett & Crawford Group, Inc. Many of our
Wholesale Brokerage competitors have relationships with
insurance companies or have a significant presence in niche
insurance markets that may give them an advantage over us.
Because relationships between insurance intermediaries and
insurance companies or clients are often local or regional in
nature, this potential competitive disadvantage is particularly
pronounced outside of California. This could also impact our
ability to compete effectively in any new states or regions that
we enter. A number of standard market insurance companies are
engaged in the sale of products that compete with those products
we offer. These carriers sell their products directly through
retail agents and brokers, without the involvement of a
wholesale broker, which may yield higher commissions to retail
agents and brokers and may impact our ability to compete. In
addition, the Internet continues to evolve as a source for
direct placement of personal lines business.
In addition, the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 and regulations enacted thereunder
permit banks, securities firms and insurance companies to
affiliate. As a result, the financial services industry has
experienced and may continue to experience consolidation, which
in turn has resulted and could continue to result in increased
competition from diversified financial institutions, including
competition for acquisition prospects.
Insurance
Companies and Ratings
The following table sets forth our insurance subsidiaries:
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Domicile
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Licensed States
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Life of the South Insurance Company
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Georgia
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45 states
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Southern Financial Life Insurance Company
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Kentucky
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Kentucky
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Bankers Life of Louisiana
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Louisiana
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Louisiana
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Lyndon Southern Insurance Company
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Delaware
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41 states
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Insurance Company of the South
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Georgia
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Georgia and North Carolina
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Rating organizations periodically review the financial strength
of insurers, including our insurance subsidiaries. Insurance
companies are assigned financial strength ratings based upon
factors relevant to policyholders such as financial strength,
operating performance, strategic position and ability to meet
ongoing obligations to policyholders. Ratings are an important
factor in establishing the competitive position of insurance
companies. A.M. Bests financial strength ratings,
which are not investment ratings, range from A++ (superior) to S
(suspended), and include 16 separate ratings categories. All of
our insurance subsidiaries have a financial strength rating of
B++, which is the fifth highest of the ratings categories, from
A.M. Best. According to A.M. Best, a B++ rating, in
their opinion, means a company has a good ability to meet its
ongoing insurance obligations. Our insurance subsidiaries are
subject to periodic review by rating organizations and may be
revised upward, downward or revoked at
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their sole discretion. In our Payment Protection business, we
generally target markets that are not ratings sensitive.
Accordingly, we do not consider obtaining upgraded ratings to be
a strategic focus.
Regulation
Our Payment Protection, BPO and Wholesale Brokerage businesses
are subject to extensive regulation and supervision, including
at the federal, state and local level and, to a limited degree,
by foreign authorities. We cannot predict the impact of future
state, federal or foreign laws or regulations on our business.
Future laws and regulations, or the interpretation thereof, may
have a material adverse effect on our results of operations and
financial condition.
Payment
Protection
State
Regulation
Our insurance operations and subsidiaries are subject to
regulation in the various states and jurisdictions in which they
transact business. State insurance laws and regulations regulate
most aspects of our insurance businesses, and our insurance
subsidiaries are regulated by the insurance departments of the
states in which they are domiciled and licensed. Our
non-U.S. insurance
operations are principally regulated by insurance regulatory
authorities in the jurisdictions in which they are domiciled
(i.e., Turks and Caicos). Our insurance products and thus
our businesses also are affected by U.S. federal, state and
local tax laws, and the tax laws of
non-U.S. jurisdictions.
The extent of U.S. state insurance regulation varies, but
generally derives from statutes that delegate regulatory,
supervisory and administrative authority to a department of
insurance in each state. The purpose of the laws and regulation
affecting our insurance operations is primarily to protect the
policyholders and not our stockholders or our agents
(i.e., the financial institutions that sell our products
to their customers). The regulation, supervision and
administration by state departments of insurance relate, among
other things, to: standards of solvency that must be met and
maintained; the payment of dividends; changes in control of
insurance companies; the licensing of insurers and their agents
and other producers; the types of insurance that may be written;
privacy practices; the ability to enter and exit certain
insurance markets; the nature of and limitations on investments
and premium rates, or restrictions on the size of risks that may
be insured under a single policy; reserves and provisions for
unearned premiums, losses and other obligations; deposits of
securities for the benefit of policyholders; payment of sales
compensation to third parties; approval of policy forms; and the
regulation of market conduct, including underwriting and claims
practices. Further, state legislators and insurance regulators
and the National Association of Insurance Commissioners (NAIC)
continually re-examine laws and regulations, which may result in
changes to existing laws or regulations or interpretations
thereof that adversely affect our business. Although we believe
we are in compliance in all material respects with applicable
state and federal laws and regulations, there can be no
assurance that more restrictive laws or regulations will not be
adopted in the future that could make compliance more difficult
or expensive.
State insurance departments also conduct periodic examinations
of the affairs of insurance companies and require the filing of
annual statements and other reports, prepared under statutory
accounting principles (SAP), relating to the financial condition
of companies and other matters. Financial examinations completed
during the past three years with respect to our operating
insurance company subsidiaries have not resulted in material
negative adjustments to statutory surplus, and pending financial
and market conduct examinations with respect to these
subsidiaries have not identified any material findings to date.
At the present time, our insurance company subsidiaries are
collectively licensed to transact business in 45 states
including the District of Columbia, although three of our
insurance subsidiaries individually
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are licensed in only one or a few states. We have insurance
subsidiaries domiciled in the states of Delaware, Georgia,
Kentucky and Louisiana.
Insurance Holding Company Statutes. All
U.S. jurisdictions in which our insurance subsidiaries
conduct insurance business have enacted laws that generally
require each insurance company in a holding company system to
register with the insurance regulatory authority of its
jurisdiction of domicile and to furnish that regulatory
authority financial and other information concerning the
operations of, and the interrelationships and transactions
among, companies within its holding company system that may
materially affect the operations, management or financial
conditions of the insurers within the system.
As a holding company, we are not regulated as an insurance
company, but because we own capital stock in insurance
subsidiaries, we are subject to the state insurance holding
company statutes, as well as certain other laws of each of the
states of domicile of our insurance subsidiaries. All holding
company statutes, as well as other laws, require disclosure and
in many instances, prior regulatory approval of material
transactions between an insurance company and an affiliate. The
holding company statutes as well as other laws also require,
among other things, prior regulatory approval of an acquisition
of control of a domestic insurer, certain transactions between
affiliates and payments of extraordinary dividends or
distributions. Transactions within the holding company system
affecting insurers must be fair and reasonable, and each
insurers policyholder surplus following any such
transaction must be both reasonable in relation to its
outstanding liabilities and adequate for its needs.
Change in Control Requirements. State
insurance regulatory laws intended primarily for the protection
of policyholders contain provisions that require advance
approval, by the state insurance commissioner, of any change in
control of an insurance company that is domiciled, or in some
cases, having such substantial business that it is deemed to be
commercially domiciled, in that state. Prior to granting such
approval, the state insurance commissioner will consider such
factors as the financial strength of the applicant, the
integrity of the applicants board of directors and
executive officers, the applicants plans for the future
operations of the domestic insurer and any anti-competitive
results that may arise from the consummation of the acquisition
of control. We own, directly or indirectly, all of the shares of
stock of insurance companies domiciled in Delaware, Georgia and
Louisiana. We own 85% of the shares of stock of an insurance
company domiciled in Kentucky, with 15% owned by a private
party. Control is generally presumed to exist
through the ownership of 10% or more of the voting securities of
a domestic insurance company or of any company that controls a
domestic insurance company. Any purchaser of shares of common
stock representing 10% or more of the voting power of our
capital stock generally will be presumed to have acquired
control of our domestic insurance company subsidiaries unless,
following application for exemption by that purchaser in each
insurance subsidiarys state of domicile, the relevant
insurance commissioner determines otherwise.
In addition, the laws of many states contain provisions
requiring pre-notification to state agencies prior to any change
in control of a non-domestic insurance company subsidiary that
transacts business in that state. While these pre-notification
statutes do not authorize the state agency to disapprove the
change in control, they do authorize issuance of cease and
desist orders with respect to the non-domestic insurer if it is
determined that conditions, such as undue market concentration,
would result from the change in control.
Any future transactions that would constitute a change in
control of any of our insurance company subsidiaries would
generally require prior approval by the insurance departments of
the states in which our insurance subsidiaries are domiciled or
commercially domiciled and may require pre-acquisition
notification in those states that have adopted pre-acquisition
notification provisions and in which one or more of such
insurance subsidiaries are admitted to transact business. These
requirements may deter,
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delay or prevent transactions affecting the control of our
common stock, including transactions that could be advantageous
to our stockholders.
Dividends Limitations. As an insurance
holding company, our ability to meet our obligations and pay
operating expenses and dividends depends on the receipt of
sufficient funds from our primary operating insurance company
subsidiaries. The inability of these companies to pay dividends
to us in an amount sufficient to meet obligations and pay
expenses and dividends could have a negative effect on us.
The payment of dividends to us by any of our insurance company
subsidiaries in excess of a certain amount (i.e.,
extraordinary dividends) must be approved by the
subsidiarys domiciliary state department of insurance. For
example, Georgia, the state of domicile of our largest insurance
company subsidiary, Life of the South Insurance Company,
prohibits the payment of any dividend, the amount of which,
together with all dividends made in the preceding twelve months,
exceeds the greater of (i) 10% of Life of the South
Insurance Companys statutory surplus as of the end of the
prior calendar year or (ii) Life of the South Insurance
Companys statutory net gains from operations from the
prior calendar year, without prior approval from the Georgia
insurance regulator. Under this restriction, the maximum
dividend permitted to be paid by Life of the South Insurance
Company without prior regulatory approval in 2010 would be
$8.3 million. In the event the insurance regulatory
authorities of any such state were to prohibit the payment of
dividends to us, such dividends would not be available for our
other businesses or potential investments. In addition, Delaware
prohibits Lyndon Southern Insurance Company, a Delaware domestic
insurer, from paying a dividend from any source other than
earned surplus without the prior approval of the Delaware
insurance regulator. Earned surplus is defined as an
amount equal to the insurers unassigned funds as set forth
in its most recent annual statement submitted to the Delaware
insurance department including all or part of its surplus
arising from unrealized capital gains or revaluation of assets.
Ordinary dividends, for which regulatory approval is generally
not required, are limited to amounts determined by a formula,
which varies by state. If insurance regulators determine that
payment of an ordinary dividend or any other payments by our
insurance company subsidiaries to us (such as payments under a
tax sharing agreement or payments for employee or other
services) would be adverse to policyholders or creditors, the
regulators may block or restrict such payments that would
otherwise be permitted without prior approval.
Our insurance company subsidiaries also must give ten days
prior notice to the state commissioner of insurance of an
intention to pay a dividend or make a distribution other than an
extraordinary dividend or extraordinary distribution
and/or
notify the commissioner shortly after declaration of such
dividend or distribution. Following any payment of a dividend,
the insurers policyholder surplus must be reasonable in
relation to the insurers outstanding liabilities and
adequate for its financial needs.
Regulation of Investments. Our
insurance company subsidiaries must comply with their respective
state of domiciles laws regulating insurance company
investments. These laws prescribe the kind, quality and
concentration of investments and while unique to each state, the
laws are modeled on the standards promulgated by the NAIC. Such
investment laws are generally permissive with respect to
federal, state and municipal obligations, and more restrictive
with respect to corporate obligations, particularly
non-investment grade obligations, foreign investment, equity
securities and real estate investments. Each insurance company
is therefore limited by the investment laws of its state of
domicile from making excessive investments in any given security
(such as single issuer limitations) or in certain classes or
riskier investments (such as aggregate limitation in
non-investment grade bonds). The diversification requirements
are broadly consistent with our investment strategies. Failure
to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as
non-admitted assets for the purpose of measuring surplus, and,
in some instances, would require divesture of such non-complying
investments. We believe the investments made by our insurance
subsidiaries comply with these laws and regulations.
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Risk-Based Capital Requirements. The
NAIC has adopted a model act with risk-based capital (RBC)
formulas to be applied to insurance companies. RBC is a method
of measuring the amount of capital appropriate for an insurance
company to support its overall business operations in light of
its size and risk profile. RBC standards are used by state
insurance regulators to determine appropriate regulatory actions
relating to insurers that show signs of weak or deteriorating
conditions. The domiciliary states of our insurance subsidiaries
have adopted laws substantially similar to the NAICs RBC
model act. RBC requirements determine minimum capital
requirements and are intended to raise the level of protection
for policyholder obligations. RBC levels are not intended as a
measure to rank insurers generally, and the insurance laws in
our domiciliary states generally restrict the public
dissemination of insurers RBC levels. Under laws adopted
by individual states, insurers having total adjusted capital
less than that required by the RBC calculation will be subject
to varying degrees of regulatory action, depending on the level
of capital inadequacy.
Under laws adopted by individual states, insurers having less
total adjusted capital (generally, as defined by the NAIC), than
that required by the relevant RBC formula will be subject to
varying degrees of regulatory action, depending on the level of
capital inadequacy. The RBC laws provide for four levels of
regulatory action. The extent of regulatory intervention and
action increases as the ratio of total adjusted capital to RBC
falls. The first level, the company action level, requires an
insurer to submit a plan of corrective action to the regulator
if total adjusted capital falls below 200% of the RBC amount (or
below 250%, when the insurer has a negative trend as
defined under the RBC laws). The second level, the regulatory
action level, requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance
commissioner to perform an examination or other analysis and
issue a corrective order if total adjusted capital falls below
150% of the RBC amount. The third level, the authorized control
level, authorizes the relevant insurance commissioner to take
whatever regulatory action is considered necessary to protect
the best interests of the policyholders and creditors of the
insurer, which may include the actions necessary to cause the
insurer to be placed under regulatory control (i.e.,
rehabilitation or liquidation) if total adjusted capital falls
below 100% of the RBC amount. The fourth action level is the
mandatory control level, which requires the relevant insurance
commissioner to place the insurer under regulatory control if
total adjusted capital falls below 70% of the RBC amount.
The formulas have not been designed to differentiate among
adequately capitalized companies that operate with higher levels
of capital. At December 31, 2009, all of our insurance
subsidiaries had total adjusted capital in excess of amounts
requiring company or regulatory action at any prescribed RBC
action level.
Statutory Accounting
Principles. Statutory accounting principles
(SAP) is a basis of accounting developed by U.S. insurance
regulators to monitor and regulate the solvency of insurance
companies. In developing SAP, insurance regulators were
primarily concerned with assuring an insurers ability to
pay all its current and future obligations to policyholders. As
a result, statutory accounting focuses on conservatively valuing
the assets and liabilities of insurers, generally in accordance
with standards specified by the insurers domiciliary
jurisdiction. Uniform statutory accounting practices are
established by the NAIC and generally adopted by regulators in
the various U.S. jurisdictions. These accounting principles
and related regulations determine, among other things, the
amounts our insurance subsidiaries may pay to us as dividends.
GAAP is designed to measure a business on a going-concern basis.
It gives consideration to matching of revenue and expenses and,
as a result, certain expenses are capitalized when incurred and
then amortized over the life of the associated policies. The
valuation of assets and liabilities under GAAP is based in part
upon best estimate assumptions made by the insurer.
Stockholders equity represents both amounts currently
available and amounts expected to emerge over the life of the
business. As a result,
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the values for assets, liabilities and equity reflected in
financial statements prepared in accordance with GAAP may be
different from those reflected in financial statements prepared
under SAP.
Policy and Contract Reserve Sufficiency
Analysis. Under the laws and regulations of
their jurisdictions of domicile, our insurance company
subsidiaries are required to conduct annual analyses of the
sufficiency of statutory reserves. In addition, other
jurisdictions in which the subsidiaries are licensed may have
certain reserve requirements that differ from those of their
domiciliary jurisdictions. In each case, a qualified actuary
must submit an opinion that states that the aggregate statutory
reserves, when considered in light of the assets held with
respect to such reserves, make good and sufficient provision for
the associated contractual obligations and related expenses of
the insurer. If such an opinion cannot be provided, the insurer
must set up additional reserves by moving funds from surplus.
Our insurance subsidiaries most recently submitted these
opinions without qualification as of December 31, 2009 to
applicable insurance regulatory authorities.
Assessments for Guaranty
Funds. Virtually all states require insurers
licensed to do business in their state to bear a portion of the
loss suffered by some insureds as a result of the
insolvency of other insurers. Depending upon state law, insurers
can be assessed an amount that is generally equal to between 1%
and 3% of premiums written for the relevant lines of insurance
in that state each year to pay the claims of an insolvent
insurer. A portion of these payments is recoverable through
premium rates, premium tax credits or policy surcharges.
Significant increases in assessments could limit the ability of
our insurance subsidiaries to recover such assessments through
tax credits or other means. In addition, there have been some
legislative efforts to limit or repeal the tax offset
provisions, which efforts, to date, have been generally
unsuccessful. These assessments may increase in the future,
depending on the rate of insurance company insolvencies. We
cannot predict the amount or timing of any future assessments
for guaranty funds.
Market Conduct Regulation. State
insurance laws and regulations include numerous provisions
governing the marketplace activities of insurers and insurance
producers, including provisions governing the form and content
of disclosure to consumers, product illustrations, agent and
licensing, advertising, sales and underwriting practices,
complaint handling and claim handling. The state regulatory
authorities generally enforce these provisions through periodic
market conduct examinations.
Statutory Financial Examinations. As
part of their regulatory oversight process, state insurance
departments conduct periodic detailed examination of the books,
records, accounts and business practices of insurers domiciled
in their jurisdictions. These examinations generally are
conducted under guidelines promulgated by the NAIC.
Regulation of Credit Insurance
Products. Most states and other jurisdictions
in which our insurance subsidiaries do business have enacted
laws and regulations that apply specifically to consumer credit
insurance. The methods of regulation vary but generally relate
to, among other things, the amount and term of coverage, the
content of required disclosures to borrowers, the filing and
approval of policy forms and rates, the ability to provide
creditor-placed insurance and limitations on the amount of
premiums that may be charged and on the amount of compensation
that may be paid in connection with the sale of such insurance.
The regulation of credit insurance is also affected by judicial
activity. For example, federal court decisions have enhanced the
ability of community banks to engage in activities that
effectively compete with our credit insurance business without
being subject to various aspects of state insurance regulation;
however, we perform administration services for banks that offer
those debt cancellation products.
Regulation of Service Contracts and Extended
Warranties. The regulation of the sale of
service contracts and extended warranties varies considerably
from state to state. In all states, the terms of
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service contract or extended warranty contracts must be
structured in such a way so as not to be considered to be
insurance. In addition, in many states, prior to transacting
business, obligors, and in some states administrators, must
register with a state regulatory agency, most often the
states insurance department, subject to the agencys
prior approval of the registration. In order to register,
obligors must demonstrate compliance with certain minimum
financial strength criteria. Many states also require that
certain mandatory disclosures be included in the terms and
conditions of a service contract or extended warranty and that
the form of the contract be filed with the state prior to being
offered. Some states require persons who sell service contracts
or extended warranties to be licensed by or registered with the
state. Any material changes to the manner in which service
contracts and extended warranties are regulated, or in the
ability of the obligors to provide these products under state
laws and regulations, could have a material adverse impact on
our business.
Policy Forms. Our insurance
subsidiaries policy forms are subject to regulation in
every state jurisdiction in which they are licensed to transact
insurance business. In most U.S. jurisdictions, policy
forms must be filed prior to use, and in some U.S.
jurisdictions, forms must also be approved prior to use.
Privacy Laws. Most states have enacted
general privacy legislation regarding the protection of customer
and consumer information (including state laws implementing the
Gramm-Leach-Bliley Act with respect to the insurance industry)
and requiring notification to consumers in the event of a
security breach if the consumers or employees
personal information may have been compromised as a result of
the breach. We have adopted privacy policies and practices in
our business which address the requirements of such laws and we
have implemented physical, administrative and logical security
measures with the intent of maintaining the security of our
facilities and systems and protecting our, our clients and
their customers confidential information and
personally-identifiable information against unauthorized access
through the misdirection, theft or loss of data.
Reinsurance. Our insurance company
subsidiaries typically do not retain underwriting risk. Instead,
they typically reinsure most of the business they write. The
business is reinsured either with offshore reinsurers that are
owned by our Payment Protection clients, our Turks and Caicos
subsidiary reinsurer or unaffiliated reinsurers. Some states
have laws or practices that restrict such reinsurance
arrangements to instances where the direct (or ceding) insurer
retains a minimum percentage of the underwriting risk, for
example, 10%. A state could impose new or different limitations
or prohibitions on reinsurance that could negatively impact our
business and results of operations.
Federal
Regulation
In 1945 the U.S. Congress enacted the McCarran-Ferguson Act,
which declared the regulation of insurance to be primarily the
responsibility of the individual states. Although repeal of the
McCarran-Ferguson Act is debated in the U.S. Congress from
time to time, the federal government generally does not directly
regulate the insurance business. However, federal legislation
and administration policies in several areas, including
healthcare, pension regulation, age and sex discrimination,
financial service regulation, securities regulation, privacy
laws, terrorism and federal taxation do affect the insurance
business.
Traditionally, the U.S. federal government has not directly
regulated the insurance business. Congress recently passed and
the President signed into law the Dodd-Frank Act providing for
the enhanced federal supervision of financial institutions,
including insurance companies in certain circumstances, and
financial activities that represent a systemic risk to financial
stability or the U.S. economy. Under the Dodd-Frank Act,
the Federal Insurance Office will be established within the
U.S. Treasury Department to monitor all aspects of the
insurance industry and its authority will extend to all lines of
insurance except health insurance, long-term care insurance that
is not included with life or annuity insurance components and
crop insurance. The director of the Federal Insurance Office
will have the ability to
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recommend that an insurance company or insurance holding company
be subject to heightened prudential standards by the Federal
Reserve, if it is determined that financial distress at the
company could pose a threat to the financial stability of the
U.S. economy. Notwithstanding the creation of the Federal
Insurance Office, the Dodd-Frank Act provides that state
insurance regulators will remain the primary regulatory
authority over insurance and expressly withholds from the
Federal Insurance Office and the U.S. Treasury Department
general supervisory or regulatory authority over the business of
insurance. The Dodd-Frank Act also provides for the preemption
of state laws when inconsistent with certain international
agreements and would streamline the regulation of reinsurance
and surplus lines insurance. At this time, we cannot assess
whether any other proposed legislation or regulatory changes
will be adopted, or what impact, if any, the Dodd-Frank Act,
NAIC initiatives or any other legislation or changes could have
on our results of operations, financial condition or liquidity.
With regard to payment protection products, there are federal
and state laws and regulations that govern the disclosures
related to lenders sales of those products. Our ability to
administer those products on behalf of financial institutions is
dependent upon their continued ability to sell those products.
To the extent that federal or state laws or regulations change
to restrict or prohibit the sale of these products, our
administration services and fees revenues would be adversely
affected. The Dodd-Frank Act created a new Bureau of Consumer
Financial Protection within the Federal Reserve, which would add
new regulatory oversight for these lender products. The full
impact of this oversight cannot be determined until the Bureau
has been established and implementing regulations are put in
place.
Gramm-Leach-Bliley Act. On
November 12, 1999, the Gramm-Leach-Bliley Act of 1999
became law, implementing fundamental changes in the regulation
of the financial services industry in the United States.
The Gramm-Leach-Bliley Act permits the transformation of the
already converging banking, insurance and securities industries
by permitting mergers that combine commercial banks, insurers
and securities firms under one holding company. Under the
Gramm-Leach-Bliley Act, community banks retain their existing
ability to sell insurance products in some circumstances.
Privacy provisions of the Gramm-Leach-Bliley Act became fully
effective in 2001. These provisions established consumer
protections regarding the security and confidentiality of
nonpublic personal information and, as implemented through state
insurance laws and regulations, require us to make full
disclosure of our privacy policies to customers. See
Enterprise Risk Management.
Health Insurance Portability and Accountability Act of
1996 (HIPAA). Through HIPAA, the Department
of Health and Human Services imposes obligations for issuers of
health and dental insurance coverage and health and dental
benefit plan sponsors. HIPAA established requirements for
maintaining the confidentiality and security of individually
identifiable health information and new standards for electronic
health care transactions. The Department of Health and Human
Services promulgated final HIPAA regulations in 2002. The
privacy regulations required compliance by April 2003, the
electronic transactions regulations by October 2003 and the
security regulations by April 2005. Recently, parts of HIPAA
were amended under the HITECH Act, and pursuant to these
amendments, new regulations have been issued requiring
notification of government agencies and consumers in the event
of certain security breaches involving personal health
information.
HIPAA is far-reaching and complex and proper interpretation and
practice under the law continue to evolve. Consequently, our
efforts to measure, monitor and adjust our business practices to
comply with HIPAA are ongoing. Failure to comply could result in
regulatory fines and civil lawsuits. Knowing and intentional
violations of these rules may also result in federal criminal
penalties.
Furthermore, we are subject to laws and regulations arising out
of our services for our clients, particularly in the area of
banking, financial services and insurance, such as the Fair
Credit Reporting Act, the Fair and Accurate Credit Transactions
Act, the Right to Financial Privacy Act, the USA Patriot Act,
the Bank Service Company Act, the Home Owners Loan Act, the
Electronic Funds Transfer Act,
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the Equal Credit Opportunity Act, the Real Estate Settlement
Procedures Act and the Credit Card Accountability Responsibility
and Disclosure Act of 2009 as well as regulation by
U.S. agencies such as the SEC, the Federal Reserve, the
Federal Deposit Insurance Corporation, the National Credit Union
Administration, the Commodity Futures Trading Commission, the
Federal Financial Institutions Examination Council, the Office
of the Comptroller of the Currency and the Office of Thrift
Supervision. We are also subject to regulation under the Federal
Trade Commission Act, the Family Educational Rights and Privacy
Act, the Communications Act, the Electronic Communications
Privacy Act and applicable regulations in the area of health and
other personal information that we process as part of our
services.
Foreign Jurisdictions. A portion of our
business is ceded to our reinsurance subsidiaries domiciled in
Turks and Caicos. Those subsidiaries must satisfy local
regulatory requirements, such as filing annual financial
statements, filing annual certificates of compliance and paying
annual fees. If we fail to maintain compliance with applicable
laws, rules and regulations, the licenses issued by the
regulatory authority in Turks and Caicos could be subject to
modification or revocation, and our subsidiaries could be
prevented from conducting business.
BPO
We are subject to federal and state laws and regulations,
particularly related to our administration of insurance products
on behalf of other insurers. In order for us to process and
administer insurance products of other companies, we are
required to maintain licenses of a third party administrator in
the states where those insurance companies operate. With regard
to our third party administration operations, we also must
comply with the related federal and state privacy laws that
similarly apply to our insurance operations.
We are also subject to laws and regulations on direct marketing,
such as the Telemarketing Consumer Fraud and Abuse Prevention
Act and the Telemarketing Sales Rule, the Telephone Consumer
Protection Act, the Do-Not-Call Implementation Act and rules
promulgated by the Federal Communications Commission and the
Federal Trade Commission and the CAN-SPAM Act. Failure to comply
with the provisions of such acts and rules could result in fines
and penalties.
As a business process outsourcer for insurers and financial
institutions, we are subject to data protection and privacy
laws, such as the Gramm-Leach-Bliley Act as well as HIPAA and
certain state data privacy laws. In addition, the terms of our
contracts typically require us to comply with applicable laws
and regulations. If we fail to comply with any applicable laws
or regulations, we may be restricted in our ability to provide
services and may also be subject to civil or criminal penalties,
litigation as well as contract termination.
Wholesale
Brokerage
Our Wholesale Brokerage and premium finance operations are
subject to regulation at the federal, state and local levels.
Bliss & Glennon and our designated employees must be
licensed to act as agents, brokers, producers
and/or
agencies by state regulatory authorities in the states where we
conduct business. Regulations and licensing laws vary by state
and are often complex and subject to interpretation and
enforcement by the relevant departments of insurance.
The applicable licensing laws and regulations in all states are
subject to amendment or reinterpretation by state regulatory
authorities, and such authorities are generally vested with
broad discretion as to the granting, revocation, suspension and
renewal of licenses. Failure to comply with relevant
requirements (including interpretations thereof by the state
regulatory authorities) could result in us
and/or our
employees being prevented or temporarily suspended from carrying
on some or all of our activities in a particular state.
Our premium finance operations are subject to federal and state
regulation, with the state of domicile having authority over
change in control, licensing, operating rules and affiliated
transactions. State
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departments of insurance where we operate also have licensing
authority over our contracts with insureds or borrowers, as well
as operating rules which provide certain contractual terms and
guidelines for compensation. In addition, premium finance
companies are subject to certain federal regulation, including
review and audit authority of the Federal Deposit Insurance
Corporation.
Our insurance brokerage and administrative service activities
are subject to regulation and supervision by state authorities.
These requirements are generally designed to protect insured
parties by establishing minimum standards of conduct and
practice. Although the scope of regulation and form of
supervision may vary from state to state, insurance laws
generally grant broad discretion to supervisory authorities in
adopting regulations and supervising regulated activities.
Generally, in every state in which we do business as an
insurance broker, we are required to be licensed or to have
received regulatory approval to conduct business. In addition,
most states require that our employees who engage in brokerage
activities in that state be licensed personally or operate under
an agency license.
We also are required in many states to report, collect and remit
surplus lines taxes to state taxing authorities for insurance
policies placed in the surplus lines market. The laws and
regulations regarding the calculation of surplus lines taxes
vary significantly from state to state, and it can be difficult
and time consuming to determine the amount of surplus lines
taxes due to a particular state, especially for insurance
policies covering risks located in more than one state. From
time to time, we and our licensed employees are subject to
inspection by state governmental authorities with regard to our
compliance with state insurance laws and regulations and the
collection and payment of surplus lines taxes. We also are
affected by the governmental regulation and supervision of
insurance carriers. For example, if we act as an MGA for an
insurance carrier, we may be required to comply with laws and
regulations affecting the insurance carrier. Moreover,
regulation affecting the insurance carriers with which we place
business can affect how we conduct operations.
Laws and regulations vary from state to state and are always
subject to amendment or interpretation by regulatory
authorities. These authorities have substantial discretion as to
the decision to grant, renew and revoke licenses and approvals.
Our continuing ability to do business in the states in which we
currently operate depends on the validity of and continued good
standing under the licenses and approvals pursuant to which we
operate. More restrictive laws, rules or regulations may be
adopted in the future that could make compliance more difficult
and expensive or adversely affect our business. See Risk
Factors Risks Related to Our Businesses and
Industries We are subject to extensive governmental
laws and regulations, which increase our costs and could
restrict the conduct of our business.
Technology
and Operations
Technology
Platform Architecture
Our technology infrastructure has been designed and built to
support reliability and scalability. Our technology systems are
specifically designed, built
and/or
acquired to support each of our unique segments, business
processing units and distribution channels. In many areas, we
have built our systems from the ground up to provide the most
flexible and robust solutions to meet our needs and service our
clients. For example, our Automated Insurance Reporting (AIR)
technology provides single point policy data entry and
electronic underwriting data transmission by our Payment
Protection clients. We believe this approach allows us to
maximize efficiency and maintain the highest possible service
levels. In addition to building our own systems, we have also
capitalized on state of the art, industry software products from
IBM, Oracle and others to support both ours and our
clients needs.
We develop our own technology solutions when we need to, using
industry standard software development methods and best
practices such as Microsoft .NET. However, when solutions
already exist, we seek out the top providers of these solutions
and incorporate them into our infrastructure. Many of our
solutions are provided via the Internet, using web services and
portals. Our web solutions are built using
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state of the art methodologies, such as Service Oriented
Architecture (SOA). Our web services provide the flexibility we
need to interact with other systems for purposes of automation,
customer convenience and to maximize efficiencies through batch
processing.
Our technology platform is fault tolerant and scalable through
the use of virtualization techniques, storage area networks,
blade hardware and replication solutions. Due to the nature of
the information we receive from our clients and their customers,
many of our technology solutions must pass the most stringent
security requirements. Many of our BPO solutions, as well as the
systems and networks they operate on, are SAS 70 certified,
Payment Card Industry (PCI) Tier 1 Certified and undergo
several other security reviews by our clients.
Data
Center and Network Facilities
We operate and maintain several data centers. Our primary data
center is located in Jacksonville, Florida, and our data center
in Atlanta, Georgia provides remote replication and high
availability capabilities for our most critical applications.
Our data centers in Jacksonville and Atlanta are staffed
24 hours a day, 7 days a week. We also have data
centers in Redondo Beach, California and Conroe, Texas. All
centers are physically secured, and our Jacksonville and Atlanta
centers also utilize monitoring, environmental alarms, closed
circuit television and redundant power sources. All of our
systems and centers are on regular backup schedules and data is
stored off site at secure locations.
Our network is managed by both internal personnel and outsourced
to a managed service provider for added reliability. Our network
is monitored 24 hours a day, 7 days a week. All
critical systems within our network are fully monitored for
reporting continuity and fault isolation.
Staff
As of September 30, 2010, we employed 26 full-time IT
personnel. Our staff is divided into programming, systems
operations, network operations, governance and compliance and
our project management office (PMO). Our PMO includes our
project managers and business analysts. In addition to our
full-time staff, we have several contract employees supporting
specific project needs at any time.
Intellectual
Property
We own or license a number of trademarks, trade names,
copyrights, service marks, trade secrets and other intellectual
property rights that relate to our services and products.
Although we believe that these intellectual property rights are,
in the aggregate, of material importance to our businesses, we
believe that none of our businesses are materially dependent
upon any particular trademark, trade name, copyright, service
mark, license or other intellectual property right.
U.S. trademark and service mark registrations are generally
for a term of 10 years, renewable every 10 years as
long as the trademark or service mark is used in the regular
course of trade.
We have entered into confidentiality agreements with our
clients. These agreements impose restrictions on these
customers use of our proprietary software and other
intellectual property rights.
Seasonality
Our financial results may be affected by seasonal variations.
Revenues in our Payment Protection business may fluctuate
seasonally based on consumer spending trends, where consumer
spending has historically been higher in April, September and
December, corresponding to Easter,
back-to-school
and the holiday season. Accordingly, our Payment Protection
revenues may reflect higher second, third and fourth quarters
than in the first quarter.
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Revenues in our Wholesale Brokerage business may fluctuate
seasonally based on policy renewal dates, which are typically
concentrated in July and December, during our third and fourth
quarters. In addition, our quarterly revenues may be affected by
new placements, cancellations or non renewals of large policies
because commission revenues are earned on the effective date as
opposed to ratably over the year. Our Wholesale Brokerage
quarterly revenues may also be affected by the amount of profit
commission that we receive from insurance carriers, because
profit commissions are primarily received in the first and
second quarter of each year.
Properties
We lease our principal executive offices, which are located in
Jacksonville, Florida and consist of approximately
50,000 square feet. We lease an additional office space
located in Jacksonville, Florida, which consists of
600 square feet. In addition, we lease approximately,
100,000 square feet of office space in approximately 20
locations throughout the United States.
Most of our leases have lease terms of three to five years with
provisions for renewals.
We believe our properties are adequate for our business as
presently conducted.
Employees
As of September 30, 2010, we employed approximately
447 people on a full or part-time basis. None of our
employees are represented by unions or trade organizations. We
believe that our relations with our employees are satisfactory.
Legal
Proceedings
We are a party to claims and litigation in the normal course of
our operations. We believe that the ultimate outcome of these
matters will not have a material adverse effect on our
consolidated financial position, results of operations or cash
flows. In our Payment Protection business, we are currently a
defendant in lawsuits which relate to marketing
and/or
pricing issues that involve claims for punitive, exemplary or
extracontractual damages in amounts substantially in excess of
the covered claim. We consider such litigation customary in our
line of business. While in our opinion, the ultimate resolution
of such litigation, which we are vigorously defending, should
not be material to our financial position, results of operations
or cash flows. It should be noted that large punitive damage
awards, bearing little relation to actual damages sustained by
plaintiffs, have been awarded in certain states against other
companies in the credit insurance business.
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MANAGEMENT
Executive
Officers and Directors
The following table sets forth the names and ages, as of
November 30, 2010, of our executive officers and directors.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Richard S.
Kahlbaugh*
|
|
|
50
|
|
|
Chairman, President and Chief Executive Officer
|
Walter P. Mascherin
|
|
|
56
|
|
|
Senior Executive Vice President and Chief Financial Officer
|
Michael Vrban
|
|
|
51
|
|
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Executive Vice President, Chief Accounting Officer and Treasurer
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Daniel A. Reppert
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50
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Executive Vice President and President, Bliss & Glennon
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W. Dale Bullard
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52
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Executive Vice President and Chief Marketing Officer
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Alan E. Kaliski
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63
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Senior Vice President and Chief Risk Officer
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Joseph R. McCaw
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58
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Executive Vice President and President, Life of the South
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Robert S. Fullington
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63
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Executive Vice President and President, Consecta
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Paul S. Romano
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50
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Executive Vice President and Chief Administrative Officer
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John G.
Short*
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48
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Senior Vice President, General Counsel and Secretary
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John R. Carroll
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42
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Director
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J.J. Kardwell
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34
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Director
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Alfred R. Berkeley, III
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66
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Director nominee
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Francis M. Colalucci
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66
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Director nominee
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Frank P. Filipps
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63
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Director nominee
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Ted W. Rollins
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48
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Director nominee
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* |
Richard S. Kahlbaugh and John G. Short are
brothers-in-law.
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Set forth below is a description of the business experience of
the foregoing persons.
Richard S. Kahlbaugh has been our President and
Chief Executive Officer and a director since June 2007 and has
been our Chairman since June 2010. Prior to becoming President
and Chief Executive Officer, Mr. Kahlbaugh was our Chief
Operating Officer from 2003 to 2007. He also serves as the Chief
Executive Officer of all of our insurance subsidiaries. Prior to
joining us in 2003, Mr. Kahlbaugh served as President and
Chief Executive Officer of Volvos Global Insurance Group.
He also served as the first General Counsel of the Walshire
Assurance Group, a publicly traded insurance company, and
practiced law with McNees, Wallace and Nurick.
Mr. Kahlbaugh holds a J.D. from Delaware Law School of
Widener University and a B.A. from the University of Delaware.
Mr. Kahlbaugh was selected to serve on our board of
directors in light of his significant knowledge of our products
and markets and his ability to provide valuable insight to our
board of directors as to
day-to-day
business issues we face in his role as our Chief Executive
Officer.
Walter P. Mascherin has been our Senior Executive
Vice President and Chief Financial Officer since October 2010.
Prior to joining us, Mr. Mascherin worked at Volvo
Financial Services for 14 years where he served as Senior Vice
President of Organization Development and Workouts from 2009 to
2010, Senior Vice President and Chief Credit Officer from 2006
to 2009, Vice President of Corporate Development (US) in 2006
and Vice President and Chief Operating Officer from 2004 to
2005. Mr. Mascherin holds an M.B.A. from Heriot Watt
University, Edinburgh, Scotland and a Business Administration
Diploma from Ryerson University, Ontario, Canada.
137
Michael Vrban has been our Executive Vice
President since July 2008, Chief Accounting Officer since
January 2010 and our Treasurer since July 2007. Mr. Vrban
was our Acting Chief Financial Officer from April 2010 to
September 2010. Mr. Vrban served as our Chief Financial
Officer from July 2007 to December 2009 and as Senior Vice
President from July 2007 to July 2008. Prior to joining us,
Mr. Vrban served as Senior Vice President and Chief
Financial Officer of Commerce West Insurance Company from
November 1999 to February 2007 where he was responsible for the
management of the finances and operations. Mr. Vrban holds
a B.S. from Baldwin-Wallace College.
Daniel A. Reppert has been our Executive Vice
President and President of Bliss & Glennon (our
Wholesale Distribution business) since May 2009.
Mr. Reppert has been an Executive Vice President since
January 2008. He served as our Chief Operating Officer from
September 2007 to April 2010 and our Chief Actuary from July
2006 to September 2007. Prior to joining us, Mr. Reppert
served as Senior Risk Officer of Insurance at Wachovia
Corporation from July 2004 to June 2006. He has more than
25 years of experience in insurance and financial services.
He is a Fellow of the Casualty Actuarial Society and a Member of
the American Academy of Actuaries. Mr. Reppert holds a B.S.
from Lebanon Valley College.
W. Dale Bullard has been our Executive Vice
President and Chief Marketing Officer since May 2006.
Mr. Bullard joined us in 1994 as our Senior Vice President
and has over 27 years of experience in the insurance
industry. Prior to joining us, Mr. Bullard held various
positions at Independent Insurance Group from 1979 to 1994, most
recently as a Senior Vice President in 1988. Mr. Bullard
holds a B.S. from the University of South Carolina.
Mr. Bullard currently serves on the board of directors of
the Consumer Credit Insurance Association and previously served
as its president.
Alan E. Kaliski has been our Senior Vice President
and Chief Risk Officer since May 2010. He also serves as the
appointed actuary for our statutory property and casualty
insurance companies. Prior to joining us, Mr. Kaliski spent
32 years with Royal Insurance Group where he held various
executive positions, including most recently as its Chief
Actuary. Mr. Kaliski holds an M.A. from the University of
Georgia and a B.S. from the Virginia Military Institute. In
addition, he is a Fellow of the Casualty Actuarial Society and a
Member of the American Academy of Actuaries.
Joseph R. McCaw has been our Executive Vice
President and President of Life of the South since November
2008. Mr. McCaw joined us in 2003 as our First Vice
President of Finance/Retail. Prior to joining us, Mr. McCaw
served as President of Financial Institution Group Senior Vice
President and Chief Marketing Officer for Protective Life
Corporation. Mr. McCaw holds an M.B.A. from Lindenwood
University and a B.A. from Westminster College.
Robert S. Fullington has been our Executive Vice
President since May 2006 and President of Consecta since 2002.
Prior to joining us in 1996 as Vice President and Chief
Information Officer, he was a principal in the IBM Management
Consulting Group and initially served as an outsourcing manager
for IBM. Mr. Fullington holds an M.B.A. and a B.S. from the
University of Florida.
Paul S. Romano has been our Executive Vice
President and Chief Administrative Officer since
October 2010 and was our Senior Vice President, Corporate
Development from February 2009 to September 2010. Prior to
joining us permanently, Mr. Romano was an independent
consultant for us beginning in 2007. Mr. Romano was a
business consultant with his own firm after selling Cross Keys
Capital, LLC, a construction finance company that he founded
with four other partners in 1995. He practiced real estate,
banking and finance law with Buchanan Ingersoll, PC in
Harrisburg, Pennsylvania and he clerked for the Honorable
Richard B. Wickersham of the Superior Court of Pennsylvania. In
addition, he is a member of the Pennsylvania Golf Association
Executive Committee and is a member of the Pennsylvania Bar
Association. Mr. Romano holds a J.D. from Pennsylvania
State University Dickinson School of Law and a B.S. from the
University of Pennsylvania Wharton School of Business.
138
John G. Short joined us in September 2007 as our
Vice President, General Counsel and Corporate Secretary and
became our Senior Vice President in May 2010. Prior to joining
us, Mr. Short served as Vice President of State External
Affairs at Embarq Corporation from May 2006 to February 2007,
and Sprint Corporation from June 1995 to May 2006.
Mr. Short holds a J.D. from the College of William and Mary
and a B.S. from the University of Richmond.
John R. Carroll has served on our board of
directors since June 2007. Mr. Carroll currently serves as
a Managing Director of Summit Partners, which he joined in 1998.
Prior to joining Summit Partners, Mr. Carroll worked as a
consultant at Bain & Company from June 1997 to
September 1997 and worked as a commercial banker at BayBanks,
Inc. from March 1991 to March 1993. Mr. Carroll currently
serves on the board of directors of FleetCor Technologies, Inc.
and numerous other private companies. Mr. Carroll holds an
M.B.A. from Northwestern University and a B.A. from Dartmouth
College. Mr. Carroll was selected to serve on our board of
directors in light of his experiences in banking, investment
banking and private equity financing, and his experiences as a
director with private companies.
J.J. Kardwell has served on our board of directors
since June 2007. Mr. Kardwell joined Summit Partners in
2003 as a Vice President and currently serves as a Principal.
Prior to joining Summit Partners, Mr. Kardwell worked as a
Director at Windhorst New Technologies from May 2000 to August
2001 and in various finance roles at The Walt Disney Company
from August 1998 to May 2000. Mr. Kardwell holds an M.B.A.
from Harvard Business School and an A.B. from Harvard
University. Mr. Kardwell serves on the board of directors
of numerous private companies. Mr. Kardwell was selected to
serve on our board of directors in light of his experiences with
private equity financing, his experiences as a director with
private companies and his management and leadership experience.
Alfred R. Berkeley, III will become a member
of our board of directors upon the consummation of this
offering. Mr. Berkeley is currently the Chairman of
Pipeline Financial Group, Inc., the parent of Pipeline Trading
Systems, L.L.C., a block trading brokerage service, where he
also served as Chief Executive Officer from December 2003 to
March 2010. He also serves as a trustee of Johns Hopkins
University and a as a member of the Johns Hopkins University
Applied Physics Laboratory, LLC. He formerly served as Vice
Chairman of the Nomination Evaluation Committee for the National
Medal of Technology and Innovation, which makes candidate
recommendations to the Secretary of Commerce. Mr. Berkeley
also serves as Vice Chairman of the National Infrastructure
Advisory Council for the President of the United States and
served as the Chairman of XBRL US, the non-profit organization
established to set data standards for the modernization of the
Securities and Exchange Commissions EDGAR reporting
system, from 2007 until January 2010. Prior to that, he
served as the Vice Chairman of NASDAQ from July 2000 to July
2003 and President of NASDAQ from 1996 until 2000. From 1972 to
1996, Mr. Berkeley served in a number of capacities at
Alex. Brown & Sons Incorporated, which was acquired by
Bankers Trust New York Corporation and later by Deutsche
Bank AG. Most recently, he was Managing Director in the
corporate finance department where he financed computer software
and electronic commerce companies. He joined Alex.
Brown & Sons Incorporated as a Research Analyst in
1972 and became a general partner in 1983. From 1985 to 1987, he
served as Head of Information Services for the firm. From 1988
to 1990, Mr. Berkeley took a leave of absence from Alex.
Brown & Sons Incorporated to serve as President and
Chief Executive Officer of Rabbit Software Inc., a public
telecommunications software company. He served as a captain in
the United States Air Force and a major in the United States
Air Force Reserve. Mr. Berkeley has served as a
director of ACI Worldwide, Inc. since 2007. He also currently
serves as a director of EDGAR Online, Inc., RealPage Inc. and
XBRL US. Mr. Berkeley was previously a director of
Kintera, Inc., a provider of software for non-profit
organizations, from September 2003 until it was acquired by
Blackbaud, Inc.; Webex Communications Inc., a provider of
meeting and web event software, until it was acquired by Cisco
Systems, Inc. and National Research Exchange Inc., a registered
broker dealer, until it ceased operations. Mr. Berkeley
holds an M.B.A. from The Wharton School at the University of
Pennsylvania and a B.A. from the University of Virginia.
Mr. Berkeley was selected to serve on our board of
directors
139
in light of his experiences as a director of a number of public
companies, his capital markets experience and his management and
leadership experiences.
Francis M. Colalucci will become a member of our
board of directors upon the consummation of this offering.
Mr. Colalucci was the Senior Vice President, Chief
Financial Officer and Treasurer of Tower Group, Inc., from
February 2002 until his retirement in March 2010. Prior to that,
Mr. Colalucci was employed by the Empire Insurance Company
from 1996 until 2001, a property and casualty insurance company,
and ultimately served as Executive Vice President, Chief
Financial Officer and Treasurer. Mr. Colalucci served as a
director of Tower Group, Inc. from March 2002 until he retired
from the board in May 2010, and was previously a director of
Empire Insurance Company from 1996 until 2001.
Mr. Colalucci holds a B.B.A. from St. Johns
University and is a New York State licensed Certified Public
Accountant. Mr. Colalucci was selected to serve on our
board of directors in light of his 40 years of relevant
accounting and financial experience and more than 30 years
of insurance industry-related experience.
Frank P. Filipps will become a member of our board
of directors upon the consummation of this offering.
Mr. Filipps served as the Chairman and Chief Executive
Officer of Clayton Holdings, Inc., a mortgage services company,
from April 2005 to July 2008. Prior to that, Mr. Filipps
served as the Chairman and Chief Executive Officer of Radian
Group, Inc. and its principal subsidiary, Radian Guaranty, Inc.
from June 1999 to April 2005. Mr. Filipps has been a
director and a member of the compensation committee of the Board
of Directors of Primus Guaranty, Ltd., a holding company
primarily engaged in selling credit protection against
investment grade credit obligations of corporate and sovereign
entities, since September 2004. He has also been a director of
Impac Mortgage Holdings, Inc. since August 1995.
Mr. Filipps holds a B.A. from Rutgers University and an
M.A. from New York University. Mr. Filipps was selected to
serve on our board of directors in light of his diversified
background of managing companies and his past senior executive
positions and operating experience.
Ted W. Rollins will become a member of our board
of directors upon the consummation of this offering.
Mr. Rollins currently serves as the co-chairman of the
board of directors and Chief Executive Officer of Campus Crest
Communities, Inc., a company he co-founded in 2004. Prior to
that, Mr. Rollins co-founded and managed several companies
that developed and operated housing properties and directed
several private real estate focused investment funds. From 1998
through 2002, he served as president of St. James Capital, an
investment company focused on research-based, structural land
investment and niche income property opportunities.
Mr. Rollins holds a B.S.B.A. from The Citadel and an M.B.A.
from Duke University. Mr. Rollins was selected to serve on
our board of directors in light of his management and leadership
experiences, including his senior executive positions.
Board of
Directors
Our business and affairs are managed under the direction of our
board of directors. Our bylaws will provide that our board of
directors will consist of between three and 15 directors.
Upon the consummation of this offering, our board of directors
will consist of seven directors.
Our executive officers and key employees serve at the discretion
of our board of directors and will serve until his or her
successor is duly elected and qualified.
Our board of directors has affirmatively determined
Messrs. Berkeley, Colalucci, Filipps and Rollins are
independent directors under the applicable rules of the New York
Stock Exchange and as such term is defined in
Rule 10A-3(b)(1)
under the Exchange Act.
140
Board
Committees
Our board of directors has the authority to appoint committees
to perform certain management and administration functions. Upon
the consummation of this offering, our board of directors will
have four committees: the audit committee, the compensation
committee, the nominating and corporate governance committee and
the executive committee.
Audit
Committee
The primary purpose of the audit committee is to assist the
boards oversight of:
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the integrity of our financial statements;
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our systems of control over financial reporting and disclosure
controls and procedures;
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our compliance with legal and regulatory requirements;
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our independent auditors qualifications and independence;
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the performance of our independent auditors and our internal
audit function; and
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the preparation of the report required to be prepared by the
committee pursuant to Securities and Exchange Commission rules.
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Messrs. Carroll and Kardwell currently serve on our audit
committee. After this offering, Messrs. Colalucci, Filipps
and Rollins will serve on the audit committee.
Mr. Colalucci will serve as chairman of the audit committee
and also qualifies as an audit committee financial
expert as such term has been defined by the Securities and
Exchange Commission in Item 407(d)(5) of
Regulation S-K.
Our board of directors has affirmatively determined that all
members of the audit committee meet the definition of
independent directors for the purposes of serving on
the audit committee under the Securities and Exchange Commission
and the New York Stock Exchange rules.
Compensation
Committee
The primary purpose of our compensation committee is to:
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recommend to our board of directors for consideration, the
compensation and benefits of our executive officers and key
employees;
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monitor and review our compensation and benefit plans;
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administer our stock and other incentive compensation plans and
programs and prepare recommendations and periodic reports to the
board of directors concerning such matters;
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prepare the compensation committee report required by Securities
and Exchange Commission rules to be included in our annual
report;
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prepare recommendations and periodic reports to the board of
directors as appropriate; and
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handle such other matters that are specifically delegated to the
compensation committee by our board of directors from time to
time.
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141
Messrs. Carroll and Kardwell currently serve on our compensation
committee. After this offering, Messrs. Berkeley, Colalucci
and Filipps will serve on the compensation committee, and
Mr. Berkeley will serve as the chairman. Each member of the
compensation committee is independent within the meaning of the
New York Stock Exchange rules and the relevant federal
securities laws and regulations.
Corporate
Governance Committee
The primary purpose of the corporate governance committee is to:
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identify and recommend to the board individuals qualified to
serve as directors of our company and on committees of the board;
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advise the board with respect to the board composition,
procedures and committees;
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develop and recommend to the board a set of corporate governance
guidelines and principles applicable to us;
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review and approve all related person transactions for potential
conflict of interest situations on an ongoing basis; and
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review the overall corporate governance of our company and
recommend improvements when necessary.
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After this offering, Messrs. Filipps, Berkeley and Rollins
will serve on the corporate governance committee, and
Mr. Filipps will serve as the chairman. Each member of the
corporate governance committee is independent within the meaning
of the New York Stock Exchange rules and the relevant federal
securities laws and regulations.
Executive
Committee
The primary purpose of the executive committee is to handle such
matters that are specifically delegated to the executive
committee by our board of directors from time to time.
After this offering, Messrs. Kahlbaugh, Berkeley and
Kardwell will serve on the executive committee, and
Mr. Kahlbaugh will serve as the chairman.
Compensation
Committee Interlocks and Insider Participation
Upon the completion of this offering, none of our executive
officers will serve on the compensation committee or board of
directors of any other company of which any of the members of
our compensation committee is an executive officer.
During the year ended December 31, 2009, our compensation
committee consisted of John R. Carroll, J.J. Kardwell and Robert
M. Clements. Mr. Clements resigned from our board of
directors in February 2010.
Code of
Business Conduct and Ethics
We have adopted a code of business conduct and ethics that
applies to all of our employees, officers and directors,
including those officers responsible for financial reporting.
These standards are designed to deter wrongdoing and to promote
honest and ethical conduct. The code of business conduct and
ethics will be available on our internet site at
www.fortegra.com. Any amendments to the code, or any waivers of
its requirements, will be disclosed on our website.
142
EXECUTIVE
AND DIRECTOR COMPENSATION
Compensation
Discussion and Analysis
Named
Executive Officers
For 2009, our named executive officers were:
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Richard S. Kahlbaugh, President and Chief Executive Officer;
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Michael Vrban, Executive Vice President and Chief Accounting
Officer and our Chief Financial Officer in 2009;
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W. Dale Bullard, Executive Vice President and Chief Marketing
Officer;
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Robert S. Fullington, Executive Vice President and President,
Consecta; and
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Daniel A. Reppert, Executive Vice President and President,
Bliss & Glennon.
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Evolution
of Our Compensation Approach
Our compensation approach is necessarily tied to our stage of
development. Historically, our board of directors approved the
compensation of our named executive officers in part in reliance
on the recommendations of our Chief Executive Officer and the
compensation committee of our board of directors, which included
the input of our largest equity holders. Our other named
executive officers compensation was determined in the sole
discretion of our board of directors in reliance on
recommendations made by our Chief Executive Officer and our
compensation committee. Bonus payments and grants of options and
restricted stock were determined in the sole discretion of our
board of directors.
In connection with the Summit Partners Transactions,
Messrs. Kahlbaugh, Bullard and Fullington entered into
employment agreements with us, and in 2009, Messrs. Vrban
and Reppert entered into employment agreements with us. Each
employment agreement provides for a base salary that is reviewed
annually. Salary adjustments, in the case of Mr. Kahlbaugh,
may be made in the sole discretion of our compensation
committee, and, in the case of Messrs. Vrban, Bullard,
Fullington and Reppert, may be made in the sole discretion of
our compensation committee upon the recommendations from our
Chief Executive Officer. Each employment agreement also provides
for bonus compensation and eligibility to receive stock options
at the discretion of our board of directors.
Our compensation committee reviews and approves the compensation
of our named executive officers and oversees and administers our
executive compensation programs and initiatives. We expect that
the specific direction, emphasis and components of our executive
compensation program will continue to evolve.
Principles
of Our Executive Compensation Program
We have sought to create an executive compensation program that
balances short-term versus long-term payments and awards, cash
payments versus equity awards and fixed versus contingent
payments and awards in ways that we believe are most appropriate
to motivate our named executive officers. Our executive
compensation program is designed to:
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attract and retain talented and experienced executives in the
competitive insurance and other financial services industries;
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143
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motivate and reward executives whose knowledge, skills and
performance are critical to our success;
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align the interests of our named executive officers and
stockholders by motivating named executive officers to increase
stockholder value and rewarding named executive officers when
stockholder value increases;
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ensure fairness among the executive management team by
recognizing the contributions each executive makes to our
success;
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foster a shared commitment among executives by aligning their
individual goals with the goals of the executive management team
and our company; and
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compensate our executives in a manner that incentivizes them to
manage our business to meet our long-range objectives.
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The compensation committee meets outside the presence of all of
our named executive officers to consider and determine the
appropriate level of compensation for our Chief Executive
Officer. For all other named executive officers, our Chief
Executive Officer makes recommendations to the compensation
committee and meets with the chairman of the compensation
committee to discuss those recommendations. The compensation
committee then determines the appropriate level of compensation
for those named executive officers. Going forward, our Chief
Executive Officer will review annually each other named
executive officers performance with the compensation
committee and recommend for each the appropriate base salary,
cash performance awards and grants of long-term equity incentive
awards. Based on these recommendations from our Chief Executive
Officer and in consideration of the objectives described above
and the principles described below, the compensation committee
will approve the annual compensation packages of our named
executive officers other than our Chief Executive Officer. The
compensation committee also will annually review our Chief
Executive Officers performance and determine his base
salary, cash performance awards and grants of long-term equity
incentive awards based on its assessment of his performance with
input from any consultants engaged by the compensation committee.
In determining the compensation of our named executive officers,
we are guided by the following key principles:
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Competition. Compensation should
reflect the competitive marketplace, so we can retain, attract
and motivate talented executives.
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Accountability for Business
Performance. Compensation should be tied to
our financial performance to hold executives accountable for
their contributions to our performance as a whole through the
performance of aspects of our business for which they are
responsible.
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Accountability for Individual
Performance. Compensation should be tied to
the individuals performance to encourage and reflect
individual contributions to our performance. We consider
individual performance as well as performance of the businesses
and responsibility areas that an individual oversees, and we
weigh these factors as we consider appropriate in assessing a
particular individuals performance.
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Alignment with Stockholder
Interests. Compensation should be tied to our
financial performance through equity awards to align the
interests of our named executive officers and key employees with
those of our stockholders.
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144
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Fair and Equitable Compensation. The
total compensation program should be fair and equitable to both
our named executive officers and our stockholders and should be
fair relative to the compensation paid to other professionals in
our organization.
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Components
of Our Executive Compensation Program
Our executive compensation program currently consists of:
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base salary;
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cash incentive awards linked to corporate performance as set
forth by the compensation committee or board of directors;
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deferred compensation provided to certain executives;
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periodic grants of stock options under our equity incentive
plans;
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other executive benefits and perquisites; and
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employment agreements, which contain termination and change of
control benefits.
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We combine these elements in order to formulate compensation
packages that provide competitive pay, reward the achievement of
financial, operational and strategic objectives and align the
interests of our named executive officers and other senior
personnel with those of our equityholders.
Base
Salary
The primary component of compensation of our executives has
historically been base salary. We believe that the base salary
element is required in order to provide our named executive
officers with a stable income stream that is commensurate with
their responsibilities and competitive market conditions. The
base salary of our named executive officers is set by their
respective employment agreement and is reviewed and adjusted
accordingly on an annual basis by our compensation committee.
Our compensation committee increases the base salaries paid to
our named executive officers, based on:
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our performance relative to the annual financial objectives set
for us;
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our expectations as to the performance and contribution of such
named executive officer and our judgment as to his potential
future value to us;
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our knowledge of the competitive factors within the industries
in which we operate;
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the job responsibilities of the named executive officer; and
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the background and circumstances of the named executive
officers, including experience and skill.
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Historically, we have not applied specific formulas to set the
base salary of our Chief Executive Officer, nor have we sought
to benchmark his base salary against similarly situated
companies. In 2009, our Chief Executive Officer reviewed
publicly available information of companies operating in similar
industries and geographies before making his recommendations for
base salaries for the other named executive officers to the
compensation committee.
145
As of January 1, 2009, Mr. Kahlbaughs base
salary was $350,000, which was increased on July 1, 2009 to
$380,000 in recognition of his responsibilities as our President
and Chief Executive Officer. For the fiscal year 2009,
Mr. Vrbans base salary was $215,000;
Messrs. Bullards and Fullingtons base salaries
were $255,000; and Mr. Repperts base salary was
$250,000.
The base salaries paid to our named executive officers in 2009
are set forth below in the Summary Compensation Table.
Cash
Incentive Awards
We believe that cash incentive awards focus our named executive
officers efforts and reward named executive officers for
annual results of operations that help create value for our
stockholders. For 2009, our Chief Executive Officers cash
incentive award was set by our board of directors and tied to
the adjusted EBITDA target. For our other named executive
officers, cash incentive awards in 2009 were tied to the
achievement of adjusted EBITDA targets and such named executive
officers achievement of individual annual performance
objectives recommended by our Chief Executive Officer and
approved by our board of directors.
The financial performance criteria established for Richard S.
Kahlbaugh in 2009 were as follows:
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Cash Incentive Award
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Available as Percent of
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Percent of Target Adjusted EBITDA
|
|
Base Salary
|
|
Less than 100%
|
|
0%
|
100%
|
|
50%
|
At or above 150%
|
|
100%
|
In 2009, Messrs. Vrban, Bullard, Fullington and Reppert
were eligible to receive a cash incentive award only if we met
our overall adjusted EBITDA target. If we did not meet our
adjusted EBITDA target, each executive would receive no cash
incentive award.
Once our adjusted EBITDA target was met, Messrs. Vrban and
Reppert were eligible to earn cash incentive awards of up to
36.5% of their respective base salaries and Messrs. Bullard
and Fullington were eligible to earn cash incentive awards of up
to 32.5% of their respective base salaries. For 2009, the cash
incentive awards for Messrs. Vrban, Bullard, Fullington and
Reppert were allocated, as a percentage of the target cash
incentive award, between (i) achievement of our target
adjusted EBITDA and (ii) individual annual performance
objectives, as follows:
|
|
|
|
|
|
|
|
|
Individual Annual
|
|
|
|
|
Performance
|
Named Executive Officer
|
|
Target Adjusted EBITDA
|
|
Objectives
|
|
Michael Vrban
|
|
45.0%
|
|
55.0%
|
W. Dale Bullard
|
|
40.0%
|
|
60.0%
|
Robert Fullington
|
|
40.0%
|
|
60.0%
|
Daniel A. Reppert
|
|
37.5%
|
|
62.5%
|
Based on our target adjusted EBITDA and the completion of
individual annual performance objectives, our Chief Executive
Officer recommended to the compensation committee the cash
incentive award to be paid to each named executive officer,
other than our Chief Executive Officer. The compensation
committee reviewed the personal performance objectives achieved
and missed by each named executive officer, other than our Chief
Executive Officer, and then approved the final cash incentive
award.
146
The following briefly outlines the individual annual performance
objectives for each of the named executive officers, other than
our Chief Executive Officer, with the percentage of target cash
incentive award the individual annual performance objective
accounts for in the parenthetical, for 2009:
|
|
|
|
|
Michael Vrban. Mr. Vrbans
individual annual performance objectives included:
(i) completion of federal and state income tax returns by a
specified date (10.0%); (ii) increasing investment income
by 15% and reducing bank costs by 10% over 2008 (10.0%);
(iii) decreasing the close time of our financial records
that comply with GAAP, including delivery of completed
reconciliations within a specified period (5.0%);
(iv) expanding our recovery business by pursuing
infrastructure solutions (5.0%); (v) implementing an
internet based expenses program (5.0%); (vi) identifying
strategies to increase operating margin, including reducing
specified expenses by 25% over 2008, and reducing manual or
paper checks produced by accounts payable by 70% (5.0%);
(vii) programing and implementing retro automation by a
specified date (5.0%); (viii) closing and liquidating CRC
Reassurance by a specified date (5.0%); and (ix) paying
down our subordinated debentures by $10 million by a
specified date (5.0%). Mr. Vrban met each of his personal
objectives enumerated above in clauses (i), (iv), (vi),
(viii) and (ix) and did not meet the other objectives.
The compensation committee reduced Mr. Vrbans award
by approximately $11,800 based on the compensation
committees view of his general overall performance during
the year.
|
|
|
|
W. Dale
Bullard. Mr. Bullards individual
annual performance objectives included: (i) achievement of
a target EBITDA of $1.14 million, $1.19 million and
$0.27 million in our collateral, auto and specialty
business units (25.0%); (ii) adding ten new accounts by
year end in our collateral business unit (10.0%);
(iii) adding ten new accounts in our auto business unit
representing $2.0 million in annualized premium volume
(10.0%); (iv) adding five new accounts in our specialty
business unit representing annualized production of
$7.35 million (5.0%); (v) redomestication of Lyndon
Southern Insurance Company (5.0%); and (vi) achievement of
net premiums written of $20.0 million annualized (25.0%).
Mr. Bullard met his personal objective enumerated above in
clause (v) above and received the full amount associated
with meeting such objective. During the year,
Mr. Bullards responsibilities were adjusted, which
resulted in Mr. Bullard not achieving a number of his
personal objectives. Based on Mr. Bullards overall
contributions to our business, including his role in identifying
two acquisition candidates, the percentage of his target
adjusted EBITDA award increased from 20% to 40% of his total
eligible cash incentive award. This change to
Mr. Bullards target adjusted EBITDA award is
reflected in the table above under the heading Target
Adjusted EBITDA.
|
|
|
|
Robert S.
Fullington. Mr. Fullingtons
individual annual performance objectives included:
(i) achievement of $14 million in net revenue and
$6.4 million in net income for our Consecta brand (36.0%);
(ii) developing and executing a diversification of
Consectas revenue to minimize the impact of NUFIC (4.2%);
(iii) adding ten new accounts that represent
$2.0 million in new revenue (4.2%); (iv) maintaining
an operating margin of 30%; (4.2%) (v) reconciling cash and
outstanding balances from NUFIC every thirty days without
falling behind in any quarter (4.2%); (vi) launching
marketing websites by a specified date (3.6%); and
(vii) expanding our claim service programs to two new
carriers or MGAs (3.6%). Mr. Fullington met his personal
objectives enumerated in clauses (i), (ii), (iii), (iv) and
(v) above. The compensation committee reduced
Mr. Fullingtons award by approximately $5,800 based
on the compensation committees view of his general overall
performance during the year.
|
|
|
|
Daniel A.
Reppert. Mr. Repperts individual
annual performance objectives included: (i) achievement of
a target EBITDA of $3.55 million in our bank units (5.0%);
|
147
|
|
|
|
|
(ii) achievement of operational efficiency objectives,
including implementing claims auto adjudication, tripling the
number of premium remittances paid by electronic means,
increasing the usage of our AIR technology, redomesticating
Lyndon Southern Insurance Company, reducing licensing costs by
10%, eliminating 100% of inactive agents in all accounts and
reducing storage expense by 10% (2.5%); (iii) completion of
all agreed IT projects on time (2.5%); (iv) increasing
productivity by 10% in our shared services business unit (2.5%);
and (v) achievement of a target EBITDA of $7.1 million
in Bliss & Glennon on an annualized basis (50.0%).
Mr. Reppert met his personal objectives enumerated above in
clauses (ii) and (iii) above and received the full
amounts associated with meeting such objectives.
|
In the fiscal year ended December 31, 2009, the target
adjusted EBITDA was $34.5 million. Our actual adjusted
EBITDA for the year was $34.6 million. Based on the
achievement of our target adjusted EBITDA and the completion of
individual performance objectives, the compensation committee
approved, upon the recommendation of the Chief Executive
Officer, payouts at 60.0%, 45.0%, 81.0% and 42.5% of target cash
incentive awards for Messrs. Vrban, Bullard, Fullington and
Reppert, respectively.
Target and actual cash incentive awards for each named executive
officer, other than our Chief Executive Officer, for the fiscal
year ended December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Target Cash
|
|
Actual Cash
|
Named Executive Officer
|
|
Incentive Award
|
|
Incentive Award
|
|
Michael Vrban
|
|
$
|
78,475
|
|
|
$
|
47,085
|
|
W. Dale Bullard
|
|
$
|
82,875
|
|
|
$
|
37,294
|
|
Robert Fullington
|
|
$
|
82,875
|
|
|
$
|
67,129
|
|
Daniel A. Reppert
|
|
$
|
91,250
|
|
|
$
|
38,781
|
|
Our board of directors may from time to time exercise its
discretion and award additional annual cash performance bonuses.
Our board of directors exercised this discretion in 2009 and
granted cash bonuses to each of our named executive officers in
2009 above the amounts earned pursuant to the achievement of
individual annual performance objectives based on our adjusted
EBITDA performance for the fiscal year ended December 31,
2009 and the contribution of each named executive officer, other
than our Chief Executive Officer, towards that achievement.
Additionally, our board of directors granted additional cash
bonuses to Messrs. Kahlbaugh and Vrban in the amount of
$25,000 and $20,000, respectively, for completing a significant
financial transaction. Furthermore, each named executive officer
received a holiday bonus of $1,346.
The Summary Compensation Table includes the cash bonus amounts
earned for each named executive officer in 2009 pursuant to
their financial performance criteria and performance objectives
in the column entitled Non-Equity Incentive Plan
Compensation and the discretionary bonus awards granted by
our board of directors in the column entitled Bonus.
Deferred
Compensation
Messrs. Kahlbaugh, Bullard and Fullington are also eligible
to receive a deferred bonus award under their respective
employment agreements that is paid in accordance with their
respective deferred compensation agreements. The deferred bonus
award is granted on or before May 1 of each year for which we
achieve our annual EBITDA target for the preceding calendar
year. In 2009, each of Messrs. Bullard and Fullington was
entitled to a deferred bonus award of $15,000, an amount that
could be increased by $1,000 for every 1% that our actual EBITDA
exceeds the annual EBITDA target, up to a maximum of $30,000.
Mr. Kahlbaugh was entitled to a deferred bonus award of
between $20,000 and $40,000, as determined by the compensation
committee.
148
The deferred bonus awarded to each of Messrs. Kahlbaugh,
Bullard and Fullington is paid to a trust account that was set
up pursuant to their respective deferred compensation agreements
and deferred compensation trust agreements. See
Nonqualified Deferred Compensation. The
deferred compensation agreements provide for certain payments
from the trust upon the occurrence of retirement, death or
termination upon a change of control. See
Potential Payments upon Termination or Change
of Control. As of 2010, Mr. Kahlbaugh no longer
receives this additional bonus as deferred compensation, and any
future awards will be paid directly to him.
Long-Term
Equity-Based Compensation
We believe that our long-term performance is fostered by a
compensation methodology that compensates named executive
officers through the use of equity-based awards, such as stock
options, restricted stock awards and other rights to receive
compensation based on the value of our equity. We also believe
that when our named executive officers possess an ownership
interest in us, they have a continuing stake in our long-term
success.
Certain of our named executive officers currently own
outstanding options that were issued under our Key Employee
Stock Option Plan (1995) and our 2005 Equity Incentive
Plan, in addition to options granted outside of such plans. All
outstanding unvested options granted under the 2005 Equity
Incentive Plan, as well as the options granted outside of the
plans, will be fully vested on July 31, 2011. See
Outstanding Equity Awards at Fiscal
Year-End. Additionally, unvested options granted under
this plan become fully vested and exercisable upon the
occurrence of certain change of control events. See
Potential Payments upon Termination or Change
of Control. All options granted under the Key Employee
Stock Option Plan (1995) to our named executive officers
were fully vested upon the consummation of the Summit Partners
Transactions. We did not grant any stock-based awards to our
named executive officers in 2009 and no future options will be
granted under the Key Employee Stock Option Plan (1995) and
the 2005 Equity Incentive Plan. We intend to adopt an equity
plan in connection with this offering. See
2010 Omnibus Incentive Plan. All of our
outstanding options are subject to certain forfeiture rights
contained within each individual stock option agreement.
Generally, the stock option agreements provide for termination
of the option upon the earliest of certain events to occur
including: (i) the term of the option; (ii) one or two
years following the executives termination due to death or
disability; (iii) one year following the executives
termination without cause or for good reason; (iv) three
months following the executives retirement; or
(v) the date the executive voluntarily terminates his
employment or is terminated with cause.
Other
Executive Benefits and Perquisites
We provide various benefits and perquisites to our named
executive officers. We offer all full-time employees the
opportunity to participate in a 401(k) plan. The general purpose
of our 401(k) plan is to provide employees with an incentive to
make regular savings in order to provide additional financial
security during retirement. Our 401(k) plan provides that we
match an employees contribution, up to an employee
contribution of 5% of salary. Our named executive officers
participate in this 401(k) plan on the same basis as all of our
other participating employees. We provide to all eligible
employees, including our named executive officers, insurance
coverage, including, medical, dental and group life insurance
plans and programs. We also provide our named executive officers
with an executive medical reimbursement plan as an additional
benefit. Each named executive officer also receives an
automobile allowance under his respective employment agreement,
which is consistent with industry practice.
Employment
Agreements and Termination and Change of Control
Benefits
We have employment agreements with each of our named executive
officers. We entered into employment agreements with
Messrs. Kahlbaugh, Bullard and Fullington in connection
with the Summit
149
Partners Transactions. We also entered into employment
agreements with Messrs. Vrban and Reppert on
January 1, 2009.
The primary purpose of the agreements is to establish the terms
of employment and to protect both us and the executive. We are
provided with reasonable protections that the executive will
perform at acceptable levels and will not compete with or
recruit employees from us during or after the termination of
employment. The executive is provided financial protection in
the event of certain reasons for termination of employment in
recognition of the executives professional career and a
forgoing of present and future career options. The employment
agreements provide for severance payments in the event of
certain categories of termination. See
Potential Payments upon Termination or Change
of Control and Employment
Agreements.
Risk
Review
As part of its oversight of our executive compensation program,
our compensation committee considers the impact of the program
and the incentives created by the compensation awards that the
program administers on our risk profile. In addition, we review
all of our compensation policies and procedures, including the
incentives that they create and factors that may reduce the
likelihood of excessive risk taking to determine whether they
present a significant risk to us. Based on this review, we have
concluded that our compensation policies and procedures are not
reasonably likely to have a material adverse effect on us.
Summary
Compensation Table
The following table sets forth certain information with respect
to compensation for the year ended December 31, 2009 earned
by or paid to our named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Compensation
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)(1)
|
|
($)(2)
|
|
($)(3)
|
|
($)(4)
|
|
($)
|
|
Richard S. Kahlbaugh
|
|
|
2009
|
|
|
$
|
379,615
|
|
|
$
|
76,346
|
|
|
$
|
230,000
|
|
|
$
|
45,458
|
|
|
$
|
731,419
|
|
Chairman, President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Vrban
|
|
|
2009
|
|
|
$
|
223,269
|
|
|
$
|
24,261
|
|
|
$
|
47,085
|
|
|
$
|
33,882
|
|
|
$
|
328,497
|
|
Executive Vice President, Chief Accounting Officer and
Treasurer(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W. Dale Bullard
|
|
|
2009
|
|
|
$
|
264,807
|
|
|
$
|
1,552
|
|
|
$
|
52,294
|
|
|
$
|
42,809
|
|
|
$
|
361,462
|
|
Executive Vice President and Chief Marketing Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Fullington
|
|
|
2009
|
|
|
$
|
264,807
|
|
|
$
|
4,217
|
|
|
$
|
82,129
|
|
|
$
|
36,007
|
|
|
$
|
387,160
|
|
Executive Vice President and President, Consecta
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel A. Reppert
|
|
|
2009
|
|
|
$
|
259,615
|
|
|
$
|
12,565
|
|
|
$
|
38,781
|
|
|
$
|
37,807
|
|
|
$
|
348,768
|
|
Executive Vice President and President, Bliss &
Glennon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The amounts reported in this column reflect the base salaries
paid in 2009 to each named executive officer. Forecasted annual
salaries are generally based on 26 bi-weekly pay periods. In the
year ended December 31, 2009, our named executive
officers were paid their normal bi-weekly pay for 27 pay
periods.
|
|
(2)
|
Bonus represents discretionary cash amounts awarded
by our board of directors to named executive officers.
Messrs. Kahlbaugh, Vrban, Bullard, Fullington and Reppert
earned $50,000, $2,915, $206, $2,871 and $11,219, respectively,
as a discretionary bonus above the amounts they earned under our
non-equity incentive plan compensation. See
|
150
|
|
|
Compensation
Discussion and Analysis Components of our Executive
Compensation Program Cash Incentive Awards.
Messrs. Kahlbaugh and Vrban earned a one-time 2009 payment
of $25,000 and $20,000, respectively, in connection with a
significant financial transaction. Each of
Messrs. Kahlbaugh, Vrban, Bullard, Fullington and Reppert
earned additional bonus compensation of $1,346 for the holidays.
Other bonus amounts paid in 2009 were made under each
executives employment agreement and are included in the
column Non-Equity Incentive Plan Compensation.
|
|
|
(3)
|
Reflects annual performance bonuses earned by the named
executive officers for the year ended December 31, 2009
based upon the named executive officers respective base
salaries as of December 31, 2009. For
Messrs. Kahlbaugh, Bullard and Fullington, such amount
includes $40,000, $15,000 and $15,000, respectively, earned in
2009, pursuant to the deferred compensation arrangements. Such
amounts are payable in the following year once the respective
years financial statements have been audited. See
Compensation Discussion and
Analysis Components of our Executive Compensation
Program Deferred Compensation.
Mr. Kahlbaugh elected to take his $40,000 bonus as a cash
payment rather than as deferred compensation.
|
|
(4)
|
This column includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
Other Health and
|
|
|
|
|
Automobile
|
|
Reimbursement
|
|
Wellness
|
Name
|
|
401(k)
Match(a)
|
|
Allowance(b)
|
|
Plan(c)
|
|
Benefits(d)
|
|
Richard S. Kahlbaugh
|
|
$
|
9,846
|
|
|
$
|
13,200
|
|
|
$
|
13,317
|
|
|
$
|
9,095
|
|
Michael Vrban
|
|
$
|
6,202
|
|
|
$
|
12,000
|
|
|
$
|
6,543
|
|
|
$
|
9,137
|
|
W. Dale Bullard
|
|
$
|
7,356
|
|
|
$
|
13,200
|
|
|
$
|
13,187
|
|
|
$
|
9,066
|
|
Robert S. Fullington
|
|
$
|
7,356
|
|
|
$
|
13,200
|
|
|
$
|
11,051
|
|
|
$
|
4,400
|
|
Daniel A. Reppert
|
|
$
|
7,212
|
|
|
$
|
12,000
|
|
|
$
|
9,514
|
|
|
$
|
9,081
|
|
|
|
|
|
(a)
|
Reflects amounts of contributions paid to such executive under
401(k) matching for eligible employees.
|
|
|
(b)
|
Represents the automobile allowance payable under such
executives employment agreement
|
|
|
(c)
|
Represents the amount of reimbursement for eligible expenses not
covered by available group health, dental or vision plans.
|
|
|
(d)
|
Reflects amounts paid to various vendors on behalf of our named
executive officers for insurance coverage such as health,
dental, vision, life, accidental death and dismemberment, long
term care, and short term and long term disability.
|
|
|
(5) |
Mr. Vrban served as our Chief Financial Officer in 2009 and
is currently our Acting Chief Financial Officer.
|
2009
Grants of Plan-Based Awards
The following table sets forth certain information with respect
to grants of plan-based awards for the year ended
December 31, 2009 with respect to the named executive
officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under
|
|
|
|
|
Non-Equity Incentive Plan Awards
|
|
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
Name
|
|
Grant Date
|
|
($)
|
|
($)
|
|
($)
|
|
Richard S. Kahlbaugh
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Bonus(1)
|
|
|
n/a
|
|
|
|
|
|
|
$
|
20,000
|
|
|
$
|
40,000
|
|
Cash Incentive
Award(2)
|
|
|
n/a
|
|
|
|
|
|
|
$
|
190,000
|
|
|
$
|
380,000
|
|
Michael Vrban
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Incentive
Award(2)
|
|
|
n/a
|
|
|
|
|
|
|
$
|
78,475
|
|
|
$
|
78,475
|
|
W. Dale Bullard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Bonus(1)
|
|
|
n/a
|
|
|
|
|
|
|
$
|
15,000
|
|
|
$
|
30,000
|
|
Cash Incentive
Award(2)
|
|
|
n/a
|
|
|
|
|
|
|
$
|
82,875
|
|
|
$
|
82,875
|
|
Robert S. Fullington
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Bonus(1)
|
|
|
n/a
|
|
|
|
|
|
|
$
|
15,000
|
|
|
$
|
30,000
|
|
Cash Incentive
Award(2)
|
|
|
n/a
|
|
|
|
|
|
|
$
|
82,875
|
|
|
$
|
82,875
|
|
Daniel A. Reppert
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Incentive
Award(2)
|
|
|
n/a
|
|
|
|
|
|
|
$
|
91,250
|
|
|
$
|
91,250
|
|
151
|
|
(1)
|
Reflects annual deferred compensation awards as estimated
payments to Messrs. Kahlbaugh, Bullard and Fullington under
deferred compensation arrangements. The amounts in the
threshold, target and
maximum columns reflect a certain bonus award amount
based on the achievement of certain adjusted EBITDA targets,
which we discussed above under Compensation
Discussion and Analysis Components of our Executive
Compensation Program Deferred Compensation. If
actual performance in any fiscal year does not exceed the
target, then no deferred bonus is granted to a named
executive officer for that fiscal year.
|
|
(2)
|
Reflects annual cash performance awards as estimated payments to
the named executive officers under our non-equity incentive
plan. The amounts in the threshold,
target and maximum columns reflect a
percentage of base salary for such named executive officer,
which we discussed above under Compensation
Discussion and Analysis Components of our Executive
Compensation Program Cash Incentive Awards.
Any level of our performance which falls between two specific
points shall entitle the named executive to receive a percentage
of base salary determined on a straight-line basis between two
such points. If actual performance in any fiscal year does not
exceed the target, then no cash award is granted to
a named executive officer for that fiscal year, except for the
Chief Executive Officer who may be awarded a discretionary bonus
if such target is not met.
|
For additional information, see Employment
Agreements.
Outstanding
Equity Awards at Fiscal Year-End
The following table sets forth certain information with respect
to outstanding equity awards held by our named executive
officers as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Awards(1)
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Option
|
|
|
(#)
|
|
(#)
|
|
Price
|
|
Expiration
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
($)
|
|
Date
|
|
Richard S. Kahlbaugh
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
50,000.00
|
|
|
|
|
|
|
$
|
15.92
|
|
|
|
11/17/2015
|
|
Options(2)
|
|
|
32,386.88
|
|
|
|
19,432.12
|
|
|
$
|
17.07
|
|
|
|
10/24/2017
|
|
Michael Vrban
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options(3)
|
|
|
7,337.60
|
|
|
|
4,807.40
|
|
|
$
|
17.07
|
|
|
|
10/24/2017
|
|
W. Dale Bullard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
5,200.00
|
|
|
|
|
|
|
$
|
8.12
|
|
|
|
3/8/2011
|
|
Options
|
|
|
50,000.00
|
|
|
|
|
|
|
$
|
15.92
|
|
|
|
11/17/2015
|
|
Options(2)
|
|
|
26,820.63
|
|
|
|
16,092.237
|
|
|
$
|
17.07
|
|
|
|
10/24/2017
|
|
Robert S. Fullington
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
47,000.00
|
|
|
|
|
|
|
$
|
8.12
|
|
|
|
3/8/2011
|
|
Options
|
|
|
50,000.00
|
|
|
|
|
|
|
$
|
15.92
|
|
|
|
11/17/2015
|
|
Options(2)
|
|
|
26,820.63
|
|
|
|
16,092.237
|
|
|
$
|
17.07
|
|
|
|
10/24/2017
|
|
Daniel A. Reppert
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options(3)
|
|
|
7,337.60
|
|
|
|
4,807.40
|
|
|
$
|
17.07
|
|
|
|
10/24/2017
|
|
|
|
(1)
|
Does not give effect to the conversion of our Class A
common stock or stock split of our common stock that will occur
prior to the consummation of this offering.
|
|
(2)
|
Of the shares subject to the option, 25% vested on June 20,
2008. The remaining shares subject to the option vested ratably
on a monthly basis over the 36 months thereafter and will
vest in full as of June 30, 2011.
|
|
(3)
|
Of the shares subject to the option, 25% vested on July 25,
2008. The remaining shares subject to the option vested ratably
on a monthly basis over the 36 months thereafter and will
vest in full as of July 31, 2011.
|
152
Option
Exercises
The following table sets forth certain information with respect
to option exercises during the year ended December 31, 2009
by our named executive officers. Only Mr. Fullington
exercised options in 2009.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
|
Value
|
|
|
Number of
|
|
Realized
|
|
|
Shares
|
|
on
|
|
|
Acquired on Exercise
|
|
Exercise
|
Name
|
|
(#)(1)
|
|
($)(2)
|
|
Robert S. Fullington
|
|
|
3,000
|
|
|
$
|
111,960
|
|
|
|
(1)
|
Does not give effect to the conversion of our Class A
common stock or stock split of our common stock that will occur
prior to the consummation of this offering.
|
|
(2)
|
The aggregate dollar value realized on exercise is the
difference between the fair market value of shares of common
stock on December 31, 2009 based upon an internal valuation
model and the $8.12 per share exercise price of the options,
multiplied by the number of shares subject to the option
exercised.
|
Nonqualified
Deferred Compensation
Each of Messrs. Kahlbaugh, Bullard and Fullington are
entitled to deferred compensation pursuant to their respective
employment agreements. See Compensation
Discussion and Analysis Components of Our Executive
Compensation Program Deferred Compensation
above. Earnings on the nonqualified deferred compensation are
not considered above market or preferential.
The following table presents information regarding nonqualified
deferred compensation to the applicable named executive officers
for the year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registrant
|
|
Aggregate
|
|
Aggregate
|
|
Aggregate
|
|
|
Contributions
|
|
Earnings
|
|
Withdrawals/
|
|
Balance as Last
|
|
|
in Last FY
|
|
in Last FY
|
|
Distributions
|
|
FYE
|
Name
|
|
($)(1)
|
|
($)(2)
|
|
($)
|
|
($)
|
|
Richard S. Kahlbaugh
|
|
$
|
27,000
|
|
|
$
|
9,585
|
|
|
|
n/a
|
|
|
$
|
76,302
|
|
W. Dale Bullard
|
|
$
|
17,000
|
|
|
$
|
3,206
|
|
|
|
n/a
|
|
|
$
|
291,287
|
|
Robert S. Fullington
|
|
$
|
17,000
|
|
|
$
|
12,923
|
|
|
|
n/a
|
|
|
$
|
95,927
|
|
|
|
(1)
|
Amounts in this column reflect deferrals of annual cash awards
earned in 2008 and deferred in 2009. For Mr. Kahlbaugh, the
amount includes $5,000 previously earned but not deferred from
the prior year.
|
|
(2)
|
Each participating named executive officer credits his
investment gains and/or losses against the Vanguard
Index Trust 500 Portfolio or a similar
index fund. We may provide alternative deemed
investment vehicles from time to time and permit the named
executive officers to select which deemed investment
vehicle against which they will credit their investments. Gains
and/or losses are based on the actual investment experience of
the underlying investment. In addition, all or a portion of a
named executive officers plan assets may be held in our
common stock. The fair market values of such shares has been
determined as of December 31, 2009 based upon an internal
valuation model.
|
Potential
Payments upon Termination or Change of Control
The information below describes and quantifies certain
compensation that would become payable under each named
executive officers employment agreement if, as of
December 31, 2009, his employment had been terminated. Due
to the number of factors that affect the nature and amount of
any benefits provided upon the events discussed below, any
actual amounts paid or distributed may be different. Factors
that could affect these amounts include the timing during the
year of any such event.
153
Each of Messrs. Kahlbaugh, Vrban, Bullard, Fullington and
Reppert are entitled to termination payments and benefits
pursuant to their employment agreements. In the event of death
or physical or mental disability rendering any of these
executives substantially unable to perform their duties in any
material respect for a period of at least 180 days out of
any 12-month
period, their employment agreements will automatically
terminate. In such instances, Messrs. Kahlbaugh, Vrban and
Reppert will be entitled to receive: (i) accrued but unused
vacation pay and unpaid base salary; (ii) any payments and
benefits to which he is entitled under any of our arrangements
or plans; (iii) a pro-rated annual bonus, based on the
executives date of termination, for the current fiscal
year and any unpaid annual bonus for the prior fiscal year; and
(iv) continued coverage by the same medical, dental and
life insurance coverages as in effect immediately prior to
termination for a period of one year. If Mr. Bullard or
Mr. Fullington is terminated due to death or disability,
each is entitled to receive: (i) accrued but unused
vacation pay; (ii) unpaid base salary; (iii) any
unpaid annual bonus for the prior fiscal year; and (iv) any
payments and benefits to which he is entitled under any of our
arrangements or plans. In the case of death, each of the named
executive officers base salary will continue through the
end of the month in which death occurs. In addition, each of
Messrs. Kahlbaugh, Bullard and Fullington will be entitled
to receive his deferred bonus from the prior year.
If any executive is terminated for cause, or if any executive
voluntarily terminates his employment without good reason, the
executive is entitled to receive only his unpaid base salary,
accrued but unused vacation pay, his prior year annual bonus and
any payments and benefits to which he is entitled under any of
our arrangements or plans. In addition, each of
Messrs. Kahlbaugh, Bullard and Fullington will be entitled
to receive his deferred bonus from the prior year.
If any executives employment is terminated without cause
or by the executive for good reason, the executive is entitled
to receive: (i) provided he does not violate the
non-compete and non-solicitation clauses in his employment
agreement, severance pay equal to the executives monthly
base salary at the time of termination for 12 months from
the date of termination (or in the case of Messrs. Bullard
and Fullington, 18 months from the date of termination);
(ii) in the case of Messrs. Kahlbaugh, Vrban and
Reppert, a pro-rated annual bonus based on the executives
date of termination, for the current fiscal year and unpaid base
salary and any unpaid annual bonus for the prior fiscal year;
(iii) paid vacation accrued up until the date of
termination; and (iv) continued coverage by the same
medical, dental and life insurance coverages as in effect
immediately prior to the termination of his employment and
continuing until his severance pay expires or he commences new
employment and becomes eligible for comparable benefits. In
addition, each of Messrs. Kahlbaugh, Bullard and Fullington
will be entitled to receive his deferred bonus from the prior
year.
Under each executives employment agreement,
cause generally means that we have determined that
any or more than one of the following has occurred: (i) the
executive has been convicted of or has pleaded guilty or nolo
contendere to any felony or any crime involving moral
turpitude or misrepresentation; (ii) the executive failed
to carry out any reasonable and lawful instructions and this
failure or refusal continued for a period of ten days following
written notice; (iii) the executive violated any of the
various non-compete clauses in his employment agreement;
(iv) the executive committed fraud, embezzlement,
misappropriation of our funds, misrepresentation, breached his
fiduciary duty or engaged in any other material act of
dishonesty against us; or (v) the executive engaged in any
gross or willful misconduct resulting in a substantial loss to
us or substantial damage to our reputation.
Under each executives employment agreement, good
reason generally means (i) assignment to the
executive of any duties inconsistent in any substantial respect
with his position, authority or responsibilities as contemplated
in his employment agreement, or any duties which are illegal or
unethical, subject to a
30-day cure
period after notice has been given; (ii) any material
failure to pay the compensation or benefits set out in his
employment agreement; or (iii) relocation of the
executives primary place of employment to a location not
within a
50-mile
radius of Jacksonville, Florida.
154
In addition, each of Messrs. Kahlbaugh, Bullard and
Fullington are entitled to payments pursuant to their deferred
compensation agreements. In the event of death during their
employment and the achievement of certain adjusted EBITDA
targets, we are obligated to contribute the executives
deferred bonus award for the prior fiscal year to the
executives deferred compensation trust account. See
Compensation Discussion and
Analysis Components of Our Executive Compensation
Program Deferred Compensation. Additionally,
the designated recipients of Messrs. Kahlbaugh, Bullard and
Fullington are entitled to a lump sum payment of the account
balance of the deferred compensation trust account. Upon a
change of control and termination without cause or with good
reason within 12 months of the change of control,
Messrs. Kahlbaugh, Bullard and Fullington are entitled to a
lump sum payment of the account balance of their respective
deferred compensation trust account. Upon any other termination
of employment, Messrs. Kahlbaugh, Bullard and Fullington
are entitled to the balance of their respective deferred
compensation trust account paid out in a lump sum or 120
substantially equal monthly installments at their respective
normal retirement date. These payments are conditioned upon the
executive rendering reasonable business consulting and advisory
services as our board of directors may require.
Pursuant to the stock options we issued under our 2005 Equity
Incentive Plan and outside of our existing plans to
Messrs. Kahlbaugh, Vrban, Bullard, Fullington and Reppert,
all unvested options immediately vest and become exercisable
upon a transaction where (i) a person of group of persons,
other than Summit Partners or certain permitted transferees,
owns more than 50% of our securities or (ii) a sale of all
or substantially all of our assets. In addition, our
compensation committee may provide for: (i) continuation of
such options by us or the surviving company;
(ii) substitution of the options by the surviving company
with substantially the same terms; (iii) upon written
notice, provide that all outstanding options must be exercised
within 15 days or such other determined period; or
(iv) cancellation of all or any portion of outstanding
options for fair value.
The following table summarizes the potential payments to
Messrs. Kahlbaugh, Vrban, Bullard, Fullington and Reppert
assuming that such events occurred as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
Deferred
|
|
|
|
Accelerated
|
|
|
|
|
|
|
Severance
|
|
|
|
Compensation
|
|
Compensation
|
|
Paid
|
|
Vesting of
|
|
Benefit
|
|
|
|
|
Amounts
|
|
Bonus
|
|
Bonus(1)
|
|
Account(1)(2)
|
|
Vacation
|
|
Options
|
|
Continuation
|
|
Total
|
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)(3)
|
|
($)(4)
|
|
($)
|
|
($)
|
|
Richard S. Kahlbaugh
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination with cause or without good reason
|
|
|
|
|
|
|
190,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
29,231
|
|
|
|
|
|
|
|
|
|
|
|
259,231
|
|
Termination without cause or for good reason
|
|
|
380,000
|
|
|
|
190,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
29,231
|
|
|
|
|
|
|
|
22,412
|
|
|
|
661,643
|
|
Termination upon death or disability
|
|
|
|
|
|
|
190,000
|
|
|
|
40,000
|
|
|
|
76,302
|
|
|
|
29,231
|
|
|
|
|
|
|
|
22,412
|
|
|
|
357,945
|
|
Termination upon change of
control(5)
|
|
|
380,000
|
|
|
|
190,000
|
|
|
|
40,000
|
|
|
|
76,302
|
|
|
|
29,231
|
|
|
|
551,260
|
|
|
|
22,412
|
|
|
|
1,289,205
|
|
Michael Vrban
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination with cause or without good reason
|
|
|
|
|
|
|
47,085
|
|
|
|
|
|
|
|
|
|
|
|
16,538
|
|
|
|
|
|
|
|
|
|
|
|
63,623
|
|
Termination without cause or for good reason
|
|
|
215,000
|
|
|
|
47,085
|
|
|
|
|
|
|
|
|
|
|
|
16,538
|
|
|
|
|
|
|
|
15,680
|
|
|
|
294,303
|
|
Termination upon death or disability
|
|
|
|
|
|
|
47,085
|
|
|
|
|
|
|
|
|
|
|
|
16,538
|
|
|
|
|
|
|
|
15,680
|
|
|
|
79,303
|
|
Termination upon change of
control(5)
|
|
|
215,000
|
|
|
|
47,085
|
|
|
|
|
|
|
|
|
|
|
|
16,538
|
|
|
|
136,379
|
|
|
|
15,680
|
|
|
|
430,682
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
Deferred
|
|
|
|
Accelerated
|
|
|
|
|
|
|
Severance
|
|
|
|
Compensation
|
|
Compensation
|
|
Paid
|
|
Vesting of
|
|
Benefit
|
|
|
|
|
Amounts
|
|
Bonus
|
|
Bonus(1)
|
|
Account(1)(2)
|
|
Vacation
|
|
Options
|
|
Continuation
|
|
Total
|
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)(3)
|
|
($)(4)
|
|
($)
|
|
($)
|
|
W. Dale Bullard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination with cause or without good reason
|
|
|
|
|
|
|
37,294
|
|
|
|
15,000
|
|
|
|
|
|
|
|
19,615
|
|
|
|
|
|
|
|
|
|
|
|
71,909
|
|
Termination without cause or for good reason
|
|
|
382,500
|
|
|
|
37,294
|
|
|
|
15,000
|
|
|
|
|
|
|
|
19,615
|
|
|
|
|
|
|
|
33,380
|
|
|
|
487,789
|
|
Termination upon death or disability
|
|
|
|
|
|
|
37,294
|
|
|
|
15,000
|
|
|
|
291,287
|
|
|
|
19,615
|
|
|
|
|
|
|
|
|
|
|
|
363,196
|
|
Termination upon change of
control(5)
|
|
|
382,500
|
|
|
|
37,294
|
|
|
|
15,000
|
|
|
|
291,287
|
|
|
|
19,615
|
|
|
|
456,512
|
|
|
|
33,380
|
|
|
|
1,235,588
|
|
Robert S. Fullington
|
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Termination with cause or without good reason
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67,129
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15,000
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19,615
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101,744
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Termination without cause or for good reason
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382,500
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67,129
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15,000
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19,615
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23,177
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507,421
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Termination upon death or disability
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67,129
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15,000
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95,927
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19,615
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197,671
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Termination upon change of
control(5)
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382,500
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67,129
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15,000
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95,927
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19,615
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456,512
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23,177
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1,059,860
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Daniel A. Reppert
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Termination with cause or without good reason
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38,781
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19,231
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58,012
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Termination without cause or for good reason
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250,000
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38,781
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19,231
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18,595
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326,607
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Termination upon death or disability
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38,781
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19,231
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18,595
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76,607
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Termination upon change of
control(5)
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250,000
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38,781
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19,231
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136,379
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18,595
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462,986
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(1)
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The amounts reported in the Deferred Compensation Bonus column
reflect the deferred bonus award earned by such executive in
2009. See Compensation Discussion and
Analysis Components of Our Executive Compensation
Program Deferred Compensation. The amounts
reported in the Deferred Compensation Account column reflect a
lump sum payment of the balance of such executives
deferred compensation trust account.
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(2)
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The amounts reported in this column for termination upon a
change of control are only applicable if, after a change of
control, such executive was terminated without cause or by the
executive for good reason. If such executive is terminated for
any other reason, his deferred compensation account is paid out
at his normal retirement date.
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(3)
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The amounts reported in this column assume that no vacation by
such executive has been taken for the year ended
December 31, 2009.
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(4)
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The amounts reported in this column reflect the aggregate dollar
value of unvested stock options held by such executive on
December 31, 2009 that would accelerate upon such change of
control. The aggregate dollar value is the difference between
the fair market value of shares of common stock on
December 31, 2009 based upon an internal valuation model
and the $17.07 per share exercise price of the options,
multiplied by the number of shares subject to the unvested
option.
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(5)
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Assumes the executive is terminated without cause or for good
reason in connection with such change of control.
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Employment
Agreements
We have entered into employment agreements with each of
Mr. Kahlbaugh, our Chairman, President and Chief Executive
Officer; Mr. Vrban, our Executive Vice President, Chief
Accounting Officer and Treasurer; Mr. Bullard, our
Executive Vice President and Chief Marketing Officer;
Mr. Fullington, our Executive Vice President and President,
Consecta; and Mr. Reppert, our Executive Vice President and
President, Bliss & Glennon. Each agreement provides
for a rolling three-year term of employment, with
156
each agreement automatically renewing for an additional year
upon every anniversary of the agreement, unless either party
gives at least 90 days notice prior to the anniversary of
the agreement that no extension is desired. If notice is given,
the agreement will terminate three years from the anniversary of
the agreement that next follows such notice.
The salaries of Messrs. Kahlbaugh, Vrban, Bullard,
Fullington and Reppert were initially established pursuant to
their respective employment agreements. Our compensation
committee reviews the salary of Mr. Kahlbaugh annually and
may, at its sole discretion, make any increases in his annual
base salary, as it deems appropriate. Our Chief Executive
Officer reviews and recommends changes to the salaries of
Messrs. Vrban, Bullard, Fullington and Reppert annually and
the compensation committee may, at its sole discretion, make any
increases in any of their annual base salaries, as it deems
appropriate. Each named executive officer is eligible to receive
an annual performance bonus, periodic grants of long-term equity
incentive awards and deferred compensation. See
Compensation Discussion and
Analysis Components of Our Executive Compensation
Program. The employment agreements also provide that each
executive is entitled to participate in any benefits plan
comparable to our other executives, and to receive a monthly
automobile allowance. Mr. Kahlbaugh is also entitled to
reimbursements for reasonable medical, health physical fitness
and wellness expenses, including such expenses incurred while
traveling for business, and business entertainment expenses,
including two golf club memberships.
Messrs. Kahlbaugh, Vrban, Bullard, Fullington and Reppert
are entitled to certain benefits if their employment is
terminated. See Potential Payments upon
Termination and Change of Control above.
In addition, we have entered into an employment agreement with
Walter P. Mascherin, our Senior Executive Vice President and
Chief Financial Officer since October 2010.
Mr. Mascherins salary is established pursuant to his
employment agreement and is initially $285,000.
Mr. Mascherin is entitled to participate in any benefit
plan comparable to our other executives and to receive a monthly
automobile allowance. The provisions of
Mr. Mascherins employment agreement, with respect to
term and renewal, potential payments upon termination and change
of control and annual review of salary are consistent with those
described above for Mr. Vrban.
Pursuant to his employment agreement, we will grant
Mr. Mascherin the right and option to purchase
16,813 shares of our common stock, which will be
88,268 shares of our common stock after giving effect to
the stock split prior to the consummation of the offering. The
grant date will be the earlier to occur of the pricing of this
offering and April 1, 2011. At such grant date,
Mr. Mascherin will be required to enter into a stock option
grant agreement in the form generally used for our executives
and which will provide for an option term of ten years with
25% of the shares initially covered by the option vesting on the
grant date and the remaining shares covered by the option
vesting ratably on a monthly basis for 36 months
thereafter. Any options granted to Mr. Mascherin in
connection with this offering will have an exercise price equal
to the initial public offering price.
Non-Competition
and Non-Solicitation
Pursuant to their respective employment agreements, each of
Messrs. Kahlbaugh, Vrban, Bullard, Fullington and Reppert
are subject to non-competition and non-solicitation clauses.
Each executive has agreed not to engage or participate in,
directly or indirectly, any business that offers products or
provides related services and products or engages in any other
business that we are engaged in or have taken steps to engage in
prior to termination. Mr. Kahlbaugh has agreed not to
compete with us anywhere in the world for a period of
12 months after termination. Messrs. Vrban and Reppert
have agreed not to compete with us in the United States for a
period of 24 months after termination. Messrs. Bullard
and Fullington have agreed not to compete with us anywhere in
the world for a period of 18 months after termination.
Mr. Bullard is also subject to the non-competition clauses
contained in the merger agreement related to the Summit Partners
Transactions. See Certain Relationships and
157
Related Person Transactions Merger Agreement and
Related Transactions. However, in the event that
Mr. Bullard is terminated without cause or voluntarily
terminates his employment with good reason, the non-competition
clauses in the merger agreement are no longer applicable.
Additionally, Messrs. Kahlbaugh, Vrban, Bullard, Fullington
and Reppert have agreed to not solicit or attempt to directly
solicit any of our officers, directors, consultants or
executives (other than immediate family members) to leave,
unless such solicitation relates solely to a business that is
not competitive with us. Messrs. Kahlbaugh, Vrban and
Reppert have agreed to a non-solicitation period of
24 months; Messrs. Bullard and Fullington have agreed
to a non-solicitation period of 18 months.
Pursuant to Mr. Mashcerins employment agreement, he
is subject to the same non-competition and non-solicitation
clauses as described above, except that Mr. Mascherin has
agreed not to compete with us in the United States for a period
of 12 months after termination and that Mr. Mascherin
has agreed to a non-solicitation period of 12 months.
2010
Omnibus Incentive Plan
We intend to adopt our 2010 Omnibus Incentive Plan (the Omnibus
Plan), in connection with this offering. The Omnibus Plan will
become effective prior to the consummation of this offering. The
Omnibus Plan provides for grants of nonqualified stock options,
incentive stock options, stock appreciation rights, restricted
stock, other stock-based awards and performance-based
compensation. Directors and employees of us and our
subsidiaries, as well as other individuals performing services
for us, will be eligible for grants under the Omnibus Plan. The
purpose of the Omnibus Plan is to provide incentives that will
attract, retain and motivate highly competent officers,
directors, employees and other service providers by providing
them with appropriate incentives and rewards either through a
proprietary interest in our long-term success or compensation
based on their performance in fulfilling their personal
responsibilities. The following is a summary of the material
terms of the Omnibus Plan, but does not include all of the
provisions of the Omnibus Plan. For further information about
the Omnibus Plan, we refer you to the complete copy of the
Omnibus Plan, which we will file as an exhibit to the
registration statement of which this prospectus is a part.
Administration
The Omnibus Plan provides for its administration by the
compensation committee of our board of directors or any
committee designated by our board of directors to administer the
Omnibus Plan. The committee is empowered to determine the form,
amount and other terms and conditions of awards, clarify,
construe or resolve any ambiguity in any provision of the
Omnibus Plan or any award agreement and adopt such rules, forms,
instruments and guidelines for administering the Omnibus Plan as
it deems necessary or proper. All actions, interpretations and
determinations by the committee or by our board of directors are
final and binding.
Shares Available
The Omnibus Plan makes available an aggregate of
4,000,000 shares of our common stock, subject to
adjustments. In the event that any outstanding award expires, is
forfeited, cancelled or otherwise terminated without the
issuance of shares or is otherwise settled for cash, shares of
our common stock allocable to such award, to the extent of such
forfeiture, cancellation, expiration, termination or settlement
for cash, shall again be available for the purposes of the
Omnibus Plan. If any award is exercised by tendering shares of
our common stock to us, either as full or partial payment, in
connection with the exercise of such award under the Omnibus
Plan or to satisfy our withholding obligation with respect to an
award, only the number of shares of our common stock issued net
of such shares tendered will be deemed delivered for purposes of
determining the maximum number of shares of our common stock
then available for delivery under the Omnibus Plan.
158
Eligibility
for Participation
Members of our board of directors, as well as employees of, and
service providers to, us or any of our subsidiaries and
affiliates are eligible to participate in the Omnibus Plan. The
selection of participants is within the sole discretion of the
committee.
Types
of Awards
The Omnibus Plan provides for the grant of nonqualified stock
options, incentive stock options, stock appreciation rights,
restricted stock, other stock-based awards and performance-based
compensation, collectively, the awards. The
committee will, with regard to each award, determine the terms
and conditions of the award, including the number of shares
subject to the award, the vesting terms of the award, and the
purchase price for the award. Awards may be made in assumption
of or in substitution for outstanding awards previously granted
by us or our affiliates, or a company acquired by us or with
which we combine.
Award
Agreement
Awards granted under the Omnibus Plan shall be evidenced by
award agreements (which need not be identical) that provide
additional terms and conditions associated with such awards, as
determined by the committee in its sole discretion; provided,
however, that in the event of any conflict between the
provisions of the Omnibus Plan and any such award agreement, the
provisions of the Omnibus Plan shall prevail.
Options
An option granted under the Omnibus Plan will permit a
participant to purchase from us a stated number of shares at an
option price established by the committee, subject to the terms
and conditions described in the Omnibus Plan, and such
additional terms and conditions, as established by the
committee, in its sole discretion, that are consistent with the
provisions of the Omnibus Plan. Options shall be designated as
either a nonqualified stock option or an incentive stock option.
An option granted as an incentive stock option shall, to the
extent it fails to qualify as an incentive stock option, be
treated as a nonqualified option. The exercise price of an
option granted under the Omnibus Plan may not be less than 100%
of the fair market value of a share of our common stock on the
date of grant, provided the exercise price of an incentive stock
option granted to a person holding greater than 10% of our
voting power may not be less than 110% of such fair market value
on such date. The committee will determine the term of each
option at the time of grant in its discretion; however, the term
may not exceed ten years (or, in the case of an incentive stock
option granted to a ten percent stockholder, five years).
Stock
Appreciation Rights
A stock appreciation right entitles the holder to receive, upon
its exercise, the excess of the fair market value of a specified
number of shares of our common stock on the date of exercise
over the grant price of the stock appreciation right. The
payment of the value may be in the form of cash, shares of our
common stock, other property or any combination thereof, as the
committee determines in its sole discretion. Subject to the
terms of the Omnibus Plan and any applicable award agreement,
the grant price (which shall not be less than 100% of the fair
market value of a share of our common stock on the date of
grant), term, methods of exercise, methods of settlement, and
any other terms and conditions of any stock appreciation right
shall be determined by the committee. The term of a stock
appreciation right may not exceed 10 years.
Restricted
Stock
An award of restricted stock is a grant of a specified number of
shares of our common stock, which are subject to forfeiture upon
the occurrence of specified events. Each award agreement
evidencing a restricted stock grant shall specify the period(s)
of restriction, the number of shares of restricted stock
159
subject to the award, the performance, employment or other
conditions (including the termination of a participants
service whether due to death, disability or other cause) under
which the restricted stock may be forfeited to the company and
such other provisions as the committee shall determine. The
committee may require that the stock certificates evidencing
such shares be held in custody or bear restrictive legends until
the restrictions thereon shall have lapsed. Unless otherwise
determined by the committee and set forth in the award
agreement, a participant holding restricted stock will not have
the right to vote and will not receive dividends with respect to
such restricted stock.
Other
Stock-Based Awards
The committee, in its sole discretion, may grant awards of
shares of our common stock and awards that are valued, in whole
or in part, by reference to, or are otherwise based on the fair
market value of, such shares (the other stock-based
awards). Such other stock-based awards shall be in such
form, and dependent on such conditions, as the committee shall
determine, including, without limitation, the right to receive
one or more shares of our common stock (or the equivalent cash
value of such stock) upon the completion of a specified period
of service, the occurrence of an event
and/or the
attainment of performance objectives. Subject to the provisions
of the Omnibus Plan, the committee shall determine to whom and
when other stock-based awards will be made, the number of shares
of our common stock to be awarded under (or otherwise related
to) such other stock-based awards, whether such other
stock-based awards shall be settled in cash, shares of our
common stock or a combination of cash and such shares, and all
other terms and conditions of such awards.
Performance-Based
Compensation
To the extent permitted by Section 162(m) of the Internal
Revenue Code, or the Code, the committee is authorized to design
any award so that the amounts or shares payable and
distributable thereunder are treated as qualified
performance-based compensation within the meaning of
Section 162(m) of the Code. The vesting, crediting
and/or
payment of performance-based compensation shall be based on the
achievement of objective performance goals based on one or more
of the following measures: (a) consolidated earnings before
or after taxes (including earnings before interest, taxes,
depreciation and amortization); (b) net income;
(c) operating income; (d) earnings per share;
(e) book value per share; (f) return on
shareholders equity; (g) expense management;
(h) return on investment; (i) improvements in capital
structure; (j) profitability of an identifiable business
unit or product; (k) maintenance or improvement of profit
margins; (l) stock price; (m) market share;
(n) revenues or sales; (o) costs; (p) cash flow;
(q) working capital; (r) return on assets;
(s) return on stockholders equity; (t) customer
satisfaction; (u) measurable achievement in quality and
compliance initiatives; (v) working capital; (w) debt;
(x) business expansion; (y) objectively determinable
measure of non-financial operating and management performance
objectives; (z) stockholder returns, dividends
and/or other
distributions; (aa) operating efficiency or (bb) profit margin.
Such measures may be used to measure our performance or the
performance of any of our business units and may be used to
compare our performance against the performance of a group of
comparable companies, or a published index.
Transferability
Unless otherwise determined by the committee, an award shall not
be transferable or assignable by a participant except in the
event of his or her death (subject to the applicable laws of
descent and distribution) and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance
shall be void and unenforceable against us or any of our
subsidiaries or affiliates. Any permitted transfer of the awards
to heirs or legatees of a participant shall not be effective to
bind us unless the committee has been furnished with written
notice thereof and a copy of such evidence as the committee may
deem necessary to establish the validity of the transfer and the
acceptance by the transferee or transferees of the terms and
conditions of the Omnibus Plan.
160
Stockholder
Rights
Except as otherwise provided in the applicable award agreement,
a participant has no rights as a stockholder with respect to
shares of our common stock covered by any award until the
participant becomes the record holder of such shares.
Adjustment
of Awards
In the event of any corporate event or transaction such as a
merger, consolidation, reorganization, recapitalization,
separation, stock dividend, stock split, reverse stock split,
split up, spin-off, combination of shares of our common stock,
exchange of shares of our common stock, dividend in kind,
extraordinary cash dividend, or other like change in capital
structure (other than normal cash dividends) to our
stockholders, or any similar corporate event or transaction, the
committee, to prevent dilution or enlargement of
participants rights under the Omnibus Plan, shall
substitute or adjust, in its sole discretion, the number and
kind of shares that may be issued under the Omnibus Plan or
under particular forms of awards, the number and kind of shares
subject to outstanding awards, the option price, grant price or
purchase price applicable to outstanding awards, the annual
award limits,
and/or other
value determinations applicable to the Omnibus Plan or
outstanding awards.
Upon the occurrence of a change in control, unless otherwise
specifically prohibited under applicable laws or by the rules
and regulations of any governing governmental agencies or
national securities exchanges, or unless the committee shall
determine otherwise in the award agreement, the committee is
authorized (but not obligated) to make adjustments in the terms
and conditions of outstanding awards, including without
limitation the following (or any combination thereof):
(i) continuation or assumption of such outstanding awards
under the Omnibus Plan by us (if it is the surviving company or
corporation) or by the surviving company or corporation or its
parent; (ii) substitution by the surviving company or
corporation or its parent of awards with substantially the same
terms for such outstanding awards; (iii) accelerated
exercisability, vesting
and/or lapse
of restrictions under all then outstanding awards immediately
prior to the occurrence of such event; (iv) upon written
notice, provide that any outstanding awards must be exercised,
to the extent then exercisable, within fifteen days immediately
prior to the scheduled consummation of the event, or such other
period as determined by the committee (in either case contingent
upon the consummation of the event), and at the end of such
period, such awards shall terminate to the extent not so
exercised within the relevant period; and (v) cancellation
of all or any portion of outstanding awards for fair value (as
determined in the sole discretion of the committee) which, in
the case of options and stock appreciation rights, may equal the
excess, if any, of the value of the consideration to be paid in
the change of control transaction to holders of the same number
of shares subject to such options or stock appreciation rights
(or, if no such consideration is paid, fair market value of the
shares subject to such outstanding awards or portion thereof
being cancelled) over the aggregate option price or grant price,
as applicable, with respect to such awards or portion thereof
being cancelled.
Amendment
and Termination
Our board of directors may amend, alter, suspend, discontinue,
or terminate the Omnibus Plan or any portion thereof or any
award (or award agreement) thereunder at any time.
Compliance
with Code Section 409A
To the extent that the Omnibus Plan
and/or
awards are subject to Section 409A of the
U.S. Internal Revenue Code, or the Code, the committee may,
in its sole discretion and without a participants prior
consent, amend the Omnibus Plan
and/or
awards, adopt policies and procedures, or take any other actions
(including amendments, policies, procedures and actions with
retroactive effect) as are necessary or appropriate to
(a) exempt the Omnibus Plan
and/or any
award from the application of Section 409A of the Code,
(b) preserve the intended tax treatment of any such award,
or (c) comply with the requirements of Section 409A of
the Code, Department of Treasury regulations and other
interpretive
161
guidance issued thereunder, including without limitation any
such regulations or other guidance that may be issued after the
date of the grant. This plan shall be interpreted at all times
in such a manner that the terms and provisions of the Omnibus
Plan and awards are exempt from or comply with Section 409A
guidance.
Employee
Stock Purchase Plan
We intend to adopt our Employee Stock Purchase Plan (ESPP) in
connection with this offering. The purpose of the ESPP is to
provide our eligible employees and employees of our subsidiaries
with an opportunity to purchase shares of our common stock at a
discount through payroll deductions. The ESPP is designed to
provide an incentive to attract, retain and reward eligible
employees. The ESPP will be generally available to all eligible
employees, including our named executive officers, under the
same offering and eligibility terms, and will not be tied to any
performance criteria. The ESPP is not subject to any of the
provisions of the Employee Retirement Income Security Act of
1974, as amended.
The following is a summary of the material terms of the ESPP,
but does not include all of the provisions of the ESPP. For
further information about the ESPP, we refer you to a complete
copy of the ESPP, which we will file as an exhibit to the
registration statement of which this prospectus is a part.
Administration
The ESPP will be administered by the compensation committee of
our board of directors or any other committee designated by the
board to administer the ESPP. The plan administrator will have
the authority to construe and interpret the terms of the ESPP
and the purchase rights granted under it, to determine
eligibility to participate and to establish policies and
procedures for administration of the ESPP. All actions taken and
all interpretations and determinations made by the administrator
are final and binding upon the participants and the Company.
Shares Subject
to the Plan
The shares of our common stock issuable under the ESPP may be
either newly issued shares or shares we acquire, including by
purchase on the open market. The number of shares reserved
pursuant to the ESPP is 1,000,000, subject to adjustment.
If any change is made to the Companys outstanding common
stock in connection with any merger, consolidation,
reorganization, recapitalization, stock split, stock dividend,
or other like change, the committee shall make appropriate
adjustments to, without limitation, the number or kind of shares
subject to the ESPP and the purchase price of such shares in
order to prevent dilution or enlargement of participants
rights.
Eligibility
All full-time employees of us or of any subsidiary will
generally be eligible to participate in the ESPP, except that an
employee may not be granted a right to purchase stock under the
ESPP if, immediately after the grant, the employee would own
stock possessing 5% or more of the total combined voting power
or value of all classes of our capital stock or of any parent or
subsidiary entity.
Participation
Eligible employees who enroll in the ESPP may elect to have
between one and ten percent of their eligible compensation
withheld and accumulated for the purchase of shares at the end
of each offering period in which they participate, unless
otherwise determined by the administrator.
162
Each participant may cancel his or her election to participate
in the ESPP by written notice to the committee in such form and
at such times as the committee may require. Participation shall
end automatically upon termination of employment for any reason.
Offerings
Shares of our common stock are offered for purchase under the
ESPP pursuant to a series of six-month offering periods, which
will commence on January 1 and July 1 of each year, unless
otherwise determined by the administrator.
Purchase
of Shares
Amounts accumulated for each participant will be used to
purchase shares of our common stock at the end of each offering
period at a price, unless otherwise determined by the
administrator, equal to 85% of the lesser of (i) the fair
market value on the first day of the offering period and
(ii) the fair market value on the last day of the offering
period. No participant may purchase shares at a rate which
exceeds $25,000 per year or more than 3,500 shares per
offering period.
Resale
Restrictions
The ESPP is intended to provide our shares for investment by
employees and not for resale. However, we do not intend to
restrict or influence any participant from selling shares
purchased under the ESPP at any time, subject to compliance with
applicable laws.
Stockholder
Rights
No participant will have any rights as a stockholder with
respect to the shares covered by his or her purchase right until
the shares are actually purchased on the participants
behalf. No adjustment will be made for dividends, distributions,
or other rights for which the record date is prior to the date
of such purchase.
Amendment
and Termination
Our board of directors may amend or terminate the ESPP at any
time, provided that no amendment may increase the number of
shares reserved for purchase without the approval of our
stockholders. Upon a termination, shares may be issued to
participants and any amounts not applied to the purchase of
shares shall be refunded to the participants.
Director
Compensation
Prior to this offering, our directors, other than the directors
affiliated with Summit Partners, have received $5,000 in
compensation for each board of directors meeting that they
attend in person and receive $1,000 in compensation for each
board of directors meeting that they attend telephonically.
Committee chairs received an additional $10,000 in compensation
annually.
The following table sets forth all director compensation
information for the year ended December 31, 2009.
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Fees Earned
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|
|
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or Paid in Cash
|
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Total
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Name
|
|
($)
|
|
($)
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|
Kenneth N.
Hamil(1)
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|
$
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10,000
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|
|
$
|
10,000
|
|
John R. Carroll
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|
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|
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J.J. Kardwell
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|
|
|
|
|
|
|
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Robert M.
Clements(2)
|
|
$
|
15,000
|
|
|
$
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15,000
|
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Dean
Jacobson(3)
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|
|
|
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|
|
|
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163
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|
(1)
|
Mr. Hamil decided not to stand for election at our 2010
annual meeting of stockholders and resigned as chairman of our
board of directors effective May 15, 2010.
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|
(2)
|
Mr. Clements resigned as a member of our board of directors
effective February 24, 2010. As of December 31, 2009,
Mr. Clements had an option to purchase 7,972 shares of
our common stock. This option terminated upon
Mr. Clements resignation.
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(3)
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Mr. Jacobson resigned as a member of our board of directors
effective February 1, 2009.
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After this offering, directors who are our employees or
employees of our subsidiaries or affiliated with Summit Partners
will receive no compensation for their service as members of
either our board of directors or board committees. All other
non-employee directors not affiliated with Summit Partners will
be paid quarterly in arrears:
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a base annual retainer of $25,000 in cash;
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an additional annual retainer of $10,000 in cash to the director
who is the chair of the audit committee and an additional annual
retainer of $10,000 in cash to each director who is the chair of
a committee other than the audit committee; and
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a fee of $2,500 for each board and committee meeting attended or
$1,000 for meetings attended telephonically.
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We also intend to grant 15,000 shares of restricted stock,
which will vest annually over three years, to each director that
is not an employee or affiliated with Summit Partners.
Indemnification
of Officers and Directors
Our bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by the Delaware General
Corporation Law (DGCL). We have established directors and
officers liability insurance that insures such persons
against the costs of defense, settlement or payment of a
judgment under certain circumstances.
Our certificate of incorporation provides that our directors
will not be liable for monetary damages for breach of fiduciary
duty, except for liability relating to any breach of the
directors duty of loyalty, acts or omissions not in good
faith or which involve intentional misconduct or a knowing
violation of law, violations under Section 174 of the DGCL
or any transaction from which the director derived an improper
personal benefit.
In addition, prior to the consummation of this offering, we will
enter into indemnification agreements with each of our directors
and named executive officers. These agreements, among other
things, will require us to indemnify each director and executive
officer to the fullest extent permitted by the DGCL, including
indemnification of expenses such as attorneys fees,
judgments, fines, and settlement amounts incurred by the
director or executive officer in any action or proceeding,
including any action or proceeding by or in right of us, arising
out of the persons services as a director or executive
officer. At present, we are not aware of any pending or
threatened litigation or proceeding involving any of our
directors, named executive officers, employees, or agents in
which indemnification would be required or permitted. We believe
these indemnification agreements are necessary to attract and
retain qualified persons as directors and named executive
officers.
164
CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Set forth below is a description of certain relationships and
related person transactions between us and our directors,
executive officers and holders of more than 5% of our voting
securities to date in 2010 and for the years ended
December 31, 2009, 2008 and 2007. We believe that all of
the following transactions were entered into with terms as
favorable as could have been obtained from unaffiliated third
parties.
Merger
Agreement and Related Transactions
On March 7, 2007, we entered into an agreement and plan of
merger with entities affiliated with Summit Partners, or the
Summit Funds, LOS Acquisition Co., an entity formed by
affiliates of Summit Partners, the stockholders party thereto,
including current and former directors and executive officers,
and N.G. Houston, III, as the stockholder representative,
which was amended on June 20, 2007. The merger agreement
provided for a series of transactions in which entities
affiliated with Summit Partners acquired
2,522,598.71 shares of our Class A common stock, 91.2%
of our capital stock. The acquisition was financed through
(i) $20.0 million of subordinated debentures maturing
in 2012 issued to affiliates of Summit Partners,
(ii) $35.0 million of preferred trust securities
maturing in 2037 and (iii) an equity investment of
$43.1 million by affiliates of Summit Partners. In
connection with the acquisition, all of our $11.5 million
of redeemable preferred stock outstanding prior to the
acquisition remained outstanding and certain stockholders prior
the acquisition continued to hold such shares after the
acquisition. In addition to acquiring our capital stock in the
acquisition, the proceeds from the equity and debt financings
were used to repay pre-transaction indebtedness of
$10.1 million and pay transaction costs of
$5.8 million. We consummated the merger on June 20,
2007. We refer to the acquisition of capital stock by affiliates
of Summit Partners and the financing and other transactions
related to such acquisition as the Summit Partners
Transactions. In April 2009, in connection with our
acquisition of Bliss and Glennon, Inc., affiliates of Summit
Partners acquired additional shares of our capital stock for
$6.0 million. As of September 30, 2010, affiliates of
Summit Partners beneficially owned 88.6% of our capital stock.
Pursuant to the merger agreement, all of our issued and
outstanding shares of Series A, B and C redeemable
preferred stock remained outstanding and certain stockholders,
including Joseph R. McCaw, our Executive Vice President and
President of our Payment Protection business, W. Dale Bullard,
our Executive Vice President and Chief Marketing Officer,
Kenneth N. Hamil, our former Chairman and President, Barney A.
Smith, Jr., a former director, and Prince Rental &
Leasing Systems, Inc., which is an entity affiliated with our
former director John B. Prince, III, who we refer to as
rollover stockholders, continued to hold some of the shares of
our common stock that they owned prior to the transaction. In
addition, some of our current and former executive officers and
directors, including Messrs. Hamil and Bullard, N.G.
Houston, III, the former Chairman of our board of
directors, some of Mr. Houstons family members, and
David Hardegree, our former Chief Financial Officer and
Executive Vice President, who owned shares of our stock prior to
the Summit Partners Transactions and did not rollover all or a
portion of their shares, received the same consideration for
their holdings as the other stockholders in the Summit Partners
Transactions, which was $22.67 per share.
Prior to the consummation of the merger and as required by the
merger agreement, we cashed out 10,000 options held by Richard
S. Kahlbaugh, our President and Chief Executive Officer, for
approximately $145,000, 54,000 options held by Mr. Houston
for approximately $785,000, and 17,700 options held by Robert H.
Hudson, our former head of operations and premium/claim
processing, for approximately $76,000. Also pursuant to the
merger agreement, we made final payments to Messrs. Hamil
and Houston of approximately $2.0 million and
$1.8 million, respectively, pursuant to the terms of their
respective employment and deferred compensation agreements in
effect at such time. In addition, prior to the consummation of
the merger, we made payments of $125,000 to each of
Messrs. Kahlbaugh and Bullard, and Robert Fullington, our
Executive Vice President and President, Consecta, for bonuses
that were fully accrued and payments of $275,000 and $350,000 to
Messrs. Hamil and Houston, respectively, for bonuses that
were fully accrued.
165
As part of the financing for the merger, on June 20, 2007,
our direct subsidiary LOTS Intermediate Co., which was formed by
affiliates of Summit Partners in connection with the merger,
issued $20.0 million of its subordinated debentures to
entities affiliated with Summit Partners. LOTS Intermediate Co.,
which also issued $35.0 million of its preferred trust
securities to an entity not affiliated with us, then made a
dividend payment to us with the net proceeds from the issuances
of the debentures of approximately $54.1 million, which we
used to pay a portion of the merger consideration and other
transaction fees and expenses.
The $20.0 million subordinated debentures issued by LOTS
Intermediate Co. to the affiliates of Summit Partners bear
interest at a rate of 14% per annum and mature on
December 13, 2013. During the nine months ended
September 30, 2010 and each of the years ended
December 31, 2009, 2008 and 2007, we paid interest on such
subordinated debentures to the affiliates of Summit Partners of
$2.1 million, $2.8 million, $2.8 million and
$1.4 million, respectively. We intend to redeem the
subordinated debentures for $20.6 million, which includes
accrued but unpaid interest to the redemption date, with a
portion of the proceeds from this offering.
Stockholders
Agreement
On March 7, 2007, in connection with the Summit Partners
Transactions and as a condition to the merger, we entered into a
stockholders agreement with the Summit Funds, the rollover
stockholders and our employee stockholders. The rollover
stockholders and employee stockholders party to the agreement
include Messrs. Kahlbaugh, Fullington, Hamil and Smith and
Prince Rental & Leasing Systems, Inc.
The Stockholders Agreement includes provisions regarding the
election of members of our board of directors, share transfer
restrictions, rights of first refusal, tag-along rights and
drag-along rights. All of these provisions will terminate in
connection with this initial public offering.
The Stockholders Agreement also provides for (i) demand
rights, which require us to effect a registration of registrable
securities upon a written request from any of the Summit Funds;
(ii) piggyback registration rights, which require us to
register any registrable securities held by our stockholders
party to the Stockholders Agreement if we propose to register
any of our equity securities for sale to the public (whether for
our account or the account of any stockholder); and
(iii) shelf demand registration rights after 12 months
following an initial public offering when we are eligible to use
a registration statement on
Form S-3.
Our obligation to effect any demand for registration by the
Summit Funds is subject to certain conditions, including that we
need not effect more than two demand registrations and the
registrable securities to be sold by holders requesting such
registration must represent more than 35% of the total number of
registrable securities held by all holders party to the
Stockholders Agreement. The Summit Funds have not used any of
their demand registrations. In connection with any registration
effected pursuant to the terms of the Stockholders Agreement, we
will be required to pay for all of the fees and expenses
incurred in connection with such registration, including
registration fees, filing fees and printing fees. However, the
underwriting discounts, commissions and fees payable in respect
of registrable securities included in any registration will be
paid by the persons including such registrable securities in any
such registration. We have also agreed to indemnify the holders
of registrable securities against all claims, losses, damages
and liabilities with respect to each registration effected
pursuant to the registration rights agreement.
Notes
Receivable from Current and Former Executive Officers and
Directors
At various times from 2001 through 2006, we made loans to
Messrs. Hamil, Bullard, Houston and Hudson and Lloyd L.
Shaw, a former director, at varying interest rates to facilitate
their exercise of stock options. The shares received upon the
option exercises were pledged as collateral to secure the
166
loans. Prior to the consummation of the Summit Partners
Transactions in 2007, Messrs. Hamil, Bullard, Houston,
Hudson and Shaw repaid us $1.7 million, $0.6 million,
$2.3 million, $0.3 million and $0.4 million,
respectively, in full satisfaction of such loans.
Issuances
of Securities
In April 2009, in connection with our acquisition of
Bliss and Glennon, Inc., affiliates of Summit Partners
acquired 141,676,79 shares of our Class A common stock
for $42.35 per share. In April 2009, we also issued 2,951.59 and
3,541.91 shares of our Class A common stock,
respectively, to Michael Vrban, our Executive Vice President,
Chief Accounting Officer and Treasurer, and John G. Short, our
Senior Vice President, General Counsel and Secretary, for $42.35
per share.
Class A
Common Stock Conversion
Under our current amended and restated certificate of
incorporation, we are required to pay each holder of our
Class A common stock a conversion amount on each share of
Class A common stock converted. The Class A conversion
amount is (i) $17.066 for all shares of Class A common
stock issued on or about June 20, 2007 and (ii) $42.35
for all shares of Class A common stock issued on or about
April 15, 2009 multiplied by 8% per annum (calculated
daily), compounded annually from the date of issuance of such
shares until the date of conversion. In connection with this
offering and the conversion of Class A common stock to
common stock, we will pay affiliates of Summit Partners
approximately $14.0 million. We will also make an aggregate
payment of approximately $100,000 to certain of our executive
officers that hold Class A common stock.
Bonus
Pool
In connection with the Summit Partners Transactions, we
established a one-time bonus pool for certain of our executive
officers and key employees of our Payment Protection and BPO
businesses. Under the plan, each participant was allocated a
portion of the bonus pool. Upon the occurrence of Summit
Partners beneficially owning less than 10% of our outstanding
securities, each eligible participant employed by us at that
time will receive their portion of the bonus pool as determined
by their percentage interest in the bonus pool. The amount in
the bonus pool is determined by the achievement of certain
EBITDA targets by our Payment Protection and BPO businesses,
including any EBITDA derived from any acquisitions falling
within the scope of these businesses. The measurement period for
the EBITDA target is the twelve months immediately prior to the
month in which Summit Partners beneficially owns less than 10%
of our outstanding securities, with the last day of the month
prior being the measurement date for the EBITDA target. The
EBITDA targets and the corresponding amount of the bonus pool is
as follows:
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EBITDA Target
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Bonus Pool
|
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Less than $36,500,000
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$36,500,000
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|
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$1,000,000
|
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$36,500,000 $47,500,000
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Pro-rata, using a straight line interpolation
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$47,500,000 or greater
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$3,000,000
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The bonus pool has been fully allocated. Messrs. McCaw, Short
and Romano held a 30%, 15% and 5% interest, respectively, in the
bonus pool for the year ended December 31, 2009, which
percentages increased to 32%, 16% and 5%, respectively, when a
previous participant left our company. In connection with this
offering, we intend to terminate the bonus pool and grant shares
of restricted stock to Messrs. McCaw, Short and Romano and
the other bonus pool participants under our Omnibus Incentive
Plan. The number of shares of restricted stock granted to each
participant will be based on the initial public offering price
of shares in this offering. Assuming an initial public offering
price of $11.00 per share, Messrs. McCaw, Short and Romano
will receive 28,708, 14,354 and 4,785 shares of restricted
stock, respectively, and the other bonus pool participants will
receive an aggregate of
167
90,909 shares of restricted stock. Subject to the
participants continued service, all of the shares of
restricted stock will vest, if at all, when the EBITDA target of
$36.5 million is met for our Payment Protection and BPO
businesses as determined by our board of directors. In addition,
assuming an initial public offering price of $11.00 per
share, we also intend to grant 4,545, 2,273 and
2,273 shares of restricted stock to Messrs. Kahlbaugh,
Bullard and Fullington, respectively, with the same vesting
terms as the restricted stock granted to the bonus pool
participants.
Transactions
with Others
Messrs. Kahlbaugh and Short are
brothers-in-law.
Mr. Short received aggregate compensation, including base
salary, bonus and other compensation, of approximately $247,000,
$246,000 and $85,000 for the years ended December 31, 2009,
2008 and 2007, respectively. Mr. Shorts base salary
as of July 2010 is $205,000. Mr. Short also received a 15%
interest in our bonus pool that was established in connection
with the Summit Partners Transactions, which is described
further under Executive Compensation
Compensation Discussion and Analysis Components of
Our Executive Compensation Program Cash Incentive
Awards.
Kenneth N. Hamils son, Alan Hamil, is employed by us as a
manager of purchasing. Alan Hamil received aggregate
compensation, including base salary, bonus and management fees,
of approximately $123,000, $131,000 and $120,600 during the
years ended December 31, 2009, 2008 and 2007, respectively.
During the nine months ended September 30, 2010, Alan Hamil
has received approximately $84,300 in aggregate compensation.
William Larry Lee, a director prior to the Summit Partners
Transactions, was the president of Farmers & Merchants
Bank in 2007. Pursuant to an agency agreement, we paid
approximately $160,000 in commissions and fees to
Farmers & Merchants Bank during the year ended
December 31, 2007.
Malcolm Skinner, a director prior to the Summit Partners
Transactions and current employee, received aggregate
compensation, including base salary, an automobile allowance and
commissions earned, of approximately $225,000 during the year
ended December 31, 2007.
Indemnification
Agreements
We intend to enter into indemnification agreements with each of
our directors and executive officers. These agreements, among
other things, will require us to indemnify each director and
executive officer to the fullest extent permitted by Delaware
law, including indemnification of expenses such as
attorneys fees, judgments, fines and settlement amounts
incurred by the director or executive officer in any action or
proceeding, including any action or proceeding by or in right of
us, arising out of the persons services as a director or
executive officer.
In addition, in 2010 we entered into indemnity agreements with
Messrs. Kahlbaugh, Vrban and Nicholas Santoro, our former
Chief Financial Officer who resigned in April 2010, in
connection with their service as agents for the plan
administrators of the Fortegra Corporation 401(k) Savings Plan
and as plan committee members. These agreements, among other
things, require us to indemnify each plan committee member to
the extent permitted by then-applicable law, including
indemnification of expenses such as attorneys fees,
judgments, fines, taxes and judgment or settlement amounts
incurred by the executive officer in any action, suit or
proceeding by or in right of us, arising out of such
persons service as an agent of the plan administrators of
the plan or a plan committee member. We will not indemnify such
executive officers for violations of criminal law, transactions
in which improper personal benefits were received or willful
misconduct or gross negligence in performance of duties.
168
Policies
for Approval of Related Person Transactions
In connection with this offering, we will adopt a written policy
relating to the approval of related person transactions. Our
audit committee will review and approve or ratify all
relationships and related person transactions between us and
(i) our directors, director nominees, executive officers or
their immediate family members, (ii) any 5% record or
beneficial owner of our common stock or (iii) any immediate
family member of any person specified in (i) and
(ii) above. Our general counsel will be primarily
responsible for the development and implementation of processes
and controls to obtain information from our directors and
executive officers with respect to related party transactions
and for determining, based on the facts and circumstances,
whether we or a related person have a direct or indirect
material interest in the transaction.
As set forth in the related person transaction policy, in the
course of its review and approval or ratification of a related
party transaction, the committee will consider:
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the nature of the related persons interest in the
transaction;
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the availability of other sources of comparable products or
services;
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the material terms of the transaction, including, without
limitation, the amount and type of transaction; and
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the importance of the transaction to us.
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Any member of the audit committee who is a related person with
respect to a transaction under review will not be permitted to
participate in the discussions or approval or ratification of
the transaction. However, such member of the audit committee
will provide all material information concerning the transaction
to the audit committee.
169
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table shows information regarding the beneficial
ownership of our common stock (i) immediately prior to and
(ii) as adjusted to give effect to this offering by:
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each person or group who is known by us to own beneficially more
than 5% of our common stock;
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each member of our board of directors and each of our named
executive officers;
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all members of our board of directors and our named executive
officers as a group; and
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the selling stockholders.
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For further information regarding material transactions between
us and our selling stockholders, see Certain Relationships
and Related Person Transactions.
Beneficial ownership of shares is determined under rules of the
Securities and Exchange Commission and generally includes any
shares over which a person exercises sole or shared voting or
investment power. Except as noted by footnote, and subject to
community property laws where applicable, we believe based on
the information provided to us that the persons and entities
named in the table below have sole voting and investment power
with respect to all shares of our common stock shown as
beneficially owned by them. Percentage of beneficial ownership
is based on 15,991,102 shares of common stock outstanding
after giving effect to (i) the conversion of our
outstanding Class A common stock into common stock on a one
for one basis prior to the consummation of this offering;
(ii) the redemption of our outstanding redeemable preferred
stock using the proceeds of this offering; (iii) a 5.25 for
1 stock split of our common stock prior to the consummation of
this offering; and (iv) 20,256,739 shares of common stock
to be outstanding after the completion of this offering,
assuming no exercise of the over-allotment option, or 20,271,494
shares, assuming full exercise of the over-allotment option.
Shares of common stock subject to options currently exercisable
or exercisable within 60 days of the date of this
prospectus are deemed to be outstanding and beneficially owned
by the person holding the options for the purpose of computing
the percentage of beneficial ownership of that person and any
group of which that person is a member, but are not deemed
outstanding for the purpose of computing the percentage of
beneficial ownership for any other person. Except as otherwise
indicated, the persons named in the table below have sole voting
and investment power with respect to all shares of capital stock
held by them. Unless otherwise indicated, the address for each
holder listed below is Fortegra Financial Corporation,
100 West Bay Street, Jacksonville, FL 32202.
170
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Shares Beneficially Owned
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After this Offering
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Shares Beneficially
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Assuming Full Exercise of
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Owned Before this
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Shares Beneficially Owned
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the Option to Purchase
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Offering
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After this Offering
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Additional Shares
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Number of
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Shares
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Number of
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Number of
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Name of Beneficial Owner
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Shares
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Percentage
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Offered
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Shares
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Percentage
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Shares
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Percentage
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5% Stockholders:
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Summit
Partners(1)
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13,987,447
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87.5
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%
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1,548,675
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12,438,772
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61.4
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%
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11,635,129
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57.4
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%
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Named Executive Officers, Directors and Director Nominees:
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Richard S.
Kahlbaugh(2)
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528,870
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3.2
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%
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528,870
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2.5
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%
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528,870
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2.5
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%
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Walter P.
Mascherin(3)
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23,906
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*
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23,906
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*
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23,906
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*
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Michael
Vrban(4)
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73,912
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*
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73,912
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*
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73,912
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*
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W. Dale
Bullard(5)
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706,053
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4.3
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%
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36,594
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669,549
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3.2
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%
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650,470
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3.1
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%
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Robert S.
Fullington(6)
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782,217
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4.7
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%
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28,435
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753,782
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3.6
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%
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739,027
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3.5
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%
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Daniel A.
Reppert(7)
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65,089
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*
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65,089
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*
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65,089
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*
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John R.
Carroll(8)
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
J.J.
Kardwell(9)
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
Alfred R. Berkeley, III
|
|
|
15,000
|
|
|
|
|
*
|
|
|
|
|
|
|
15,000
|
|
|
|
|
*
|
|
|
15,000
|
|
|
|
|
*
|
Francis M. Colalucci
|
|
|
15,000
|
|
|
|
|
*
|
|
|
|
|
|
|
15,000
|
|
|
|
|
*
|
|
|
15,000
|
|
|
|
|
*
|
Frank P. Filipps
|
|
|
15,000
|
|
|
|
|
*
|
|
|
|
|
|
|
15,000
|
|
|
|
|
*
|
|
|
15,000
|
|
|
|
|
*
|
Ted W. Rollins
|
|
|
15,000
|
|
|
|
|
*
|
|
|
|
|
|
|
15,000
|
|
|
|
|
*
|
|
|
15,000
|
|
|
|
|
*
|
All named executive officers, directors and director nominees as
a group (12 persons)
|
|
|
2,240,047
|
|
|
|
12.6
|
%
|
|
|
65,029
|
|
|
|
2,175,018
|
|
|
|
9.9
|
%
|
|
|
2,141,274
|
|
|
|
9.7
|
%
|
Other Selling Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hamil Investments,
LLC(10)
|
|
|
422,594
|
|
|
|
2.6
|
%
|
|
|
46,739
|
|
|
|
375,855
|
|
|
|
1.9
|
%
|
|
|
351,601
|
|
|
|
1.7
|
%
|
Prince Rental & Leasing Systems,
Inc.(11)
|
|
|
385,602
|
|
|
|
2.4
|
%
|
|
|
42,648
|
|
|
|
342,945
|
|
|
|
1.7
|
%
|
|
|
320,823
|
|
|
|
1.6
|
%
|
Barney A. Smith,
Jr.(12)
|
|
|
282,744
|
|
|
|
1.8
|
%
|
|
|
31,272
|
|
|
|
251,742
|
|
|
|
1.2
|
%
|
|
|
235,244
|
|
|
|
1.2
|
%
|
|
|
*
|
Represents beneficial ownership of less than 1% of our
outstanding common stock.
|
|
(1)
|
Includes 8,080,540 shares held by Summit Partners Private
Equity Fund VII-A, L.P., 4,853,301 shares held by Summit
Partners Private Equity
Fund VII-B,
L.P., 665,383 shares held by Summit Subordinated Debt
Fund III-A,
L.P., 346,614 shares held by Summit Subordinated Debt
Fund III-B,
L.P. and 41,609 shares held by Summit Investors VI, L.P.
(such entities are collectively referred to as Summit
Partners).
|
In connection with this offering, Summit Partners Private Equity
Fund VII-A,
L.P., Summit Partners Private Equity
Fund VII-B,
L.P., Summit Subordinated Debt
Fund III-A,
L.P., Summit Subordinated Debt
Fund III-B,
L.P. and Summit Investors VI, L.P. are
footnotes continued on following page
171
selling 894,669, 537,352, 73,670,
38,377 and 4,607 shares of our common stock, respectively.
Assuming full exercise of the underwriters option to
purchase additional shares, Summit Partners Private Equity
Fund VII-A,
L.P., Summit Partners Private Equity
Fund VII-B,
L.P., Summit Subordinated Debt
Fund III-A,
L.P., Summit Subordinated Debt
Fund III-B,
L.P. and Summit Investors VI, L.P. will sell an additional
464,264, 278,844, 38,229, 19,915 and 2,391 shares of our common
stock, respectively.
Summit Partners, L.P. is (i) managing member of Summit
Partners PE VII, LLC, which is the general partner of Summit
Partners PE VII, L.P., which is the general partner of Summit
Partners Private Equity
Fund VII-A,
L.P. and Summit Partners Private Equity
Fund VII-B,
L.P., (ii) the managing member of Summit Partners SD III,
LLC, which is the general partner of Summit Partners SD III,
L.P., which is the general partner of Summit Subordinated Debt
Fund III-A,
L.P. and Subordinated Debt
Fund III-B,
L.P. and (iii) the managing member of Summit Partners VI
(GP), LLC, which is the general partner of Summit Partners VI
(GP), L.P., which is the general partner of Summit Investors VI,
L.P. Summit Partners, L.P., through a two-person investment
committee, currently composed of Martin J. Mannion and Bruce R.
Evans, has voting and dispositive authority over the shares held
by each of these entities and therefore beneficially owns such
shares. The address for each of these entities is 222 Berkeley
Street, 18th Floor, Boston, MA 02116. Entities affiliated with
Summit Partners hold private equity investments in one or more
broker-dealers, and as a result Summit Partners is an affiliate
of a broker- dealer. However, Summit Partners acquired the
securities to be sold in this offering in the ordinary course of
business for investment for its own account and not as a nominee
or agent and, at the time of that purchase, had no contract,
undertaking, agreement, understanding or arrangement, directly
or indirectly, with any person to sell, transfer, distribute or
grant participations to such person or to any third person with
respect to those securities.
|
|
(2) |
Includes 506,211 shares that are subject to options that
are currently exercisable or exercisable within 60 days of
the date of this prospectus and 8,816 held by us for his benefit.
|
|
|
(3)
|
Includes 23,906 shares that are subject to options that are
currently exercisable or exercisable within 60 days of the
date of this prospectus.
|
|
(4)
|
Includes 55,791 shares that are subject to options that are
currently exercisable or exercisable within 60 days of the
date of this prospectus and 2,625 shares of common stock
held by Mr. Vrbans wife.
|
|
|
(5) |
Includes 491,625 shares prior to the offering that are
subject to options that are currently exercisable or exercisable
within 60 days of the date of this prospectus,
2,625 shares of common stock held by
Mr. Bullards wife and 33,656 shares held by us
for his benefit.
|
|
|
(6) |
Includes 690,359 shares prior to the offering that are
subject to options that are currently exercisable or exercisable
within 60 days of the date of this prospectus,
15,750 shares of common stock held by Robert S. Fullington
Granter Retained Annuity Trust, 15,750 shares of common
stock held by the Robert S. Fullington GRAT II and
2,107 shares held by us for his benefit. If the
over-allotment is exercised in full, Mr. Fullington will
exercise options for 14,755 shares of common stock to sell
in the offering.
|
|
|
(7)
|
Includes 55,791 shares that are subject to options that are
currently exercisable or exercisable within 60 days of the
date of this prospectus.
|
|
(8)
|
Excludes shares held by Summit Partners. Mr. Carroll
is a member of the general partner of Summit Partners L.P. and
as a result may be deemed to beneficially own the shares owned
by Summit Partners. Mr. Carroll disclaims ownership of the
shares held by Summit Partners, except to the extent of his
pecuniary interest therein.
|
|
(9)
|
Excludes shares held by Summit Partners. Mr. Kardwell
is a principal of Summit Partners L.P. and as a result may be
deemed to beneficially own the shares owned by Summit Partners.
Mr. Kardwell disclaims ownership of the shares held by
Summit Partners, except to the extent of his pecuniary interest
therein.
|
|
(10)
|
Kenneth N. Hamil is the managing partner of Hamil Investments,
LLC and has sole voting and dispositive power over the shares.
The address for this entity is 112 Annapolis Lane, Ponta Vedra
Beach, FL 32082.
|
|
(11)
|
John Prince is the President of Prince Rental &
Leasing Systems, Inc. and has sole voting and dispositive power
over the shares. The address for this entity is 1410
U.S. Highway 82 West, Tifton, GA 31793.
|
|
(12)
|
The address for the selling stockholder is 4634 Carlton Dunes
Drive, #12, Amelia Island, FL 32034.
|
172
DESCRIPTION
OF CAPITAL STOCK
The following is a description of the material terms of our
amended and restated certificate of incorporation and bylaws as
they will be in effect immediately prior to the consummation of
this offering. This summary does not purport to be complete and
is qualified in its entirety by reference to the actual terms
and provisions of our amended and restated certificate of
incorporation and bylaws, copies of which will be filed as
exhibits to the registration statement of which this prospectus
is a part.
Authorized
Capitalization
Our authorized capital stock consists of 150,000,000 shares
of common stock, par value $0.01 per share, and
10,000,000 shares of preferred stock, par value $0.01 per
share. Immediately following the completion of this offering,
20,256,739 shares of common stock will be outstanding, and
7,840 shares of our redeemable Series A preferred
stock, 2,450 shares of our redeemable Series B
preferred stock and 2,000 shares of our redeemable
Series C preferred stock will be outstanding.
Common
Stock
Voting
Rights
Each share of common stock entitles the holder to one vote with
respect to each matter presented to our stockholders on which
the holders of common stock are entitled to vote. Our common
stock votes as a single class on all matters relating to the
election and removal of directors on our board of directors and
as provided by law, with each share of common stock entitling
its holder to one vote. Holders of our common stock will not
have cumulative voting rights. Except in respect of matters
relating to the election and removal of directors on our board
of directors and as otherwise provided in our amended and
restated certificate of incorporation or required by law, all
matters to be voted on by our stockholders must be approved by a
majority of the shares present in person or by proxy at the
meeting and entitled to vote on the subject matter. In the case
of election of directors, all matters to be voted on by our
stockholders must be approved by a plurality of the votes
entitled to be cast by all shares of common stock.
Dividend
Rights
Holders of common stock will share equally in any dividend
declared by our board of directors, subject to the rights of the
holders of any outstanding preferred stock.
Liquidation
Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, holders of our common
stock would be entitled to share ratably in our assets that are
legally available for distribution to stockholders after payment
of liabilities. If we have any preferred stock outstanding at
such time, holders of the preferred stock may be entitled to
distribution
and/or
liquidation preferences. In either such case, we must pay the
applicable distribution to the holders of our preferred stock
before we may pay distributions to the holders of our common
stock.
Other
Rights
Our stockholders have no preemptive or other rights to subscribe
for additional shares. All holders of our common stock are
entitled to share equally on a
share-for-share
basis in any assets available for distribution to common
stockholders upon our liquidation, dissolution or winding up.
All outstanding shares are, and all shares offered by this
prospectus will be, when sold, validly issued, fully paid and
nonassessable.
173
Registration
Rights
Our existing stockholders have certain registration rights with
respect to our common stock pursuant to a stockholders
agreement. For further information regarding this agreement, see
Certain Relationships and Related Person
Transactions Stockholders Agreement.
Preferred
Stock
Our board of directors is authorized to provide for the issuance
of preferred stock in one or more series and to fix the
preferences, powers and relative participating, optional or
other special rights, and qualifications, limitations or
restrictions thereof, including the dividend rate, conversion
rights, voting rights, redemption rights and liquidation
preference and to fix the number of shares to be included in any
such series without any further vote or action by our
stockholders. Any preferred stock so issued may rank senior to
our common stock with respect to the payment of dividends or
amounts upon liquidation, dissolution or winding up, or both. In
addition, any such shares of preferred stock may have class or
series voting rights.
Series A,
B and C Redeemable Preferred Stock
As of September 30, 2010, we had $7.4 million,
$2.1 million and $1.9 million outstanding of our
Series A, B and C redeemable preferred stock, respectively.
We intend to use a portion of the net proceeds from this
offering to redeem all of our outstanding redeemable preferred
stock. See Use of Proceeds.
Holders of our Series A, B and C redeemable preferred stock
have no voting rights.
Our Series A and C redeemable preferred stock each accrue
cumulative cash dividends at a rate of 8.25% per annum of the
liquidation preference of $1,000 per share of such series of
redeemable preferred stock. Our Series B redeemable
preferred stock accrues cash dividends at a rate per annum of
4.0% plus 90 day LIBOR times the liquidation preference of
$1,000 per share of Series B redeemable preferred stock.
For any dividends declared by our board of directors, holders of
our Series A, B and C redeemable preferred stock will share
equally in such dividend before any holders of all other classes
or series of our common stock or other equity securities receive
any dividends.
Our outstanding Series A and B redeemable preferred stock
must be redeemed in full on December 31, 2034 and any
outstanding Series C redeemable preferred stock must be
redeemed in full on December 31, 2035. Additionally, we
have the option to redeem our Series A and B redeemable
preferred stock at certain redemption prices on or after
January 1, 2010 and our Series C redeemable preferred
stock at certain redemption prices on or after January 1,
2011, respectively.
Upon a change of control, any holder of each series of
redeemable preferred stock may require that we redeem all or any
portion of such holders redeemable preferred stock at a
certain redemption price. A change of control for such purposes
is: (i) if there is a change in the beneficial ownership of
50% or more of the shares of our common stock or voting power;
(ii) a sale of all or substantially all of our assets; or
(iii) a merger where we are not the surviving corporation.
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, before any holders of
all other classes or series of our common stock or other equity
securities receive any distributions, holders of our
Series A, B and C redeemable preferred stock would be
entitled to a liquidation preference of $1,000 per share of
Series A redeemable preferred stock and an amount equal to
any accumulated and unpaid dividends. If there are insufficient
assets to permit full payment to all holders of our
Series A, B and C redeemable preferred stock, holders of
each series of redeemable preferred stock will share equally in
any distribution.
174
Anti-Takeover
Effects of the DGCL and Our Certificate of Incorporation and
Bylaws
Our amended and restated certificate of incorporation and bylaws
contain provisions that may delay, defer or discourage another
party from acquiring control of us. We expect that these
provisions, which are summarized below, will discourage coercive
takeover practices or inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire
control of us to first negotiate with our board of directors,
which we believe may result in an improvement of the terms of
any such acquisition in favor of our stockholders. However, they
also give our board the power to discourage acquisitions that
some stockholders may favor.
Undesignated
Preferred Stock
The ability to authorize undesignated preferred stock will make
it possible for our board of directors to issue preferred stock
with super voting, special approval, dividend or other rights or
preferences on a discriminatory basis that could impede the
success of any attempt to acquire us. These and other provisions
may have the effect of deferring, delaying or discouraging
hostile takeovers, or changes in control or management of our
company.
Requirements
for Advance Notification of Stockholder Meetings, Nominations
and Proposals
Our bylaws provide that special meetings of the stockholders may
be called only upon the request of not less than a majority of
the combined voting power of the voting stock, upon the request
of a majority of the board, or upon the request of the chief
executive officer. Our bylaws prohibit the conduct of any
business at a special meeting other than as specified in the
notice for such meeting. These provisions may have the effect of
deferring, delaying or discouraging hostile takeovers, or
changes in control or management of our company.
Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the
direction of the board of directors or a committee of the board
of directors. In order for any matter to be properly
brought before a meeting, a stockholder will have to
comply with advance notice requirements and provide us with
certain information. Additionally, vacancies and newly created
directorships may be filled only by a vote of a majority of the
directors then in office, even though less than a quorum, and
not by the stockholders. Our amended and restated certificate of
incorporation provides that removal of a director without cause
requires approval by at least 75% of shares of common stock
entitled to vote. Our bylaws allow the presiding officer at a
meeting of the stockholders to adopt rules and regulations for
the conduct of meetings which may have the effect of precluding
the conduct of certain business at a meeting if the rules and
regulations are not followed. These provisions may also defer,
delay or discourage a potential acquirer from conducting a
solicitation of proxies to elect the acquirers own slate
of directors or otherwise attempting to obtain control of our
company.
Stockholder
Action by Written Consent
Pursuant to Section 228 of the DGCL, any action required to
be taken at any annual or special meeting of the stockholders
may be taken without a meeting, without prior notice and without
a vote if a consent or consents in writing, setting forth the
action so taken, is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which
all shares of our stock entitled to vote thereon were present
and voted, unless the companys certificate of
incorporation provides otherwise. Our amended and restated
certificate of incorporation provides that any action required
or permitted to be taken by our stockholders may be effected at
a duly called annual or special meeting of our stockholders and
may not be effected by consent in writing by such stockholders,
unless such action is recommended by all directors then in
office.
175
Business
Combinations under Delaware Law
Our amended and restated certificate of incorporation expressly
states that we have elected not to be governed by
Section 203 of the DGCL, which prohibits a publicly held
Delaware corporation from engaging in a business
combination with an interested stockholder for
a period of three years after the time the stockholder became an
interested stockholder, subject to certain exceptions, including
if, prior to such time, the board of directors approved the
business combination or the transaction which resulted in the
stockholder becoming an interested stockholder. Business
combinations include mergers, asset sales and other
transactions resulting in a financial benefit to the
interested stockholder. Subject to various
exceptions, an interested stockholder is a person
who, together with his or her affiliates and associates, owns,
or within three years did own, 15% or more of the
corporations outstanding voting stock. These restrictions
generally prohibit or delay the accomplishment of mergers or
other takeover or
change-in-control
attempts that are not approved by a companys board of
directors. Although we have elected to opt out of the
statutes provisions, we could elect to be subject to
Section 203 in the future.
Corporate
Opportunities
Our amended and restated certificate of incorporation will
provide that Summit Partners and its affiliates have no
obligation to offer us an opportunity to participate in business
opportunities presented to Summit Partners or its respective
affiliates even if the opportunity is one that we might
reasonably have pursued (and therefore may be free to compete
with us in the same business or similar businesses), and that
neither Summit Partners nor its respective affiliates will be
liable to us or our stockholders for breach of any duty by
reason of any such activities unless, in the case of any person
who is a director or officer of our company, such business
opportunity is expressly offered to such director or officer in
writing solely in his or her capacity as an officer or director
of our company.
Listing
We have applied to have our common stock listed on the New York
Stock Exchange under the symbol FRF.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company, LLC.
176
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there was no public market for our
common stock.
Sale of
Restricted Securities
After this offering, there will be outstanding
20,256,739 shares of our common stock. Of these shares, all
of the shares sold in this offering will be freely tradable
without restriction under the Securities Act of 1933, as
amended, unless purchased by our affiliates as that
term is defined in Rule 144 under the Securities Act. The
remaining shares of common stock that will be outstanding after
this offering are restricted securities within the
meaning of Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if they are
registered under the Securities Act or are sold pursuant to an
exemption from registration under Rule 144 under the
Securities Act, which is summarized below. Subject to the
lock-up
agreements described below, shares held by our affiliates that
are not restricted securities may be sold subject to compliance
with Rule 144 of the Securities Act without regard to the
prescribed one-year holding period under Rule 144.
Lock-Up
Arrangements and Registration Rights
In connection with this offering, we, each of our directors,
executive officers and the selling stockholders have entered
into lock-up
agreements described under Underwriting that
restrict the sale of shares of our common stock for up to
180 days after the date of this prospectus, subject to an
extension in certain circumstances.
In addition, following the expiration of the
lock-up
period, certain stockholders will have the right, subject to
certain conditions, to require us to register the sale of their
shares of our common stock under federal securities laws. If
these stockholders exercise this right, our other existing
stockholders may require us to register their registrable
securities. By exercising their registration rights, and selling
a large number of shares, the selling stockholders could cause
the prevailing market price of our common stock to decline.
Following the
lock-up
periods described above, all of the shares of our common stock
that are restricted securities or are held by our affiliates as
of the date of this prospectus will be eligible for sale in the
public market in compliance with Rule 144 under the
Securities Act.
Rule 144
The shares of our common stock sold in this offering will
generally be freely transferable without restriction or further
registration under the Securities Act, except that any shares of
our common stock held by an affiliate of ours may
not be resold publicly except in compliance with the
registration requirements of the Securities Act or under an
exemption under Rule 144 or otherwise. Rule 144
permits our common stock that has been acquired by a person who
is an affiliate of ours, or has been an affiliate of ours within
the past three months, to be sold into the market in an amount
that does not exceed, during any three-month period, the greater
of:
|
|
|
|
|
one percent of the total number of shares of our common stock
outstanding; or
|
|
|
|
the average weekly reported trading volume of our common stock
for the four calendar weeks prior to the sale.
|
Such sales are also subject to specific manner of sale
provisions, a six-month holding period requirement, notice
requirements and the availability of current public information
about us.
177
Approximately 373,538 shares of our common stock that are
not subject to
lock-up
arrangements described above will be eligible for sale under
Rule 144 immediately upon the closing of this offering.
Rule 144 also provides that a person who is not deemed to
have been an affiliate of ours at any time during the three
months preceding a sale, and who has for at least six months
beneficially owned shares of our common stock that are
restricted securities, will be entitled to freely sell such
shares of our common stock subject only to the availability of
current public information regarding us. A person who is not
deemed to have been an affiliate of ours at any time during the
three months preceding a sale, and who has beneficially owned
for at least one year shares of our common stock that are
restricted securities, will be entitled to freely sell such
shares of our common stock under Rule 144 without regard to
the current public information requirements of Rule 144.
Additional
Registration Statements
We intend to file one or more registration statements on
Form S-8
under the Securities Act to register shares of our common stock
issued or reserved for issuance under our equity incentive
plans, including the equity incentive plan we intend to adopt
prior to the consummation of this offering. The first such
registration statement is expected to be filed soon after the
date of this prospectus and will automatically become effective
upon filing with the Securities and Exchange Commission.
Accordingly, shares registered under such registration statement
will be available for sale in the open market, unless such
shares are subject to vesting restrictions with us or the
lock-up
restrictions described above.
178
MATERIAL
U.S. FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
ownership and disposition of common stock that may be relevant
to you if you are a
non-U.S. Holder.
In general, a
non-U.S. Holder
is any person or entity that is, for U.S. federal income
tax purposes, a foreign corporation, a nonresident alien
individual or a foreign estate or trust. This discussion is
based on current law, which is subject to change, possibly with
retroactive effect. This discussion is limited to
non-U.S. Holders
who hold shares of common stock as capital assets within the
meaning of the U.S. Internal Revenue Code. Moreover, this
discussion is for general information only and does not address
all the tax consequences that may be relevant to you in light of
your personal circumstances, nor does it discuss special tax
provisions, which may apply to you if you relinquished
U.S. citizenship or residence or if you are a controlled
foreign corporation or a passive foreign investment company.
If you are an individual, you may, in many cases, be deemed to
be a resident alien, as opposed to a nonresident alien, by
virtue of being present in the United States for at least
31 days in the calendar year and for an aggregate of at
least 183 days during a three-year period ending in the
current calendar year. For these purposes, all the days present
in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in
the second preceding year are counted. Resident aliens are
subject to U.S. federal income tax as if they were
U.S. citizens.
If a partnership, including any entity treated as a partnership
for U.S. federal income tax purposes, is a holder of our
common stock, the tax treatment of a partner in the partnership
will generally depend upon the status of the partner and the
activities of the partnership. A holder that is a partnership,
and the partners in such partnership, should consult their own
tax advisors regarding the tax consequences of the purchase,
ownership and disposition of our common stock.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT
A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON
STOCK AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE
LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING
JURISDICTION.
Dividends
We do not anticipate paying any dividends on our common stock in
the foreseeable future. See Dividend Policy. If
distributions are paid on shares of our common stock, such
distributions will constitute dividends for U.S. federal
income tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under
U.S. federal income tax principles. If a distribution
exceeds our current and accumulated earnings and profits, it
will constitute a return of capital that reduces, but not below
zero, a
non-U.S. Holders
adjusted tax basis in our common stock. Any remainder will
constitute gain from the sale or exchange of the common stock.
If dividends are paid, as a
non-U.S. Holder,
you will be subject to withholding of U.S. federal income
tax at a 30% rate or a lower rate as may be specified by an
applicable income tax treaty. To claim the benefit of a lower
rate under an income tax treaty, you must properly file with the
payor an Internal Revenue Service
Form W-8BEN,
or successor form, claiming an exemption from or reduction in
withholding under the applicable tax treaty. In addition, where
dividends are paid to a
non-U.S. Holder
that is a partnership or other pass-through entity, persons
holding an interest in the entity may need to provide
certification claiming an exemption or reduction in withholding
under the applicable treaty.
If dividends are considered effectively connected with the
conduct of a trade or business by you within the United States
and, if a tax treaty applies, are attributable to a
U.S. permanent establishment of
179
yours, those dividends will be subject to U.S. federal
income tax on a net basis at applicable graduated individual or
corporate rates but will not be subject to withholding tax,
provided an Internal Revenue Service
Form W-8ECI,
or successor form, is filed with the payor. If you are a foreign
corporation, any effectively connected dividends may, under
certain circumstances, be subject to an additional branch
profits tax at a rate of 30% or a lower rate as may be
specified by an applicable income tax treaty.
You must comply with the certification procedures described
above, or, in the case of payments made outside the United
States with respect to an offshore account, certain documentary
evidence procedures, directly or under certain circumstances
through an intermediary, to obtain the benefits of a reduced
rate under an income tax treaty with respect to dividends paid
with respect to your common stock. In addition, if you are
required to provide an Internal Revenue Service
Form W-8ECI
or successor form, as discussed above, you must also provide
your U.S. tax identification number.
If you are eligible for a reduced rate of U.S. withholding
tax pursuant to an income tax treaty, you may obtain a refund of
any excess amounts withheld by timely filing an appropriate
claim for refund with the Internal Revenue Service.
Gain on
Disposition of Common Stock
As a
non-U.S. Holder,
you generally will not be subject to U.S. federal income
tax on any gain recognized on a sale or other disposition of
common stock unless:
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the gain is considered effectively connected with the conduct of
a trade or business by you within the United States and, where a
tax treaty applies, is attributable to a U.S. permanent
establishment of yours (in which case you will be taxed in the
same manner as a U.S. person, and if you are a foreign
corporation, you may be subject to an additional branch profits
tax equal to 30% or a lower rate as may be specified by an
applicable income tax treaty);
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you are an individual who is present in the United States for
183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met (in which case
you will be subject to a 30% (or a lower rate as may be
specified by an applicable income tax treaty) tax on the amount
by which your capital gains allocable to U.S. sources
exceed capital losses allocable to U.S. sources during the
taxable year of the sale or other disposition); or
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we are or become a U.S. real property holding corporation
(USRPHC). We believe that we are not currently, and
are not likely to become, a USRPHC. Even if we were to become a
USRPHC, gain on the sale or other disposition of common stock by
you generally would not be subject to U.S. federal income
tax provided:
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the common stock is regularly traded on an established
securities market; and
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you do not actually or constructively own more than 5% of the
common stock during the shorter of (i) the five-year period
ending on the date of such disposition or (ii) the period
of time during which you held such shares.
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Federal
Estate Tax
Individuals, or an entity the property of which is includable in
an individuals gross estate for U.S. federal estate
tax purposes, should note that common stock held at the time of
such individuals death will be included in such
individuals gross estate for U.S. federal estate tax
purposes and may be subject to U.S. federal estate tax,
unless an applicable estate tax treaty provides otherwise.
180
Information
Reporting and Backup Withholding Tax
We generally must report annually to the Internal Revenue
Service and to each of you the amount of dividends paid to you
and the tax withheld with respect to those dividends, regardless
of whether withholding was required. Copies of the information
returns reporting those dividends and withholding may also be
made available to the tax authorities in the country in which
you reside under the provisions of an applicable income tax
treaty or other applicable agreements. Backup withholding is
generally imposed (currently at a 28% rate) on certain payments
to persons that fail to furnish the necessary identifying
information to the payor. You generally will be subject to
backup withholding tax with respect to dividends paid on your
common stock unless you certify your
non-U.S. status
or you otherwise establish an exemption. Dividends subject to
withholding of U.S. federal income tax as described above
in Dividends would not be subject to
backup withholding.
The payment of proceeds of a sale of common stock effected by or
through a U.S. office of a broker is subject to both backup
withholding and information reporting unless you provide the
payor with your name and address and you certify your
non-U.S. status
or you otherwise establish an exemption. In general, backup
withholding and information reporting will not apply to the
payment of the proceeds of a sale of common stock by or through
a foreign office of a broker. If, however, such broker is, for
U.S. federal income tax purposes, a U.S. person, a
controlled foreign corporation, a foreign person that derives
50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States or a foreign
partnership that at any time during its tax year either is
engaged in the conduct of a trade or business in the United
States or has as partners one or more U.S. persons that, in
the aggregate, hold more than 50% of the income or capital
interest in the partnership, backup withholding will not apply
but such payments will be subject to information reporting,
unless such broker has documentary evidence in its records that
you are a
non-U.S. Holder
and certain other conditions are met or you otherwise establish
an exemption.
Any amounts withheld under the backup withholding rules
generally will be allowed as a refund or a credit against your
U.S. federal income tax liability provided the required
information is furnished in a timely manner to the Internal
Revenue Service.
Recent
Legislation
In addition to withholding taxes discussed above, recent
legislation generally imposes a withholding tax of 30% on
payments to certain foreign entities, after December 31,
2012, of dividends on and the gross proceeds of dispositions of
U.S. common stock, unless various U.S. information
reporting and due diligence requirements generally relating to
U.S. owners of and account holders with those entities have
been satisfied. These new requirements are different from, and
in addition to, the beneficial owner certification requirements
described above.
Non-U.S. Holders
should consult their tax advisors regarding the possible
implications of this legislation on their investment in our
common stock.
181
UNDERWRITING
We and the selling stockholders are offering the shares of
common stock described in this prospectus through a number of
underwriters. Piper Jaffray & Co. and
SunTrust Robinson Humphrey, Inc. are acting as joint
book-running managers for this offering, and Piper Jaffray is
acting as representative of the underwriters. We and the selling
stockholders have entered into a firm commitment underwriting
agreement with the representative. Subject to the terms and
conditions of the underwriting agreement, we and the selling
stockholders have agreed to sell to the underwriters, and each
underwriter has agreed to purchase, the number of shares of
common stock listed next to its name in the following table:
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Number of
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Underwriters
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Shares
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Piper Jaffray & Co.
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SunTrust Robinson Humphrey, Inc.
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William Blair & Company, L.L.C.
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FBR Capital Markets & Co.
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Keefe, Bruyette & Woods, Inc.
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Macquarie Capital (USA) Inc.
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Liquidnet, Inc.
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Total
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The underwriters have advised us and the selling stockholders
that they propose to offer the shares of common stock to the
public at $ per share. The
underwriters propose to offer the shares of common stock to
certain dealers at the same price less a concession of not more
than $ per share. The underwriters
may allow, and the dealers may reallow, a concession of not more
than $ per share on sales to
certain other brokers and dealers. After this offering, these
figures may be changed by the underwriters.
The selling stockholders have granted to the underwriters an
option to purchase up to an additional 900,000 shares of
common stock from them at the same price to the public, and with
the same underwriting discount, as set forth above. The
underwriters may exercise this option any time during the
30-day
period after the date of this prospectus, but only to cover
over-allotments, if any. To the extent the underwriters exercise
the option, each underwriter will become obligated, subject to
certain conditions, to purchase approximately the same
percentage of the additional shares as it was obligated to
purchase under the purchase agreement.
We estimate that the total fees and expenses payable by us,
excluding underwriting discounts and commissions, will be
approximately $4.2 million. We are paying the expenses of
the selling stockholders in connection with this offering.
182
The following table shows the underwriting fees to be paid to
the underwriters by us and the selling stockholders in
connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the over-allotment option.
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No
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Full
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Exercise
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Exercise
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Per share underwriting discounts and commissions paid by us
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$
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$
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Per share underwriting discounts and commissions paid by the
selling stockholders
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$
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$
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Total underwriting discounts and commissions paid by us
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$
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$
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Total underwriting discounts and commissions paid by the selling
stockholders
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$
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$
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We have agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities
Act, or to contribute to payments that the underwriters may be
required to make in respect of those liabilities.
Piper Jaffray has informed us that neither it, nor any
other underwriter participating in the distribution of this
offering, will make sales of the shares of common stock offered
by this prospectus to accounts over which they exercise
discretionary authority without the prior specific written
approval of the customer.
We and each of our directors, executive officers and the selling
stockholders are subject to
lock-up
agreements that prohibit us and them from offering for sale,
selling, contracting to sell, granting any option for the sale
of, transferring or otherwise disposing of any shares of common
stock, options or warrants to acquire shares of our common stock
or any security or instrument related to such shares of common
stock, options or warrants for a period of at least
180 days following the date of this prospectus without the
prior written consent of Piper Jaffray. The
lock-up
agreement provides exceptions for (i) sales to underwriters
pursuant to the purchase agreement and (ii) certain other
exceptions.
The 180-day
lock-up
period in all of the
lock-up
agreements is subject to extension if, (i) during the last
17 days of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period or (ii) we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
lock-up
period, in which case the restrictions imposed in these
lock-up
agreements shall continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event, unless
Piper Jaffray waives the extension in writing.
We have applied to have our common stock listed on the New York
Stock Exchange under the symbol FRF. Prior to this
offering, there has been no established trading market for our
common stock. The initial public offering price for our common
stock offered by this prospectus was negotiated by us and the
underwriters. The factors considered in determining the initial
public offering price include the history of and the prospects
for the industry in which we compete, our past and present
operations, our historical results of operations, our prospects
for future earnings, the recent market prices of securities of
generally comparable companies and the general condition of the
securities markets at the time of this offering and other
relevant factors. There can be no assurance that the initial
public offering price of our common stock will correspond to the
price at which our common stock will trade in the public market
subsequent to this offering or that an active public market for
our common stock will develop and continue after this offering.
183
To facilitate this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the
price of the shares of common stock during and after this
offering. Specifically, the underwriters may over-allot or
otherwise create a short position in the common stock for their
own account by selling more shares of common stock than we have
sold to them. Short sales involve the sale by the underwriters
of a greater number of shares than they are required to purchase
in this offering. Covered short sales are sales made
in an amount not greater than the underwriters option to
purchase additional shares in this offering. The underwriters
may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares
in the open market. In determining the source of shares to close
out the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase
in the open market as compared to the price at which they may
purchase shares through the over-allotment option.
Naked short sales are sales in excess of this
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the shares
in the open market after pricing that could adversely affect
investors who purchase in this offering.
In addition, the underwriters may stabilize or maintain the
price of the shares by bidding for or purchasing shares in the
open market and may impose penalty bids. If penalty bids are
imposed, selling concessions allowed to syndicate members or
other broker-dealers participating in this offering are
reclaimed if shares previously distributed in this offering are
repurchased, whether in connection with stabilization
transactions or otherwise. The effect of these transactions may
be to stabilize or maintain the market price of the shares at a
level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the
price of the shares to the extent that it discourages resales of
the shares. The magnitude or effect of any stabilization or
other transactions is uncertain. These transactions may be
effected on the New York Stock Exchange or otherwise and, if
commenced, may be discontinued at any time. Some underwriters
and selling group members may also engage in passive market
making transactions in our shares. Passive market making
consists of displaying bids on the New York Stock Exchange
limited by the prices of independent market makers and effecting
purchases limited by those prices in response to order flow.
Rule 103 of Regulation M promulgated by the Securities
and Exchange Commission limits the amount of net purchases that
each passive market maker may make and the displayed size of
each bid. Passive market making may stabilize the market price
of the shares at a level above that which might otherwise
prevail in the open market and, if commenced, may be
discontinued at any time.
This prospectus in electronic format may be made available on
the websites maintained by one or more of the underwriters or
selling group members, if any, participating in this offering
and one or more of the underwriters participating in this
offering may distribute prospectuses and prospectus supplements
electronically.
Other
Relationships
From time to time in the ordinary course of their respective
businesses, certain of the underwriters and their affiliates
have in the past and may in the future engage in commercial
banking or investment banking transactions with us and our
affiliates for which they received and will receive customary
fees and expenses. In particular, an affiliate of SunTrust
Robinson Humphrey, Inc. is a lender under our revolving credit
facility.
Affiliates of Summit Partners own approximately more than 10% of
the outstanding preferred stock, representing 6.3% of the
outstanding equity of the parent company of Liquidnet, Inc., one
of the underwriters of the offering.
184
Selling
Restrictions
Sales
Outside the United States
No action has been taken in any jurisdiction (except in the
United States) that would permit a public offering of the common
stock, or the possession, circulation or distribution of this
prospectus or any other material relating to us or the common
stock in any jurisdiction where action for that purpose is
required. Accordingly, the common stock may not be offered or
sold, directly or indirectly, and none of this prospectus
supplement or any other offering material or advertisements in
connection with the offering of the common stock may be
distributed or published, in or from any country or jurisdiction
except in compliance with any applicable rules and regulations
of any such country or jurisdiction. Each of the underwriters
may arrange to sell common stock offered hereby in certain
jurisdictions outside the United States, either directly or
through affiliates, where they are permitted to do so.
European
Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State), with effect from and
including the date on which the Prospectus Directive is
implemented in that Relevant Member State, no offer of our
shares has been made or will be made to the public in that
Relevant Member State, except that, with effect from and
including such date, an offer of our shares may be made to the
public in the Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of (i) an
average of at least 250 employees during the last financial
year; (ii) a total balance sheet of more than
43,000,000 and (iii) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus
Directive); or
(d) in any other circumstances which do not require the
publication by us of a prospectus pursuant to Article 3 of
the Prospectus Directive.
For the purposes of this provision, the expression an
offer of our shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and any shares to be offered so as to enable an
investor to decide to purchase any shares, as the same may be
varied in that Relevant Member State by any measure implementing
the Prospectus Directive in that Relevant Member State and the
expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
Notice
to Investors in the United Kingdom
The Underwriter represents, warrants and agrees that it has only
communicated or caused to be communicated and will only
communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of section 21 of the Financial Services and Markets Act
2000) in connection with the issue or sale of our shares in
circumstances in which Section 21 of such Act does not
apply to us and it has complied with and will comply with all
applicable provisions of such Act with respect to anything done
by it in relation to our shares in, from or otherwise involving
the United Kingdom.
185
Switzerland
This document does not constitute a prospectus within the
meaning of Art. 652a of the Swiss Code of Obligations. Our
shares may not be sold directly or indirectly in or into
Switzerland except in a manner which will not result in a public
offering within the meaning of the Swiss Code of Obligations.
Neither this document nor any other offering materials relating
to our shares may be distributed, published or otherwise made
available in Switzerland except in a manner which will not
constitute a public offer of our shares in Switzerland.
Notice
to Prospective Investors in France
The prospectus (including any amendment, supplement or
replacement thereto) has not been prepared in connection with
the offering of our securities that has been approved by the
Autorité des marchés financiers or by the competent
authority of another State that is a contracting party to the
Agreement on the European Economic Area and notified to the
Autorité des marchés financiers; no security has been
offered or sold and will be offered or sold, directly or
indirectly, to the public in France except to permitted
investors, or Permitted Investors, consisting of persons
licensed to provide the investment service of portfolio
management for the account of third parties, qualified investors
(investisseurs qualifiés) acting for their own account
and/or
corporate investors meeting one of the four criteria provided in
article D.
341-1 of the
French Code Monétaire et Financier and belonging to a
limited circle of investors (cercle restreint
dinvestisseurs) acting for their own account, with
qualified investors and limited circle of
investors having the meaning ascribed to them in
Article L.
411-2, D.
411-1, D.
411-2, D.
734-1, D.
744-1, D.
754-1 and D.
764-1 of the
French Code Monétaire et Financier; none of this prospectus
or any other materials related to the offer or information
contained therein relating to our securities has been released,
issued or distributed to the public in France except to
Permitted Investors; and the direct or indirect resale to the
public in France of any securities acquired by any Permitted
Investors may be made only as provided by articles L.
411-1, L.
411-2, L.
412-1 and L.
621-8 to L.
621-8-3 of
the French Code Monétaire et Financier and applicable
regulations thereunder.
Notice
to Prospective Investors in Italy
The offering of the securities has not been registered pursuant
to the Italian securities legislation and, accordingly, we have
not offered or sold, and will not offer or sell, our common
stock in the Republic of Italy in a solicitation to the public,
and that sales of our common stock in the Republic of Italy
shall be effected in accordance with all Italian securities, tax
and exchange control and other applicable laws and regulations.
In any case, our common stock cannot be offered or sold to any
individuals in the Republic of Italy either in the primary
market or the secondary market.
We will not offer, sell or deliver any securities or distribute
copies of this prospectus or any other document relating to our
common stock in the Republic of Italy except to
Professional Investors, as defined in
Article 31.2 of CONSOB Regulation No. 11522 of
2 July 1998 as amended
(Regulation No. 11522), pursuant to
Article 30.2 and 100 of Legislative Decree No. 58 of
24 February 1998 as amended (Decree
No. 58), or in any other circumstances where an
expressed exemption to comply with the solicitation restrictions
provided by Decree No. 58 or Regulation No. 11971
of 14 May 1999 as amended applies, provided, however, that
any such offer, sale or delivery of our common stock or
distribution of copies of this prospectus or any other document
relating to our common stock in the Republic of Italy must be:
(a) made by investment firms, banks or financial
intermediaries permitted to conduct such activities in the
Republic of Italy in accordance with Legislative Decree
No. 385 of 1 September 1993 as amended (Decree
No. 385), Decree No. 58, CONSOB
Regulation No. 11522 and any other applicable laws and
regulations;
186
(b) in compliance with Article 129 of Decree
No. 385 and the implementing instructions of the Bank of
Italy, pursuant to which the issue, trading or placement of
securities in Italy is subject to a prior notification to the
Bank of Italy, unless and exemption, depending, inter alia, on
the aggregate amount and the characteristics of our common stock
issued or offered in the Republic of Italy, applies; and
(c) in compliance with any other applicable notification
requirement or limitation which may be imposed by CONSOB or the
Bank of Italy.
Notice
to Prospective Investors in Germany
This prospectus has not been prepared in accordance with the
requirements for a securities or sales prospectus under the
German Securities Prospectus Act (Wertpapierprospektgesetz), the
German Sales Prospectus Act (Verkaufsprospektgesetz), or the
German Investment Act (Investmentgesetz). Neither the German
Federal Financial Services Supervisory Authority (Bundesanstalt
fur Finanzdienstleistungsaufsicht BaFin) nor any
other German authority has been notified of the intention to
distribute shares of our common stock in Germany. Consequently,
shares of our common stock may not be distributed in Germany by
way of public offering, public advertisement or in any similar
manner AND THIS PROSPECTUS AND ANY OTHER DOCUMENT RELATING TO
THE OFFERING, AS WELL AS INFORMATION OR STATEMENTS CONTAINED
THEREIN, MAY NOT BE SUPPLIED TO THE PUBLIC IN GERMANY OR USED IN
CONNECTION WITH ANY OFFER FOR SUBSCRIPTION OF SHARES OF OUR
COMMON STOCK TO THE PUBLIC IN GERMANY OR ANY OTHER MEANS OF
PUBLIC MARKETING. Shares of our common stock are being offered
and sold in Germany only to qualified investors which are
referred to in Section 3, paragraph 2 no. 1, in
connection with Section 2, no. 6, of the German
Securities Prospectus Act, Section 8f paragraph 2
no. 4 of the German Sales Prospectus Act, and in
Section 2 paragraph 11 sentence 2 no. 1 of the
German Investment Act. This prospectus is strictly for use of
the person who has received it. It may not be forwarded to other
persons or published in Germany.
Notice
to Prospective Investors in Norway
Shares of our common stock will not be offered in Norway other
than (i) to investors who are deemed professional investors
under
Section 5-4
of the Norwegian Securities Trading Act of 1997 as defined in
Regulation no. 1424 of 9 December 2005
(Professional Investors), (ii) to fewer than
100 investors that are not Professional Investors or with a
total consideration of less than EUR 100,000 calculated
over a period of 12 months, or (iii) with a minimum
subscription amount of EUR 50,000. Consequently, no public
offering will be made in Norway and this prospectus has not been
filed with or approved by any Norwegian authority. The
prospectus must not be reproduced or otherwise distributed to
others by the recipient.
Notice
to Prospective Investors in Finland
This prospectus has not been prepared to comply with the
standards and requirements regarding public offering set forth
in the Finnish Securities Market Act (1989/495, as amended) and
it has not been approved by the Finnish Financial Supervision
Authority. Shares of our common stock may not be offered, sold,
advertised or otherwise marketed in Finland under circumstances
which constitute public offering of securities under Finnish law.
Notice
to Prospective Investors in the Dubai International Financial
Centre
This prospectus relates to an exempt offer in accordance with
the Offered Securities Rules of the Dubai Financial Services
Authority. This prospectus is intended for distribution only to
persons of a type specified in those rules. It must not be
delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing
or verifying any documents in connection with exempt offers. The
Dubai Financial Services Authority has not approved this
prospectus nor
187
taken steps to verify the information set out in it, and has no
responsibility for it. The shares of our common stock which are
the subject of the offering contemplated by this prospectus may
be illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares offered should conduct their own due diligence on
the shares. If you do not understand the contents of this
prospectus you should consult an authorized financial adviser.
Hong
Kong
Our shares may not be offered or sold by means of any document
other than: (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), (ii) to
professional investors as defined in the Securities
and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any
rules thereunder, or (iii) in other circumstances which do
not result in the document being a prospectus within
the meaning of the Companies Ordinance. No advertisement,
invitation or other document relating our shares may be issued,
whether in Hong Kong or elsewhere, where such document is
directed at, or the contents are likely to be accessed or read
by, the public of Hong Kong (except if permitted to do so under
the laws of Hong Kong), other than with respect to such shares
that is intended to be disposed of only to persons outside of
Hong Kong or only to professional investors as
defined in the Securities and Futures Ordinance and any rules
thereunder.
Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the SFA),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is:
(a) a corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor)
whose sole purpose is to hold investments and each beneficiary
is an accredited investor, shares, debentures and units of
shares and debentures of that corporation or the
beneficiaries rights and interest in that trust shall not
be transferable for six months after that corporation or that
trust has acquired the shares under Section 275 except:
(i) to an institutional investor or to a relevant person, or to
any person pursuant to an offer that is made on terms that such
rights or interest are acquired at a consideration of not less
than $200,000 (or its equivalent in a foreign currency) for each
transaction, whether such amount is to be paid for in cash or by
exchange of securities or other assets;
(ii) where no consideration is given for the transfer; or
(iii) by operation of law.
188
CONFLICT
OF INTEREST
Affiliates of Summit Partners own more than 10% of the
outstanding preferred stock of the parent of Liquidnet, Inc., an
underwriter for this offering. Consequently Liquidnet, Inc. may
be deemed to have a conflict of interest under
Rule 5121 of the Conduct Rules of the Financial Industry
Regulatory Authority, Inc. (Rule 5121).
Accordingly, this offering will be made in compliance with the
applicable provisions of Rule 5121. Rule 2720 requires
that a qualified independent underwriter meeting
certain standards participate in the preparation of the
registration statement and prospectus and exercise the usual
standards of due diligence with respect thereto.
Piper Jaffray has agreed to act as a qualified
independent underwriter within the meaning of
Rule 5121 in connection with this offering.
Piper Jaffray will not receive any additional compensation
for acting as a qualified independent underwriter. Liquidnet,
Inc. will not confirm any sales to accounts over which it
exercises discretionary authority without first receiving
specific written approval for the transaction from those
accounts. We have agreed to indemnify Piper Jaffray against
certain liabilities incurred in connection with acting as a
qualified independent underwriter, including
liabilities under the Securities Act.
189
LEGAL
MATTERS
Weil, Gotshal & Manges LLP, New York, New York, has
passed upon the validity of the common stock offered hereby on
behalf of us. Certain legal matters will be passed upon on
behalf of the underwriters by Dewey & LeBoeuf LLP, New
York, New York. Certain partners of Weil, Gotshal &
Manges LLP have ownership interests in funds operated by Summit
Partners.
EXPERTS
The consolidated financial statements for Fortegra Financial
Corporation and subsidiaries at December 31, 2009 and 2008,
for each of the two years ended December 31, 2009 and 2008,
the period from June 20, 2007 to December 31, 2007 and
the period from January 1, 2007 to June 19, 2007
included in this prospectus have been so included in reliance on
the report of Johnson Lambert & Co. LLP, an
independent registered certified public accounting firm, given
on the authority of said firm as experts in accounting and
auditing.
The financial statements for Bliss and Glennon, Inc. at
December 31, 2008 (Successor) and 2007 (Predecessor),
for the period from October 1, 2008 to December 31,
2008 (Successor), for the period from January 1, 2008 to
September 30, 2008 (Predecessor) and for the year ended
December 31, 2007 included in this prospectus have been so
included in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered
certified public accounting firm, given on the authority of said
firm as experts in accounting and auditing.
CHANGE IN
ACCOUNTANTS
On September 14, 2010, we re-appointed Johnson
Lambert & Co. LLP as our independent accounting firm.
Johnson Lambert &Co. LLP previously audited our 2009,
2008 and 2007 financial statements, and we dismissed them as our
independent accountants on April 20, 2010. On
March 26, 2010, we engaged PricewaterhouseCoopers LLP to
re-audit our 2009, 2008 and 2007 financial statements. We
dismissed PricewaterhouseCoopers LLP on September 13, 2010
as a result of unresolved independence issues arising from
services that they had performed for overseas affiliates of
Summit Partners, our largest stockholder.
PricewaterhouseCoopers LLP audited the financial statements
of Bliss and Glennon, Inc. at December 31, 2008 (Successor)
and 2007 (Predecessor), for the period from October 1,
2008 to December 31, 2008 (Successor), for the period from
January 1, 2008 to September 30, 2008 (Predecessor)
and for the year ended December 31, 2007, which are
included herein. The members of our audit committee participated
in and approved the decisions to appoint and dismiss
PricewaterhouseCoopers LLP and dismiss and re-appoint Johnson
Lambert & Co. LLP.
The report of Johnson Lambert & Co. LLP on our
financial statements at December 31, 2009 and 2008, for the
years ended December 31, 2009 and 2008, the period from
June 20, 2007 to December 31, 2007 and the period from
January 1, 2007 to June 19, 2007, which appears
herein, contained no adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope
or accounting principle. PricewaterhouseCoopers LLP did not
issue any reports with respect to the Companys financial
statements. Accordingly, there were no reports issued by
PricewaterhouseCoopers LLP with respect to us that contained an
adverse opinion or disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting
principle.
During the years ended December 31, 2009, 2008, the period
from June 20, 2007 to December 31, 2007, the period
from January 1, 2007 to June 19, 2007 and through
April 20, 2010, there were no disagreements with Johnson
Lambert & Co. LLP on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Johnson Lambert & Co.
LLP, would have caused it to make reference thereto in its
190
reports on the financial statements for such periods. During the
period from March 26, 2010 through September 13, 2010,
there were no disagreements with PricewaterhouseCoopers LLP on
any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused it to make
reference thereto in any reports issued on our financial
statements.
During the years ended December 31, 2009, 2008, the period
from June 20, 2007 to December 31, 2007, the period
from January 1, 2007 to June 19, 2007 and through
April 20, 2010, there have been no reportable events
(as defined in Item 304(a)(1)(v) of
Regulation S-K)
involving Johnson Lambert & Co. LLP. Except as
disclosed in the second paragraph under the heading Risk
Factors Our internal control over financial
reporting does not currently meet the standards required by
Section 404 of the Sarbanes-Oxley Act of 2002 and we have
identified a material weakness in our internal controls, and the
failure to achieve and maintain effective internal control over
financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 or to remedy the material weakness
could materially and adversely affect us, during the
period from March 26, 2010 through September 13, 2010,
there have been no reportable events (as defined in
Item 304(a)(1)(v) of
Regulation S-K)
involving PricewaterhouseCoopers LLP.
We have requested that Johnson Lambert & Co. LLP and
PricewaterhouseCoopers LLP each furnish us with a letter
addressed to the Securities and Exchange Commission stating
whether or not it agrees with the above statements. A copy of
such letters, each dated September 23, 2010, are filed as
Exhibits 16.1 and 16.2 to the registration statement of
which this prospectus forms a part.
During the years ended December 31, 2009, 2008, the period
from June 20, 2007 to December 31, 2007, the period
from January 1, 2007 to June 19, 2007 and through
March 26, 2010, we had not consulted with
PricewaterhouseCoopers LLP regarding any of the matters
described in Item 304(a)(2)(i) or Item 304(a)(2)(ii)
of
Regulation S-K.
During the period from April 20, 2010 through
September 14, 2010, we had not consulted with Johnson
Lambert & Co. LLP regarding any of the matters
described in Item 304(a)(2)(i) or Item 304(a)(2)(ii)
of
Regulation S-K.
191
WHERE YOU
CAN FIND MORE INFORMATION
We have filed a registration statement on
Form S-1
with the Securities and Exchange Commission for the stock we are
offering by this prospectus. This prospectus does not include
all of the information contained in the registration statement.
You should refer to the registration statement and its exhibits
for additional information. Whenever we make reference in this
prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you
should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other
document. When we complete this offering, we will also be
required to file annual, quarterly and special reports, proxy
statements and other information with the Securities and
Exchange Commission.
You can read our Securities and Exchange Commission filings,
including the registration statement, over the Internet at the
Securities and Exchange Commissions website at
http:www.sec.gov. You may also read and copy any document we
file with the Securities and Exchange Commission at its public
reference facilities at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. You may also obtain
copies of the documents at prescribed rates by writing to the
Public Reference Section at the Securities and Exchange
Commission at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Please call the Securities and
Exchange Commission at
1-800-SEC-0330
for further information on the operation of the public reference
facilities.
You may obtain a copy of any of our filings, at no cost, by
writing or telephoning us at:
Fortegra
Financial Corporation
100 West Bay Street
Jacksonville, Florida 32202
Attn: General Counsel
(866) 961-9529
192
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Fortegra Financial Corporation
|
|
|
|
|
Audited Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-52
|
|
|
|
|
F-53
|
|
|
|
|
F-54
|
|
|
|
|
F-55
|
|
|
|
|
F-56
|
|
|
|
|
|
|
Bliss and Glennon, Inc.
|
|
|
|
|
Audited Financial Statements
|
|
|
|
|
|
|
|
F-75
|
|
|
|
|
F-76
|
|
|
|
|
F-77
|
|
|
|
|
F-78
|
|
|
|
|
F-79
|
|
|
|
|
F-80
|
|
Unaudited Financial Statements
|
|
|
|
|
|
|
|
F-89
|
|
|
|
|
F-90
|
|
|
|
|
F-91
|
|
|
|
|
F-92
|
|
|
|
|
F-93
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM
Board of Directors
Fortegra Financial Corporation
We have audited the accompanying consolidated balance sheets of
Fortegra Financial Corporation
(the Company) as of December 31, 2009 and 2008,
and the related consolidated statements of income, changes in
stockholders equity, and cash flows for the years then
ended, for the period from June 20, 2007 to
December 31, 2007 (Successor) and for the period from
January 1, 2007 to June 19, 2007 (Predecessor).
Our audits also included the financial statement schedule of
condensed financial information of registrant appearing under
Item 16(b). These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Fortegra Financial Corporation at December 31,
2009 and 2008 and the results of its operations and its cash
flows for the years then ended, for the period from
June 20, 2007 to December 31, 2007 (Successor) and for
the period from January 1, 2007 to June 19, 2007
(Predecessor), in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Johnson Lambert & Co. LLP
Jacksonville, Florida
September 23, 2010
F-2
FORTEGRA
FINANCIAL CORPORATION
(All
Amounts in Thousands Except Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Invested assets and cash:
|
|
|
|
|
|
|
|
|
Fixed maturity securities available for sale, at fair value
(amortized cost of $78,548 and $97,926 at December 31, 2009
and 2008, respectively)
|
|
$
|
80,948
|
|
|
$
|
96,405
|
|
Equity securities available for sale (cost of $2,155 and $1,276
at December 31, 2009 and 2008, respectively)
|
|
|
2,210
|
|
|
|
1,174
|
|
Short-term investments
|
|
|
1,220
|
|
|
|
2,180
|
|
Cash and cash equivalents
|
|
|
29,940
|
|
|
|
22,082
|
|
Restricted cash
|
|
|
18,090
|
|
|
|
5,170
|
|
|
|
|
|
|
|
|
|
|
Total invested assets and cash
|
|
|
132,408
|
|
|
|
127,011
|
|
Accrued investment income
|
|
|
910
|
|
|
|
1,195
|
|
Notes receivable
|
|
|
2,138
|
|
|
|
2,159
|
|
Other receivables
|
|
|
28,116
|
|
|
|
11,446
|
|
Reinsurance receivables
|
|
|
173,798
|
|
|
|
199,023
|
|
Deferred policy acquisition costs
|
|
|
41,083
|
|
|
|
38,987
|
|
Property and equipment
|
|
|
4,140
|
|
|
|
2,574
|
|
Goodwill and other intangible assets
|
|
|
93,558
|
|
|
|
57,686
|
|
Other assets
|
|
|
2,475
|
|
|
|
2,288
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
478,626
|
|
|
$
|
442,369
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Unpaid claims
|
|
$
|
36,152
|
|
|
$
|
36,363
|
|
Unearned premiums
|
|
|
215,652
|
|
|
|
242,535
|
|
Accrued expenses and accounts payable
|
|
|
45,117
|
|
|
|
16,901
|
|
Commissions payable
|
|
|
2,157
|
|
|
|
7,231
|
|
Notes payable
|
|
|
31,487
|
|
|
|
20,000
|
|
Preferred trust securities
|
|
|
35,000
|
|
|
|
35,000
|
|
Redeemable preferred stock
|
|
|
11,540
|
|
|
|
11,540
|
|
Guaranteed investment contract
|
|
|
|
|
|
|
1,010
|
|
Deferred income taxes
|
|
|
20,728
|
|
|
|
14,768
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
397,833
|
|
|
|
385,348
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 16)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.331/3
per share (6,000,000 shares authorized and 3,007,031 and
2,871,563 shares issued at December 31, 2009 and 2008,
respectively)
|
|
|
1,002
|
|
|
|
957
|
|
Treasury stock (8,491 and 100,000 shares at
December 31, 2009 and 2008, respectively)
|
|
|
(176
|
)
|
|
|
(2,069
|
)
|
Additional paid-in capital
|
|
|
53,675
|
|
|
|
45,894
|
|
Accumulated other comprehensive income (loss), net of tax
(provision) benefit of $(865) and $552 at December 31, 2009
and 2008, respectively
|
|
|
1,607
|
|
|
|
(1,072
|
)
|
Retained earnings
|
|
|
23,210
|
|
|
|
11,652
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity before non-controlling interest
|
|
|
79,318
|
|
|
|
55,362
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest
|
|
|
1,475
|
|
|
|
1,659
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
80,793
|
|
|
|
57,021
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
478,626
|
|
|
$
|
442,369
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
F-3
FORTEGRA
FINANCIAL CORPORATION
(All
Amounts in Thousands Except Share and Per Share
Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 20, 2007
|
|
|
|
January 1, 2007
|
|
|
|
Years Ended December 31,
|
|
|
to December
|
|
|
|
to June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
31, 2007
|
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and administrative fees
|
|
$
|
31,829
|
|
|
$
|
24,279
|
|
|
$
|
10,686
|
|
|
|
$
|
8,165
|
|
Wholesale brokerage commissions and fees
|
|
|
16,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceding commission
|
|
|
24,075
|
|
|
|
26,215
|
|
|
|
13,733
|
|
|
|
|
10,753
|
|
Net investment income
|
|
|
4,759
|
|
|
|
5,560
|
|
|
|
3,411
|
|
|
|
|
2,918
|
|
Net realized gains (losses)
|
|
|
54
|
|
|
|
(1,921
|
)
|
|
|
(348
|
)
|
|
|
|
516
|
|
Net earned premium
|
|
|
108,116
|
|
|
|
112,774
|
|
|
|
68,219
|
|
|
|
|
64,906
|
|
Other income
|
|
|
971
|
|
|
|
178
|
|
|
|
28
|
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
186,113
|
|
|
|
167,085
|
|
|
|
95,729
|
|
|
|
|
87,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
32,566
|
|
|
|
29,854
|
|
|
|
20,324
|
|
|
|
|
21,224
|
|
Commissions
|
|
|
70,449
|
|
|
|
81,226
|
|
|
|
45,275
|
|
|
|
|
42,638
|
|
Personnel costs
|
|
|
31,365
|
|
|
|
21,742
|
|
|
|
10,722
|
|
|
|
|
9,409
|
|
Other operating expenses
|
|
|
22,291
|
|
|
|
12,225
|
|
|
|
8,508
|
|
|
|
|
7,118
|
|
Depreciation and amortization
|
|
|
3,507
|
|
|
|
2,629
|
|
|
|
1,292
|
|
|
|
|
221
|
|
Interest expense
|
|
|
7,800
|
|
|
|
7,255
|
|
|
|
4,130
|
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
167,978
|
|
|
|
154,931
|
|
|
|
90,251
|
|
|
|
|
81,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
non-controlling
interest
|
|
|
18,135
|
|
|
|
12,154
|
|
|
|
5,478
|
|
|
|
|
5,832
|
|
Income taxes
|
|
|
6,551
|
|
|
|
4,208
|
|
|
|
1,761
|
|
|
|
|
1,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
non-controlling
interest
|
|
|
11,584
|
|
|
|
7,946
|
|
|
|
3,717
|
|
|
|
|
3,849
|
|
Less: net income (loss) attributable to
non-controlling
interest
|
|
|
26
|
|
|
|
(82
|
)
|
|
|
64
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,558
|
|
|
$
|
8,028
|
|
|
$
|
3,653
|
|
|
|
$
|
3,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.94
|
|
|
$
|
2.90
|
|
|
$
|
1.32
|
|
|
|
$
|
1.00
|
|
Diluted
|
|
|
3.65
|
|
|
|
2.72
|
|
|
|
1.24
|
|
|
|
|
0.95
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,931,182
|
|
|
|
2,771,372
|
|
|
|
2,766,565
|
|
|
|
|
3,819,265
|
|
Diluted
|
|
|
3,170,653
|
|
|
|
2,956,211
|
|
|
|
2,955,381
|
|
|
|
|
4,028,242
|
|
See accompanying notes to these consolidated financial
statements.
F-4
FORTEGRA
FINANCIAL CORPORATION
(All
Amounts in Thousands Except Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Treasury
|
|
|
Common
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Receivables
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Non-controlling
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
from Officers
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Interest
|
|
|
Equity
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
3,840,488
|
|
|
|
(36,464
|
)
|
|
$
|
1,280
|
|
|
$
|
5,756
|
|
|
$
|
(590
|
)
|
|
$
|
(5,272
|
)
|
|
$
|
(16
|
)
|
|
$
|
32,591
|
|
|
$
|
1,998
|
|
|
$
|
35,747
|
|
Net income for the period from January 1, 2007 to
June 19, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,815
|
|
|
|
34
|
|
|
|
3,849
|
|
Change in unrealized gains and losses, net of tax benefit of $50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
3,815
|
|
|
|
34
|
|
|
|
3,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(428
|
)
|
|
|
|
|
|
|
(428
|
)
|
Options exercised
|
|
|
33,650
|
|
|
|
|
|
|
|
11
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 19, 2007 prior to Acquisition Transactions
|
|
|
3,874,138
|
|
|
|
(36,464
|
)
|
|
|
1,291
|
|
|
|
6,020
|
|
|
|
(590
|
)
|
|
|
(5,272
|
)
|
|
|
(114
|
)
|
|
|
35,978
|
|
|
|
2,032
|
|
|
|
39,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of acquisition by Summit
|
|
|
(1,107,575
|
)
|
|
|
36,464
|
|
|
|
(369
|
)
|
|
|
38,336
|
|
|
|
590
|
|
|
|
5,272
|
|
|
|
114
|
|
|
|
(35,978
|
)
|
|
|
|
|
|
|
7,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 20, 2007
|
|
|
2,766,563
|
|
|
|
|
|
|
|
922
|
|
|
|
44,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,032
|
|
|
|
47,310
|
|
Net income for the period from June 20, 2007 to
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,653
|
|
|
|
64
|
|
|
|
3,717
|
|
Change in unrealized gains and losses, net of tax expense of
$(288)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446
|
|
|
|
3,653
|
|
|
|
8
|
|
|
|
4,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
2,766,563
|
|
|
|
|
|
|
|
922
|
|
|
|
44,412
|
|
|
|
|
|
|
|
|
|
|
|
446
|
|
|
|
3,653
|
|
|
|
2,040
|
|
|
|
51,473
|
|
Net income for the year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,028
|
|
|
|
(82
|
)
|
|
|
7,946
|
|
Change in unrealized gains and losses, net of tax benefit of $764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,518
|
)
|
|
|
|
|
|
|
9
|
|
|
|
(1,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,518
|
)
|
|
|
8,028
|
|
|
|
(73
|
)
|
|
|
6,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
(308
|
)
|
|
|
(337
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244
|
|
Options exercised
|
|
|
105,000
|
|
|
|
|
|
|
|
35
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,273
|
|
Repurchased stock
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
2,871,563
|
|
|
|
(100,000
|
)
|
|
|
957
|
|
|
|
45,894
|
|
|
|
(2,069
|
)
|
|
|
|
|
|
|
(1,072
|
)
|
|
|
11,652
|
|
|
|
1,659
|
|
|
|
57,021
|
|
Net income for the year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,558
|
|
|
|
26
|
|
|
|
11,584
|
|
Change in unrealized gains and losses, net of tax expense of
$(1,400)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,679
|
|
|
|
|
|
|
|
1
|
|
|
|
2,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,679
|
|
|
|
11,558
|
|
|
|
27
|
|
|
|
14,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(211
|
)
|
|
|
(211
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
Treasury stock sold
|
|
|
|
|
|
|
91,509
|
|
|
|
|
|
|
|
1,982
|
|
|
|
1,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,875
|
|
Options exercised
|
|
|
3,000
|
|
|
|
|
|
|
|
1
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Issuance of common stock
|
|
|
132,468
|
|
|
|
|
|
|
|
44
|
|
|
|
5,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
3,007,031
|
|
|
|
(8,491
|
)
|
|
$
|
1,002
|
|
|
$
|
53,675
|
|
|
$
|
(176
|
)
|
|
$
|
|
|
|
$
|
1,607
|
|
|
$
|
23,210
|
|
|
$
|
1,475
|
|
|
$
|
80,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
F-5
FORTEGRA
FINANCIAL CORPORATION
(All
Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
Years Ended
|
|
|
June 20, 2007
|
|
|
|
January 1, 2007
|
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
to June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,558
|
|
|
$
|
8,028
|
|
|
$
|
3,653
|
|
|
|
$
|
3,815
|
|
Adjustments to reconcile net income to net cash flows provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred policy acquisition costs
|
|
|
(2,096
|
)
|
|
|
(11,218
|
)
|
|
|
(3,841
|
)
|
|
|
|
(559
|
)
|
Depreciation and amortization
|
|
|
3,507
|
|
|
|
2,629
|
|
|
|
1,292
|
|
|
|
|
221
|
|
Deferred income taxes (benefit)
|
|
|
3,411
|
|
|
|
144
|
|
|
|
(90
|
)
|
|
|
|
(394
|
)
|
Net realized gains (losses)
|
|
|
(54
|
)
|
|
|
1,921
|
|
|
|
348
|
|
|
|
|
(516
|
)
|
Stock based compensation expense
|
|
|
209
|
|
|
|
244
|
|
|
|
56
|
|
|
|
|
2
|
|
Amortization of premiums and discounts on investments, net
|
|
|
197
|
|
|
|
(11
|
)
|
|
|
(75
|
)
|
|
|
|
(55
|
)
|
Non-controlling interest
|
|
|
(184
|
)
|
|
|
(380
|
)
|
|
|
8
|
|
|
|
|
34
|
|
Change in allowance for doubtful accounts
|
|
|
(100
|
)
|
|
|
(425
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
Changes in operating assets and liabilities, net of the effect
of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
285
|
|
|
|
(262
|
)
|
|
|
544
|
|
|
|
|
(485
|
)
|
Other receivables
|
|
|
1,148
|
|
|
|
624
|
|
|
|
5,639
|
|
|
|
|
(926
|
)
|
Reinsurance receivables
|
|
|
25,225
|
|
|
|
(11,046
|
)
|
|
|
(21,216
|
)
|
|
|
|
(26,168
|
)
|
Other assets
|
|
|
(109
|
)
|
|
|
185
|
|
|
|
530
|
|
|
|
|
650
|
|
Unpaid claims
|
|
|
(211
|
)
|
|
|
(1,918
|
)
|
|
|
3,794
|
|
|
|
|
4,892
|
|
Unearned premiums
|
|
|
(27,894
|
)
|
|
|
21,959
|
|
|
|
19,913
|
|
|
|
|
25,782
|
|
Accrued expenses and accounts payable
|
|
|
3,724
|
|
|
|
4,010
|
|
|
|
(154
|
)
|
|
|
|
(4,664
|
)
|
Commissions payable
|
|
|
(5,223
|
)
|
|
|
(1,486
|
)
|
|
|
(56
|
)
|
|
|
|
889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operating activities
|
|
|
13,393
|
|
|
|
12,998
|
|
|
|
10,265
|
|
|
|
|
2,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of investments
|
|
|
12,323
|
|
|
|
26,113
|
|
|
|
25,497
|
|
|
|
|
17,125
|
|
Proceeds from sales of investments
|
|
|
14,376
|
|
|
|
8,210
|
|
|
|
310
|
|
|
|
|
3,645
|
|
Proceeds from maturities of short term investments
|
|
|
960
|
|
|
|
350
|
|
|
|
1,701
|
|
|
|
|
160
|
|
Purchases of investments
|
|
|
(8,326
|
)
|
|
|
(60,131
|
)
|
|
|
(38,763
|
)
|
|
|
|
(10,985
|
)
|
Purchases of short term investments
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
(50
|
)
|
Repayments on mortgage loans
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
9,589
|
|
Proceeds from sales of property and equipment
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
283
|
|
Purchases of property and equipment
|
|
|
(1,974
|
)
|
|
|
(1,227
|
)
|
|
|
(303
|
)
|
|
|
|
(433
|
)
|
Net (paid) received for acquisitions of subsidiaries
|
|
|
(38,577
|
)
|
|
|
(1,936
|
)
|
|
|
|
|
|
|
|
2,706
|
|
Proceeds from notes receivable
|
|
|
120
|
|
|
|
1,259
|
|
|
|
1,711
|
|
|
|
|
2,696
|
|
Change in restricted cash
|
|
|
(5,434
|
)
|
|
|
1,298
|
|
|
|
(482
|
)
|
|
|
|
(2,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided by investing activities
|
|
|
(26,532
|
)
|
|
|
(26,069
|
)
|
|
|
(10,297
|
)
|
|
|
|
22,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of notes payable and capitalized lease obligations
|
|
|
(13,600
|
)
|
|
|
(1,079
|
)
|
|
|
(16,202
|
)
|
|
|
|
(319
|
)
|
Additional borrowings under notes payable
|
|
|
25,087
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
Net proceeds from issuance of common stock and preferred trust
securities
|
|
|
5,611
|
|
|
|
|
|
|
|
34,122
|
|
|
|
|
|
|
Dividends paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(428
|
)
|
Net proceeds from exercise of stock options
|
|
|
24
|
|
|
|
846
|
|
|
|
771
|
|
|
|
|
273
|
|
Excess tax benefits from shared based compensation
|
|
|
|
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
Issuance (purchase) of treasury stock
|
|
|
3,875
|
|
|
|
(2,069
|
)
|
|
|
|
|
|
|
|
|
|
Stockholder funds disbursed at purchase
|
|
|
|
|
|
|
|
|
|
|
(39,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) financing activities
|
|
|
20,997
|
|
|
|
(1,875
|
)
|
|
|
(571
|
)
|
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
7,858
|
|
|
|
(14,946
|
)
|
|
|
(603
|
)
|
|
|
|
24,468
|
|
Cash and cash equivalents, beginning of period
|
|
|
22,082
|
|
|
|
37,028
|
|
|
|
37,631
|
|
|
|
|
13,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
29,940
|
|
|
$
|
22,082
|
|
|
$
|
37,028
|
|
|
|
$
|
37,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash payments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
7,728
|
|
|
$
|
7,184
|
|
|
$
|
4,521
|
|
|
|
$
|
727
|
|
Income taxes
|
|
$
|
3,806
|
|
|
$
|
1,212
|
|
|
$
|
1,709
|
|
|
|
$
|
3,142
|
|
See accompanying notes to these consolidated financial
statements.
F-6
FORTEGRA
FINANCIAL CORPORATION
YEARS
ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All
Amounts in Thousands Except Share Amounts, Per Share Amounts or
Unless Otherwise Noted)
|
|
1.
|
Basis of
Presentation and Organization
|
These consolidated financial statements reflect the consolidated
financial statements of Fortegra Financial Corporation and its
subsidiaries (the Company). The consolidated
financial statements presented for the period from
January 1, 2007 through June 19, 2007 (the 2007
predecessor period), represent the Company prior to its
acquisition by entities affiliated with Summit Partners, a
growth equity investment firm, referred to as the
predecessor entity. The consolidated financial
statements for the period from June 20 through December 31,
2007 (the 2007 successor period) and the years ended
December 31, 2008 and 2009 represent the
successor entity.
The Company has evaluated for disclosure events that occurred up
to the date the Companys financial statements were issued.
The Company operates in three business segments: Payment
Protection, Business Process Outsourcing (BPO) and
Wholesale Brokerage. Payment Protection specializes in
protecting lenders and their consumers from death, disability or
other events that could otherwise impair their ability to repay
a debt. BPO provides an assortment of administrative services
tailored to insurance and other financial services companies
through a virtual insurance company platform. Wholesale
Brokerage uses a pure wholesale sell-through model to sell
specialty casualty and surplus lines insurance.
Organization
The Company is a diversified insurance services company that
provides distribution and administration services on a wholesale
basis to insurance companies, insurance brokers and agents and
other financial services companies in the United States. During
2008, the Company changed to its name from Life of the South
Corporation. Most of the Companys insurance business is
generated through networks of small to mid-sized community and
regional banks, small loan companies and automobile dealerships.
The consolidated financial statements include the Company and
its
majority-owned
and controlled subsidiaries, including:
|
|
|
|
|
Bliss and Glennon, Inc.
|
|
|
|
Creative Investigations Recovery Group, LLC
|
|
|
|
CRC Reassurance Company, Ltd.
|
|
|
|
Insurance Company of the South
|
|
|
|
LOTS Intermediate Co.
|
|
|
|
Life of the South Insurance Company and its subsidiary, Bankers
Life of Louisiana
|
|
|
|
LOTS Reassurance Company
|
|
|
|
LOTSolutions, Inc.
|
F-7
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
|
|
|
|
|
Lyndon Southern Insurance Company
|
|
|
|
Southern Financial Life Insurance Company
|
Non-controlling interest includes third party ownership of 15%
of the common stock of Southern Financial Life Insurance Company
and 52% of the preferred stock of CRC Reassurance Company, Ltd.
On March 31, 2008, Bankers Life of Louisiana acquired all
of the issued and outstanding common stock of Gulfco Life
Insurance Company for a price equal to the statutory capital and
surplus applicable to such common stock. Gulfco is a life,
accident and health insurer domiciled in the State of Louisiana.
Gulfco Life Insurance Company merged with and into Bankers Life
of Louisiana on December 31, 2008. The purchase price was
$437.
The following presents assets acquired and liabilities assumed
with the acquisition of Gulfco based on their fair values as of
March 31, 2008. This acquisition is part of the Payment
Protection business segment.
|
|
|
|
|
Assets:
|
|
|
|
|
Cash
|
|
$
|
374
|
|
Investments
|
|
|
615
|
|
Other receivables
|
|
|
38
|
|
Property and equipment
|
|
|
57
|
|
Liabilities:
|
|
|
|
|
Accrued expenses and accounts payable
|
|
|
(622
|
)
|
Net deferred tax liability
|
|
|
(25
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
437
|
|
Purchase consideration
|
|
|
437
|
|
|
|
|
|
|
Goodwill
|
|
$
|
|
|
|
|
|
|
|
On December 18, 2008, the Company purchased 100% of the
outstanding stock ownership interests of Creative Investigations
Recovery Group, LLC (CIRG). CIRG provides front-end
customer service, pre-collection, nationwide collateral location
and recovery, severe skip investigations and deficiency
portfolio collections to commercial finance companies.
F-8
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The following presents assets acquired and liabilities assumed
with the acquisition of CIRG based on their fair values as of
December 18, 2008. This acquisition is part of the BPO
business segment.
|
|
|
|
|
Assets:
|
|
|
|
|
Cash
|
|
$
|
1
|
|
Other receivables
|
|
|
343
|
|
Property and equipment
|
|
|
14
|
|
Liabilities:
|
|
|
|
|
Accrued expenses and accounts payable
|
|
|
(490
|
)
|
Net deferred tax liability
|
|
|
(5
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
(137
|
)
|
Purchase consideration
|
|
|
1,200
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,337
|
|
|
|
|
|
|
On December 18, 2008, the Company recognized approximately
$642 of goodwill related to its acquisition of Darby &
Associates, Inc. The purchase price was $642. This acquisition
is part of the Payment Protection business segment.
On April 15, 2009, the Company purchased 100% of the
outstanding stock ownership interests of Bliss and Glennon,
Inc., an excess and surplus wholesale insurance broker.
The following presents assets acquired and liabilities assumed
with the acquisition of Bliss & Glennon, Inc., based
on their fair values as of April 15, 2009. This acquisition
is part of the Wholesale Brokerage business segment:
|
|
|
|
|
Assets:
|
|
|
|
|
Cash
|
|
$
|
10,966
|
|
Other receivables
|
|
|
17,818
|
|
Property and equipment
|
|
|
393
|
|
Other intangible assets
|
|
|
8,661
|
|
Other assets
|
|
|
77
|
|
Liabilities:
|
|
|
|
|
Accrued expenses and accounts payable
|
|
|
(641
|
)
|
Brokered insurance payable
|
|
|
(23,851
|
)
|
Commissions payable
|
|
|
(149
|
)
|
Net deferred tax liability
|
|
|
(1,133
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
12,141
|
|
Purchase consideration
|
|
|
42,058
|
|
|
|
|
|
|
Goodwill
|
|
$
|
29,917
|
|
|
|
|
|
|
On November 3, 2009, Triangle Life Insurance Company merged
into Life of the South Insurance Company and American Guaranty
Insurance Company merged into Insurance Company of the South.
F-9
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
On December 31, 2009, Darby & Associates, Inc.
and Gulfco Insurance Services, Inc. merged into LOTSolutions,
Inc.
Revision
of Previously Issued Consolidated Financial Statements
The Company revised its consolidated financial statements to
correct errors related to
other-than-temporary
impairments, stock options and other items. The following table
reconciles assets, stockholders equity and net income of
the Company as presented in the accompanying consolidated
financial statements to assets, stockholders equity and
net income as previously presented.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Total assets, as previously reported
|
|
$
|
474,686
|
|
|
$
|
439,321
|
|
Adjustment to correct the classification of investments from
held-to-maturity
to
available-for-sale
|
|
|
|
|
|
|
(1,791
|
)
|
Adjustment to correct the classification of reinsurance
receivables
|
|
|
|
|
|
|
1,800
|
|
Adjustment to correct goodwill
|
|
|
3,543
|
|
|
|
2,795
|
|
Other adjustments
|
|
|
397
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
Total assets, as reported herein
|
|
$
|
478,626
|
|
|
$
|
442,369
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity, as previously reported
|
|
$
|
80,278
|
|
|
$
|
57,421
|
|
Adjustment to correct the classification of investments from
held-to-maturity
to
available-for-sale
|
|
|
|
|
|
|
(1,110
|
)
|
Adjustment to correct goodwill
|
|
|
402
|
|
|
|
402
|
|
Other adjustments
|
|
|
113
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity, as reported herein
|
|
$
|
80,793
|
|
|
$
|
57,021
|
|
|
|
|
|
|
|
|
|
|
F-10
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
Years Ended December 31,
|
|
|
June 20, 2007 to
|
|
|
|
January 1, 2007 to
|
|
|
|
2009
|
|
|
2008
|
|
|
December 31, 2007
|
|
|
|
June 19, 2007
|
|
Net income, as previously reported
|
|
$
|
12,034
|
|
|
$
|
8,764
|
|
|
$
|
3,731
|
|
|
|
$
|
3,680
|
|
Adjustment to record stock based compensation
|
|
|
(209
|
)
|
|
|
(244
|
)
|
|
|
(56
|
)
|
|
|
|
(2
|
)
|
Adjustment to record other-than-temporary impairments of
investments
|
|
|
|
|
|
|
(521
|
)
|
|
|
(237
|
)
|
|
|
|
|
|
Other adjustments
|
|
|
(267
|
)
|
|
|
29
|
|
|
|
215
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported herein
|
|
$
|
11,558
|
|
|
$
|
8,028
|
|
|
$
|
3,653
|
|
|
|
$
|
3,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
Summary
of Significant Accounting Policies
|
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP)
promulgated by the Financial Accounting Standards Board
Accounting Standards Codification (ASC or the
guidance). Preparation of financial statements in
accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its majority-owned and controlled subsidiaries.
Intercompany transactions and account balances have been
eliminated.
The third party ownership of 15% of the common stock of Southern
Financial Life Insurance Company and 52% of the preferred stock
of CRC Reassurance Company, Ltd. has been reflected as
non-controlling interest on the consolidated balance sheets.
Income attributable to those companies minority
shareholders has been reflected on the consolidated statements
of income and comprehensive income as income attributable to
non-controlling interest.
Investments
Marketable debt securities are classified as
available-for-sale
and carried at fair value with unrealized gains and losses
reflected in other comprehensive income, net of tax. Marketable
equity securities are also classified as
available-for-sale
and carried at fair value with unrealized gains and losses
reflected in other comprehensive income, net of tax.
F-11
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
During 2009, the Company adopted the new accounting standards
related to other-than-temporary impairment (OTTI)
that provide guidance in determining whether impairments in debt
securities are
other-than-temporary
and require additional disclosures relating to OTTI and
unrealized losses on investments. All investments in an
unrelated loss position are reviewed at the individual security
level to determine whether a credit or interest rate-related
impairment is
other-than-temporary.
For fixed maturity securities, impairment is considered to be
other-than-temporary
if we have the intent to sell the security prior to recovery, if
it is more likely than not we will be required to sell the
security prior to recovery, or if we dont believe the
value of the security will recover. The Company impairment
analysis takes into account factors, both qualitative and
quantitative in nature.
The new standards did not change the impairment model for equity
securities which are assessed for OTTI.
Among the factors the Company considers in assessing OTTI for
debt and equity securities are the following:
|
|
|
the length of time and the extent to which fair value has been
less than cost;
|
|
|
if an investments fair value declines below cost, we
determine if there is adequate evidence to overcome the
presumption that the decline is
other-than-temporary.
Supporting evidence could include a recovery in the
investments fair value subsequent to the date of the
statement of financial position, a return of the investee to
profitability and the investees improved financial
performance and future prospects (such as earnings trends or
recent dividend payments), or the improvement of financial
condition and prospects for the investees geographic
region and industry.
|
|
|
issuer-specific considerations, including an event of missed or
late payment or default, adverse changes in key financial
ratios, an increase in nonperforming loans, a decline in
earnings substantially below that of the investees peers,
downgrading of the investees debt rating or suspension of
trading in the security;
|
|
|
the occurrence of a significant economic event that may affect
the industry in which an issuer participates, including a change
that might adversely impact the investees ability to
achieve profitability in its operations;
|
|
|
the Companys intent and ability to hold the investment for
a sufficient period to allow for any anticipated recovery in
fair value; and
|
|
|
with regards to commercial mortgage-backed securities
(CMBS), the Company also evaluates key statistics
such as breakeven constant default rates and credit enhancement
levels. The breakeven constant default rate indicates the
percentage of the pools outstanding loans that must
default each and every year with 40 percent loss severity
(i.e., a recovery rate of 60 percent) for a CMBS
class/tranche to experience its first dollar of principal loss.
Credit enhancements indicate how much protection, or
cushion, there is to absorb losses in a particular
deal before an actual loss would impact a specific security.
|
F-12
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The new guidance required that, at the date of adoption, the
Company record a cumulative effect of change in accounting
principle to reclassify the non-credit component of a previously
recognized OTTI from retained earnings to accumulated other
comprehensive income. Based on its review, the Company had no
OTTI losses to reclassify.
Cash and
Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid
investments, with original maturities of three months or less
when purchased. At various times throughout the year, the
Company has cash deposited with financial institutions that
exceed the federally insured deposit amount. Management reviews
the financial viability of these institutions on a periodic
basis and does not anticipate nonperformance by the financial
institutions.
Restricted
Cash
Restricted cash represents primarily unremitted premiums
received from agents, unremitted claims received from insurers,
fiduciary cash for reinsurers and pledged assets for the
protection of policy holders in various state jurisdictions.
Restricted cash is generally required to be kept in certain bank
accounts subject to guidelines which emphasize capital
preservation and liquidity; pursuant to the laws of certain
states in which the Companys subsidiaries operate and
applicable contractual obligations, such funds are not available
to service the Companys debt or for other general
corporate purposes. The Company is entitled to retain investment
income earned on fiduciary funds. Included in restricted cash
are cash and cash equivalents.
Other
Receivables
Other receivables consist primarily of advance commissions and
agents balances in course of collection and billed but not
collected policy premium. For policy premiums that have been
billed but not collected, the Company records a receivable on
its balance sheet for the full amount of the premium billed,
with a corresponding liability, net of its commission, to
insurance carriers. The Company earns interest on the premium
cash during the period of time between receipt of the funds and
payment of these funds to insurance carriers.
Reinsurance
Balances recoverable from reinsurers and amounts ceded to
reinsurers relating to the unexpired portion of reinsured
policies are presented as assets. Experience refunds from
reinsurers are recognized based on the underwriting experience
of the underlying contracts.
Deferred
Policy Acquisition Costs
The costs of acquiring new business and retaining existing
business, principally commissions, premium taxes and certain
underwriting and marketing costs that vary with and are
primarily related to the production of new business, have been
deferred and are being amortized as the related premium is
earned. Amortization of deferred policy acquisition costs for
the years ended December 31, 2009 and 2008, the 2007
successor period and the 2007 predecessor period totaled
$57,657, $60,594, $28,209
F-13
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
and $14,965, respectively. The Company considers investment
income in determining whether deferred acquisition costs are
recoverable at year-end. No write-offs for unrecoverable
deferred acquisition costs were recognized during 2009, 2008,
the 2007 successor period or the 2007 predecessor period.
Goodwill
and Other Intangible Assets
Goodwill is reviewed for impairment annually or more frequently
if certain indicators arise. The goodwill impairment review is a
two-step process. Step one consists of a comparison of the fair
value of a reporting unit with its carrying amount. An
impairment loss may be recognized if the review indicates that
the carrying value of a reporting unit exceeds its fair value.
Estimates of fair value are primarily determined by using
discounted cash flows. If the carrying amount of a reporting
unit exceeds its fair value, step two requires the fair value of
the reporting unit to be allocated to the underlying assets and
liabilities of that reporting unit, resulting in an implied fair
value of goodwill. If the carrying amount of the goodwill of the
reporting unit exceeds the implied fair value, an impairment
charge is recorded equal to the excess.
The impairment review is highly judgmental and involves the use
of significant estimates and assumptions. The estimates and
assumptions have a significant impact on the amount of any
impairment charge recorded. Discounted cash flow methods are
dependent upon assumption of future sales trends, market
conditions and cash flows of each reporting unit over several
years. Actual cash flows in the future may differ significantly
from those previously forecasted. Other significant assumptions
include growth rates and the discount rate applicable to future
cash flows.
The Companys reporting units for impairment testing
purposes are identical to our operating segments. The Company
calculated the fair value of each reporting unit at
December 31, 2009 and 2008 utilizing a discount rate of
10%, projected earnings and a forecasted annual growth rate of
4%. The calculations resulted in a fair value for each of our
operating segments which exceeded their respective carrying
values. Therefore, step two of the impairment test was not
necessary and an impairment charge was not recorded.
Property
and Equipment
Property and equipment are carried at cost, net of accumulated
depreciation. Gains and losses on sales and disposals of
property and equipment are based on the net book value of the
related asset at the disposal date using the specific
identification method. Maintenance and repairs, which do not
materially extend asset useful life and minor replacements, are
charged to income when incurred. Depreciation is provided using
the straight-line method over the estimated useful lives of the
respective assets with three years for computers and
five years for furniture, fixtures, equipment and software.
Leasehold improvements and capitalized leases are depreciated
over the remaining life of the lease.
The Company capitalizes internally developed software costs on a
project-by-project
basis in accordance with
ASC 350-40,
Intangibles Goodwill and Other: Internal-Use
Software. All costs to establish the technological
feasibility of computer software development is expensed to
operations when incurred. Internally developed software
development costs are carried at the lower of unamortized cost
or net
F-14
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
realizable value and are amortized based on the current and
estimated useful life of the software. Amortization over the
estimated useful life of five years begins when the software is
ready for its intended use.
Unpaid
Claims
Unpaid claims include estimates for benefits reported prior to
the close of the accounting period and other estimates,
including amounts for incurred but not reported benefits. These
liabilities are continuously reviewed and updated by management.
Management believes that such liabilities are adequate to cover
the estimated cost of the related benefits. When management
determines that changes in estimates are required, such changes
are included in current income.
Unearned
Premiums
Premiums written are earned over the period that coverage is
provided. Unearned premiums represent the portion of premiums
that will be earned in the future and are generally calculated
using the pro rata method. A premium deficiency reserve is
recorded if anticipated losses, loss adjustment expenses and
policy maintenance costs exceed the recorded unearned premium
reserve and anticipated investment income. As of
December 31, 2009 and 2008, no reserve was recorded.
Service
and Administrative Fees
The Company earns service and administrative fees for a variety
of activities. This includes providing administrative services
for other insurance companies, debt cancellation programs,
collateral tracking and asset recovery services.
The Payment Protection administrative service revenue is
recognized consistent with the earnings recognition pattern of
the underlying insurance policy or debt cancellation contract
being administered. For example, if the credit instrument is
36 months in duration, the credit insurance policy or debt
cancellation contract is also 36 months. Because the
Company provides administrative services over the life of the
policy or debt cancellation contract, it recognizes service and
administrative fees over the life of the insurance policy or
debt cancellation contract. Accordingly, if there is a pre-term
cancellation, no funds would be due to the Companys
customer. As a result, the Company has had no changes in
earnings patterns, resulting in no prior period adjustments to
total revenues or net income.
The BPO service fee revenue is recognized as the services are
performed. These services include fulfillment, BPO software
development, and claims handling for the Companys
customers. Collateral tracking fee income is recognized when the
service is performed and billed. Asset recovery service revenue
is recognized upon the location of a recovered unit and or the
location and delivery of a unit. Management reviews the
financial results under each significant BPO contract on a
monthly basis. Any losses that may occur due to a specific
contract would be recognized in the period in which the loss
occurs. During the years ended December 31, 2009 and 2008,
the 2007 successor period and the 2007 predecessor period, the
Company has not incurred a loss with respect to a specific
significant BPO contract.
F-15
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Wholesale
Brokerage Commissions and Fees
The Company earns wholesale brokerage commission and fee income
by providing wholesale brokerage services to retail insurance
brokers and agents and insurance companies. Wholesale brokerage
commission income is primarily recognized when the underlying
insurance policies are issued. A portion of the wholesale
brokerage commission income is derived from profit commission
agreements with insurance carriers. These commissions are
received from carriers based upon the underlying underwriting
profitability of the business that the Company places with those
carriers. Profit commission income is generally recognized as
revenue on the receipt of cash based on the terms of the
respective carrier contracts. In certain instances, profit
commission income may be recognized in advance of cash receipt
where the profit commission income due to be received has been
calculated or has been confirmed by the insurance carrier.
Ceding
Commissions
Ceding commissions earned under coinsurance agreements are based
on contractual formulas that take into account, in part,
underwriting performance and investment returns experienced by
the assuming companies. As experience changes, adjustments to
the ceding commissions are reflected in the period incurred.
Experience adjustments are based on the claim experience of the
related policy. The adjustment is calculated by adding the
earned premium and investment income from the assets held in
trust from the Companys benefit less earned commissions,
incurred claims and the reinsurers fee for the coverage.
Net
Investment Income
Net investment income consists of investment income from the
Companys investment portfolio. The Company recognized
investment income from interest payments and dividends less
portfolio management expenses. The Companys investment
portfolio is primarily invested in fixed maturity securities.
Investment income can be significantly impacted by changes in
interest rates. Interest rate volatility can increase or reduce
unrealized gains or unrealized losses in the Companys
portfolios. Interest rates are highly sensitive to many factors,
including governmental monetary policies, domestic and
international economic and political conditions and other
factors beyond the Companys control. Fluctuations in
interest rates affect the Companys returns on, and the
market value of, fixed maturity and short-term investments.
The fair market value of the fixed maturity securities in the
Companys portfolio and the investment income from these
securities fluctuate depending on general economic and market
conditions. The fair market value generally increases or
decreases in an inverse relationship with fluctuations in
interest rates. The Company also has investments that carry
pre-payment risk, such as mortgage-backed and asset-backed
securities. Actual net investment income
and/or cash
flows from investments that carry prepayment risk may differ
from estimates at the time of investment as a result of interest
rate fluctuations. In periods of declining interest rates,
mortgage prepayments generally increase and mortgage-backed
securities, commercial mortgage obligations and bonds are more
likely to be prepaid or redeemed as borrowers seek to borrow at
lower interest rates. Therefore, the Company may be required to
reinvest those funds in lower interest-bearing investments.
F-16
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Net
Earned Premium
Direct and assumed earned premium consists of revenue generated
from the direct sale of Payment Protection insurance policies by
the Companys distributors or premiums written for Payment
Protection insurance policies by another carrier and assumed by
the Company. Whether direct or assumed, the premium is earned
over the life of the respective policy. Direct and assumed
earned premium are offset by premiums ceded to the
Companys reinsurers, including PORCs. The amount ceded is
proportional to the amount of risk assumed by the reinsurer.
Net
Losses and Loss Adjustment Expenses
Net losses and loss adjustment expenses include actual claims
paid and the change in unpaid claim reserves.
Commissions
Commissions include the commissions paid to distributors selling
credit insurance policies. Commission rates, in many instances,
are set by state regulators and are also impacted by market
conditions. In certain instances, commissions are subject to
retrospective adjustment based on the profitability of the
related policies. Under these retrospective commission
arrangements, the producer of the credit insurance policies
receives a retrospective commission if the premium generated by
that producer in the accounting period exceeds the costs
associated with those policies, which includes our
administrative fees, claims, reserves, and premium taxes.
The Company records a liability which reflects the amount of the
retrospective commission earned by the producer, typically on a
monthly basis. The settlement with the producer, in a subsequent
period (usually the following month), results in a cash payment
to the producer, which has the effect of reducing the recorded
liability associated with that producer. If the net result is
negative, the Company will record a receivable amount due from
the producer, which reflects the fact that administrative fees,
claims, reserves, and premium taxes exceeded the amount of net
earned premium related to that producer. The Company offsets the
receivable amount due from the producer by:
|
|
|
|
|
reducing future retrospective commissions earned and payable
against the receivable amount due from the producer;
|
|
|
|
reducing the producers up-front commission associated with
current period written premium production, which is credited
against the receivable amount due from the producer; or
|
|
|
|
invoicing the producer for an amount equal to the amount due to
the Company.
|
On a monthly basis, the Company analyzes the retrospective
commission calculation for each producer and, based on the
analysis associated with each such producer, the Company records
a liability for any positive net retrospective commission earned
and due to the producer or, conversely, records a
F-17
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
receivable amount due from such producer for instances where the
net result of the retrospective commission calculation is
negative. The Company reviews, on a regular basis, all instances
where the retrospective result is a net negative amount
(receivable due from the producer) to determine the action to be
implemented with respect to such producer in order to collect
any receivable amount.
Income
Taxes
The Company files a consolidated federal income tax return with
all majority owned subsidiaries except for Triangle Life
Insurance Company, which files a separate federal income tax
return. The Company has a tax sharing agreement with its
subsidiaries where each company is apportioned the amount of tax
equal to that which would be reported on a separate company
basis. Income taxes are recorded in accordance with the asset
and liability method. Under the asset and liability method,
deferred tax assets and liabilities are recorded based on the
difference between the tax basis of assets and liabilities and
their carrying amounts for financial reporting purposes,
referred to as temporary differences.
Deferred income taxes are recorded for temporary differences
between the financial reporting and income tax bases of assets
and liabilities, based on enacted tax laws and statutory tax
rates applicable to the periods in which the Company expects the
temporary differences to reverse. A valuation allowance is
established for deferred tax assets when it is more likely than
not that an amount will not be realized.
In determining whether the Companys deferred tax asset is
realizable, the Company considered all available evidence,
including both positive and negative evidence. The realization
of deferred tax assets depends upon the existence of sufficient
taxable income of the same character during the carry-back or
carry-forward period. The Company considered all sources of
taxable income available to realize the deferred tax asset,
including the future reversal of existing temporary differences,
future taxable income exclusive of reversing temporary
differences and carry forwards, taxable income in carry-back
years and tax-planning strategies.
In June 2006, authoritative guidance was issued on income taxes.
The guidance prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. It also provides guidance on derecognition,
classification of interest and penalties and other matters.
Under the guidance, the Company may recognize the tax benefit
from an uncertain tax position only if it is more likely
than not the tax position will be sustained on examination
by the taxing authorities, based upon the technical merits of
the position. The guidance was effective for fiscal year 2009,
and the adoption did not have a material impact on the
consolidated financial statements for 2009.
Comprehensive
Income
Comprehensive income includes both net income and other items of
comprehensive income. For the years ended December 31, 2009
and 2008 and the 2007 successor period and the 2007 predecessor
period, comprehensive income was comprised of unrealized gains
and losses on securities classified as available for sale. The
Company has elected to disclose comprehensive income in its
consolidated statements of stockholders equity.
F-18
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Net
Income Per Common Share
Basic net income per common share is computed by dividing net
income available to stockholders by the weighted average number
of common shares outstanding for the period. Basic net income
per common share excludes the effect of potentially dilutive
options. Diluted net income per common share reflects potential
dilution that could occur if stock options were exercised and
excludes anti-dilutive shares.
Recently
Issued Accounting Pronouncements
On December 31, 2009, the Company adopted the new guidance
on GAAP, which is within ASC Topic 105, GAAP. The new
guidance establishes a single source of authoritative accounting
and reporting guidance recognized by the FASB for
nongovernmental entities (the Codification). The
Codification does not change current GAAP, but is intended to
simplify user access to all authoritative GAAP by providing all
the authoritative literature related to a particular topic in
one place. All existing accounting standard documents will be
superseded and all other accounting literature not included in
the Codification will be considered non-authoritative. The
adoption of the new guidance did not have an impact on the
Companys financial position, results of operations or cash
flows. References to accounting guidance contained in the
Companys consolidated financial statements and disclosures
have been updated to reflect terminology consistent with the
Codification. Plain English references to the accounting
guidance have been made along with references to the number and
name.
On December 31, 2009, the Company adopted the new guidance
on measuring the fair value of liabilities. When the quoted
price in an active market for an identical liability is not
available, this new guidance requires that either the quoted
price of the identical or similar liability when traded as an
asset or another valuation technique that is consistent with the
fair value measurements and disclosures guidance be used to fair
value the liability. The adoption of this new guidance did not
have an impact on the Companys financial position, results
of operations or cash flows.
On December 31, 2009, the Company adopted the new
subsequent events guidance. This new guidance establishes
general standards of accounting for and disclosures of events
that occur after the balance sheet date but before financial
statements are issued or are available to be issued. The
adoption of the new guidance did not have an impact on the
Companys financial position, results of operations or cash
flows.
On April 1, 2009, the Company adopted the new
other-than-temporary
impairments (OTTI) guidance. This new guidance
amends the previous guidance for debt securities and modifies
the presentation and disclosure requirements for debt and equity
securities. In addition, it amends the requirement for an entity
to positively assert the intent and ability to hold a debt
security to recovery to determine whether an OTTI exists and
replaces this provision with the assertion that an entity does
not intend to sell or it is not more likely than not that the
entity will be required to sell a security prior to recovery of
its amortized cost basis. Additionally, this new guidance
modifies the presentation of certain OTTI debt securities to
only present the impairment loss within the results of
operations that represents the credit loss associated with the
OTTI with the remaining impairment loss being presented within
F-19
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
other comprehensive income (loss) (OCI). At
adoption, there was no cumulative effect adjustment to
reclassify the non-credit component.
On January 1, 2008, the Company adopted the new guidance on
determining fair value in illiquid markets. This new guidance
clarifies how to estimate fair value when the volume and level
of activity for an asset or liability have significantly
decreased. This new guidance also clarifies how to identify
circumstances indicating that a transaction is not orderly.
Under this new guidance, significant decreases in the volume and
level of activity of an asset or liability, in relation to
normal market activity, requires further evaluation of
transactions or quoted prices and exercise of significant
judgment in arriving at fair values. This new guidance also
requires additional interim and annual disclosures. The adoption
of this new guidance did not have an impact on the
Companys financial position, results of operations or cash
flows.
On January 1, 2008, the Company adopted the new fair value
of financial instruments guidance. This new guidance requires
disclosure of the methods and assumptions used to estimate fair
value. The adoption of this new guidance did not have an impact
on the Companys financial position, results of operations
or cash flows.
On January 1, 2009, the Company adopted the revised
business combinations guidance. The revised guidance retains the
fundamental requirements of the previous guidance in that the
acquisition method of accounting is used for all business
combinations, that an acquirer be identified for each business
combination and for goodwill to be recognized and measured as a
residual. The revised guidance expands the definition of
transactions and events that qualify as business combinations to
all transactions and other events in which one entity obtains
control over one or more other businesses. The revised guidance
broadens the fair value measurement and recognition of assets
acquired, liabilities assumed and interests transferred as a
result of business combinations. It also increases the
disclosure requirements for business combinations in the
consolidated financial statements. The adoption of the revised
guidance did not have an impact on the Companys financial
position, results of operations or cash flows. However, for any
business combination in 2010 or beyond, the Companys
financial position, results of operations or cash flows could
incur a significantly different impact than had it recorded the
acquisition under the previous business combinations guidance.
Earnings volatility could result depending on the terms of the
acquisition.
On January 1, 2009, the Company adopted the new
consolidations guidance. The new guidance requires that a
non-controlling interest in a subsidiary be separately reported
within equity and the amount of consolidated net income
attributable to the non-controlling interest be presented in the
statements of income. The new guidance also calls for
consistency in reporting changes in the parents ownership
interest in a subsidiary and necessitates fair value measurement
of any non-controlling equity investment retained in a
deconsolidation. The adoption of the new guidance did not have
an impact on the Companys financial position, results of
operations or cash flows.
On December 31, 2009, the Company applied the fair value
measurements and disclosures guidance for all non-financial
assets and liabilities measured at fair value on a non-recurring
basis. The application of this guidance for those assets and
liabilities did not have an impact on the Companys
financial position, results of operations or cash flows. The
Companys non-financial assets measured at fair value on a
non-
F-20
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
recurring basis include goodwill and intangible assets. In a
business combination, the non-financial assets and liabilities
of the acquired company would be measured at fair value in
accordance with the fair value measurements and disclosures
guidance. The requirements of this guidance include using an
exit price based on an orderly transaction between market
participants at the measurement date assuming the highest and
best use of the asset by market participants. To perform a
market valuation, the Company is required to use a market,
income or cost approach valuation technique(s). The Company
performed its annual impairment analyses of goodwill and
indefinite-lived intangible assets in the fourth quarter of
2009. There was no impairment of intangible assets for 2009 and
2008.
In September 2009, the FASB issued new guidance on multiple
deliverable revenue arrangements. This new guidance requires
entities to use their best estimate of the selling price of a
deliverable within a multiple deliverable revenue arrangement if
the entity and other entities do not sell the deliverable
separate from the other deliverables within the arrangement.
This new guidance requires both qualitative and quantitative
disclosures. This new guidance will be effective for new or
materially modified arrangements in fiscal years beginning on or
after June 15, 2010. Earlier application is permitted as of
the beginning of a fiscal year. Assuming the Company does not
apply the guidance early, the Company is required to adopt this
new guidance on January 1, 2011. The Company is currently
evaluating the requirements of this new guidance and the
potential impact, if any, on the Companys financial
position, results of operations or cash flows.
The amortized cost, gross unrealized gains, gross unrealized
losses and fair values of fixed maturity securities available
for sale and equity securities available for sale at
December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
|
$
|
18,832
|
|
|
$
|
674
|
|
|
$
|
(26
|
)
|
|
$
|
19,480
|
|
Municipal securities
|
|
|
14,343
|
|
|
|
336
|
|
|
|
(97
|
)
|
|
|
14,582
|
|
Corporate securities
|
|
|
35,276
|
|
|
|
1,506
|
|
|
|
(271
|
)
|
|
|
36,511
|
|
Mortgage-backed securities
|
|
|
5,594
|
|
|
|
97
|
|
|
|
|
|
|
|
5,691
|
|
Asset-backed securities
|
|
|
4,503
|
|
|
|
181
|
|
|
|
|
|
|
|
4,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
78,548
|
|
|
$
|
2,794
|
|
|
$
|
(394
|
)
|
|
$
|
80,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock publicly traded
|
|
$
|
423
|
|
|
$
|
100
|
|
|
$
|
(154
|
)
|
|
$
|
369
|
|
Preferred stock publicly traded
|
|
|
199
|
|
|
|
1
|
|
|
|
(23
|
)
|
|
|
177
|
|
Common stock non-publicly traded
|
|
|
528
|
|
|
|
179
|
|
|
|
(45
|
)
|
|
|
662
|
|
Preferred stock non-publicly traded
|
|
|
1,005
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
2,155
|
|
|
$
|
280
|
|
|
$
|
(225
|
)
|
|
$
|
2,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The amortized cost, gross unrealized gains, gross unrealized
losses and fair values of fixed maturity securities available
for sale and equity securities available for sale at
December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
|
$
|
26,860
|
|
|
$
|
949
|
|
|
$
|
|
|
|
$
|
27,809
|
|
Municipal securities
|
|
|
16,084
|
|
|
|
270
|
|
|
|
(306
|
)
|
|
|
16,048
|
|
Corporate securities
|
|
|
38,273
|
|
|
|
267
|
|
|
|
(1,692
|
)
|
|
|
36,848
|
|
Mortgage-backed securities
|
|
|
8,096
|
|
|
|
|
|
|
|
(600
|
)
|
|
|
7,496
|
|
Asset-backed securities
|
|
|
8,613
|
|
|
|
|
|
|
|
(409
|
)
|
|
|
8,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
97,926
|
|
|
$
|
1,486
|
|
|
$
|
(3,007
|
)
|
|
$
|
96,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock publicly traded
|
|
$
|
423
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
423
|
|
Preferred stock publicly traded
|
|
|
199
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
155
|
|
Common stock non-publicly traded
|
|
|
651
|
|
|
|
63
|
|
|
|
(128
|
)
|
|
|
586
|
|
Preferred stock non-publicly traded
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
1,276
|
|
|
$
|
70
|
|
|
$
|
(172
|
)
|
|
$
|
1,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of fixed maturity securities
at December 31, 2009 by contractual maturity are shown
below. Expected maturities will differ from contractual
maturities as borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Due in one year or less
|
|
$
|
2,358
|
|
|
$
|
2,384
|
|
Due after one year through five years
|
|
|
18,552
|
|
|
|
19,290
|
|
Due after five years through ten years
|
|
|
29,966
|
|
|
|
30,973
|
|
Due after ten years through twenty years
|
|
|
3,944
|
|
|
|
3,898
|
|
Due after twenty years
|
|
|
13,631
|
|
|
|
14,028
|
|
Mortgage-backed securities
|
|
|
5,594
|
|
|
|
5,691
|
|
Asset-backed securities
|
|
|
4,503
|
|
|
|
4,684
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
78,548
|
|
|
$
|
80,948
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2009, 2008, the 2007
successor period and the 2007 predecessor period, the Company
realized gains on sales of fixed maturity securities of $824,
$30, $0 and $23, respectively. Realized losses on the sale of
fixed maturity securities totaled $787, $14, $0 and $0 for the
years ended December 31, 2009, 2008, the 2007 successor
period and the 2007 predecessor period, respectively. Gross
proceeds from the sale of these fixed maturity securities total
$14,237, $7,556, $247 and $300 in 2009, 2008, the 2007 successor
period and the 2007 predecessor period, respectively.
F-22
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
During the years ended December 31, 2009 and 2008, the 2007
successor period and the 2007 predecessor period, the Company
realized gains on sales of equity securities of $70, $14, $0 and
$493, respectively. Realized losses on the sales of equity
securities totaled $53, $0, $0 and $0 for the years ended
December 31, 2009 and 2008, the 2007 successor period and
the 2007 predecessor period, respectively. Gross proceeds from
the sales of these equity securities total $139, $535, $63 and
$3,345 in 2009, 2008, the 2007 successor period and 2007
predecessor period, respectively.
Fixed maturity and equity securities are assessed for
other-than-temporarily
impairment (OTTI) when the decline in fair value is
below the cost or amortized cost for the security basis and
determined to be
other-than-temporary
by management. OTTI losses related to the credit component of
the impairment on fixed maturity securities and equity
securities, are recorded in the consolidated statement of income
as realized losses on investments and result in a permanent
reduction of the cost basis of the underlying investment. Losses
relating to the non-credit component of OTTI losses on fixed
maturity securities are recorded in other comprehensive income.
The determination of OTTI is a subjective process, and different
judgments and assumptions could affect the timing of loss
realization.
During 2009, there were no OTTIs. During 2008, the Company
determined the decline in fair value of its investment in both a
bond investment and 15 equity securities to be OTTI. This
resulted in recording an impairment write-down of $1,153 on the
bond and $797 on the equity securities as part of net realized
gain/losses on investments. In the 2007 successor period, the
Company determined the decline in fair value of its investment
in 16 equity securities to be OTTI. This resulted in
recording an impairment writedown of $348 as part of net
realized gain/losses on investments.
F-23
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
At December 31, 2009 and 2008, the aggregate amount of
unrealized losses and the aggregate related fair values of
investments with unrealized losses were segregated into the
following time periods during which the investments had been in
unrealized loss positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Less than Twelve Months
|
|
|
Twelve Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Security
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Obligations of the U.S. Treasury and U.S. government agencies
|
|
$
|
4,510
|
|
|
$
|
(26
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,510
|
|
|
$
|
(26
|
)
|
Municipal securities
|
|
|
4,226
|
|
|
|
(81
|
)
|
|
|
544
|
|
|
|
(16
|
)
|
|
|
4,770
|
|
|
|
(97
|
)
|
Corporate securities
|
|
|
|
|
|
|
|
|
|
|
1,894
|
|
|
|
(271
|
)
|
|
|
1,894
|
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
8,736
|
|
|
$
|
(107
|
)
|
|
$
|
2,438
|
|
|
$
|
(287
|
)
|
|
$
|
11,174
|
|
|
$
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock publicly traded
|
|
$
|
|
|
|
$
|
|
|
|
$
|
186
|
|
|
$
|
(154
|
)
|
|
$
|
186
|
|
|
$
|
(154
|
)
|
Preferred stock publicly traded
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
(23
|
)
|
|
|
126
|
|
|
|
(23
|
)
|
Common stock non-publicly traded
|
|
|
42
|
|
|
|
(3
|
)
|
|
|
78
|
|
|
|
(42
|
)
|
|
|
120
|
|
|
|
(45
|
)
|
Preferred stock non-publicly traded
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
42
|
|
|
$
|
(6
|
)
|
|
$
|
390
|
|
|
$
|
(219
|
)
|
|
$
|
432
|
|
|
$
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Less than Twelve Months
|
|
|
Twelve Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Security
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Obligations of the U.S. Treasury and U.S. government agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Municipal securities
|
|
|
4,141
|
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
4,141
|
|
|
|
(306
|
)
|
Corporate securities
|
|
|
21,757
|
|
|
|
(1,692
|
)
|
|
|
|
|
|
|
|
|
|
|
21,757
|
|
|
|
(1,692
|
)
|
Mortgage-backed securities
|
|
|
7,496
|
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
7,496
|
|
|
|
(600
|
)
|
Asset backed securities
|
|
|
8,204
|
|
|
|
(409
|
)
|
|
|
|
|
|
|
|
|
|
|
8,204
|
|
|
|
(409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
41,598
|
|
|
$
|
(3,007
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
41,598
|
|
|
$
|
(3,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock publicly traded
|
|
$
|
155
|
|
|
$
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
$
|
155
|
|
|
$
|
(44
|
)
|
Common stock non-publicly traded
|
|
|
166
|
|
|
|
(93
|
)
|
|
|
85
|
|
|
|
(35
|
)
|
|
|
251
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
321
|
|
|
$
|
(137
|
)
|
|
$
|
85
|
|
|
$
|
(35
|
)
|
|
$
|
406
|
|
|
$
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, there were 13 fixed maturity
securities in an unrealized loss position. The Company does not
intend to sell and it is not more likely than not that the
Company will be required to sell these securities prior to
recovery of its amortized cost basis. As such, management
considers the impairments (i.e., excess of cost over fair value)
to be temporary.
As of December 31, 2009, there were 21 equity securities in
an unrealized loss position. When, in the opinion of management,
a decline in the estimated fair value of an investment is
considered to be other-than-temporary, the
investment is written down to its estimated fair value. Any such
write-downs are reported as realized losses on investments.
There were no such write-downs during 2009. In 2008, 15 equity
securities were written down as realized losses totaling $797.
In the 2007 successor period, 16 equity securities were written
down as realized losses totaling $348.
Pursuant to certain reinsurance agreements and statutory
licensing requirements, the Company has deposited invested
assets in custody accounts or insurance department safekeeping
accounts. The Company is not permitted to remove invested assets
from these accounts without prior approval of the contractual
party or regulatory authority. At December 31, 2009 and
2008, the Company had restricted investments with carrying
values of $20,292 and $23,736, respectively, of which $14,860
and $11,659 related to special deposits required by various
state insurance departments.
F-25
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Net investment income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Years Ended
|
|
Period from
|
|
|
Period from
|
|
|
December 31,
|
|
June 20, 2007 to
|
|
|
January 1, 2007 to
|
|
|
2009
|
|
2008
|
|
December 31, 2007
|
|
|
June 19, 2007
|
Fixed maturity securities
|
|
$
|
4,520
|
|
|
$
|
4,600
|
|
|
$
|
1,757
|
|
|
|
$
|
1,412
|
|
Cash on hand and on deposit
|
|
|
557
|
|
|
|
1,035
|
|
|
|
1,631
|
|
|
|
|
947
|
|
Common and preferred stock dividends
|
|
|
28
|
|
|
|
77
|
|
|
|
40
|
|
|
|
|
135
|
|
Debenture interest
|
|
|
162
|
|
|
|
247
|
|
|
|
206
|
|
|
|
|
302
|
|
Other income
|
|
|
2
|
|
|
|
124
|
|
|
|
(101
|
)
|
|
|
|
223
|
|
Investment expenses
|
|
|
(510
|
)
|
|
|
(523
|
)
|
|
|
(122
|
)
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
4,759
|
|
|
$
|
5,560
|
|
|
$
|
3,411
|
|
|
|
$
|
2,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables consist primarily of advance commissions and
agents balances in course of collection.
|
|
|
|
|
|
|
|
|
|
|
At
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Wholesale brokerage agent balances (premium receivable)
|
|
$
|
15,691
|
|
|
$
|
|
|
Allowance for doubtful accounts
|
|
|
(139
|
)
|
|
|
|
|
Advanced commissions
|
|
|
10,334
|
|
|
|
11,061
|
|
Insurance agent balances (premium receivable)
|
|
|
1,115
|
|
|
|
|
|
Notes receivable
|
|
|
356
|
|
|
|
|
|
Accounts receivable asset recovery
|
|
|
487
|
|
|
|
370
|
|
Reimbursable expenses asset recovery
|
|
|
158
|
|
|
|
|
|
Other receivables
|
|
|
114
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,116
|
|
|
$
|
11,446
|
|
|
|
|
|
|
|
|
|
|
The Company has various reinsurance agreements in place whereby
the amount of risk in excess of the Companys retention is
reinsured by unrelated domestic and foreign insurance companies.
The Company remains liable to policyholders in the event that
the assuming companies are unable to meet their obligations.
Fronting arrangements These arrangements are
typically with insurance companies affiliated with banks, auto
dealers or financial institutions whereby the Company cedes up
to 100% of the business written. The Company generally retains a
fee for issuing the policies and for providing administrative
services.
F-26
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Coinsurance Under coinsurance arrangements, the
Company cedes a fixed percentage of business written to
reinsurers while continuing to provide all policy
administration. The Company receives an administration fee and
generally participates in the underwriting profits, in
accordance with a contractual formula.
Excess of loss arrangements The Company seeks to
protect itself from the financial impact of large individual
claims by reinsuring credit life exposures in excess of $45 and
forced placed mortgage insurance exposures in excess of $150.
The effects of reinsurance on premiums written and earned and
losses and loss and adjustment expense (LAE) are presented in
the table below:
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
Years Ended December 31,
|
|
|
June 20, 2007 to
|
|
|
|
January 1, 2007 to
|
|
|
|
2009
|
|
|
2008
|
|
|
December 31, 2007
|
|
|
|
June 19, 2007
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
|
Written
|
|
|
Earned
|
|
Direct and assumed
|
|
$
|
273,276
|
|
|
$
|
300,219
|
|
|
$
|
337,341
|
|
|
$
|
315,566
|
|
|
$
|
181,773
|
|
|
$
|
159,914
|
|
|
|
$
|
141,240
|
|
|
$
|
130,843
|
|
Ceded
|
|
|
(172,638
|
)
|
|
|
(192,103
|
)
|
|
|
(208,235
|
)
|
|
|
(202,792
|
)
|
|
|
(106,493
|
)
|
|
|
(91,695
|
)
|
|
|
|
(73,296
|
)
|
|
|
(65,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
100,638
|
|
|
$
|
108,116
|
|
|
$
|
129,106
|
|
|
$
|
112,774
|
|
|
$
|
75,280
|
|
|
$
|
68,219
|
|
|
|
$
|
67,944
|
|
|
$
|
64,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
and LAE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
Years Ended December 31,
|
|
|
June 20, 2007 to
|
|
|
|
January 1, 2007 to
|
|
|
|
2009
|
|
|
2008
|
|
|
December 31,2007
|
|
|
|
June 19, 2007
|
|
Direct and assumed
|
|
$
|
80,383
|
|
|
$
|
76,067
|
|
|
$
|
48,477
|
|
|
|
$
|
42,640
|
|
Ceded
|
|
|
(47,817
|
)
|
|
|
(46,213
|
)
|
|
|
(28,153
|
)
|
|
|
|
(21,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE incurred
|
|
$
|
32,566
|
|
|
$
|
29,854
|
|
|
$
|
20,324
|
|
|
|
$
|
21,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Reinsurance receivables include amounts related to paid and
unpaid benefits as well prepaid reinsurance premiums. The
following reflects the components of the reinsurance receivables:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Ceded unearned premiums:
|
|
|
|
|
|
|
|
|
Life
|
|
$
|
60,281
|
|
|
$
|
82,358
|
|
Accident and health
|
|
|
29,844
|
|
|
|
32,980
|
|
Property
|
|
|
57,379
|
|
|
|
53,160
|
|
|
|
|
|
|
|
|
|
|
Total ceded unearned premiums
|
|
|
147,504
|
|
|
|
168,498
|
|
|
|
|
|
|
|
|
|
|
Ceded claim reserves:
|
|
|
|
|
|
|
|
|
Life
|
|
|
1,929
|
|
|
|
2,089
|
|
Accident and health
|
|
|
9,981
|
|
|
|
8,616
|
|
Property
|
|
|
10,608
|
|
|
|
12,697
|
|
|
|
|
|
|
|
|
|
|
Total ceded claim reserves recoverable
|
|
|
22,518
|
|
|
|
23,402
|
|
Other reinsurance settlements recoverable
|
|
|
3,776
|
|
|
|
7,123
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivables
|
|
$
|
173,798
|
|
|
$
|
199,023
|
|
|
|
|
|
|
|
|
|
|
These receivables are based upon estimates and are reported on
the balance sheet separately as assets, as reinsurance does not
relieve the Company of its legal liability to policyholders. The
Company is required to pay losses even if a reinsurer fails to
meet its obligations under the applicable reinsurance agreement.
Management continually monitors the financial condition and
agency ratings of the Companys reinsurers and believes
that the reinsurance receivables accrued are collectible.
Included in reinsurance receivables for 2009 and 2008 are
$132,735 and $151,878 recoverable from three unrelated
reinsurers. The three unrelated reinsurers are: Munich American
Reassurance Company (A. M. Best Rating-A+); London Life
Reinsurance Company (A. M. Best Rating-A); and London Life
International Reinsurance Corporation (A. M. Best Rating-NR-3).
Since London Life International Reinsurance Corporation does not
maintain an A.M. Best rating, the related receivables are
collateralized by assets held in trust and letters of credit. At
December 31, 2009, the Company does not believe there is a
risk of loss as a result of the concentration of credit risk in
the reinsurance program.
|
|
6.
|
Property
and Equipment
|
The components of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Furniture, fixtures and equipment
|
|
$
|
745
|
|
|
$
|
403
|
|
Computer equipment
|
|
|
1,058
|
|
|
|
248
|
|
Software
|
|
|
2,937
|
|
|
|
1,779
|
|
Leasehold improvements
|
|
|
513
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,253
|
|
|
|
2,892
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,113
|
)
|
|
|
(318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,140
|
|
|
$
|
2,574
|
|
|
|
|
|
|
|
|
|
|
F-28
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Depreciation expense for the years ended December 31, 2009
and 2008, the 2007 successor period and the 2007 predecessor
period totaled $662, $512, $244 and $221, respectively.
Amortization expense related to capitalized software costs for
the years ended December 31, 2009 and 2008, the 2007
successor period and 2007 predecessor period totaled $133, $20,
$0 and $0, respectively.
|
|
7.
|
Goodwill
and Other Intangible Assets
|
Goodwill resulting from the Companys acquisition by Summit
Partners, L.P. and from acquisitions of subsidiaries is carried
as an asset on the consolidated balance sheets and is not
amortized, but is evaluated to determine whether impairment
exists.
Goodwill is reviewed for impairment annually or more frequently
if certain indicators arise. The Company uses an income approach
to estimate the fair value of each reporting unit. The
impairment review is highly judgmental and involves the use of
significant estimates and assumptions. The estimates and
assumptions have a significant impact on the amount of any
impairment charge recorded. The Company completed its annual
assessment of goodwill in 2009, 2008 and 2007 and concluded that
the value of its goodwill was not impaired.
During the third quarter of 2008, the amount of goodwill
recognized as part of the Summit Partners acquisition was
determined to be $31.7 million. In December 2008, the
Company completed the acquisition of Darby &
Associates, Inc. for approximately $0.6 million resulting
in goodwill of $0.6 million. The Company also completed the
acquisition of CIRG in December 2008 for $1.2 million and
recorded goodwill of $1.3 million. In April 2009, the
Company acquired Bliss and Glennon, Inc. (B&G), for
$42.1 million resulting in goodwill of $29.9 million
and other intangible assets of $8.7 million.
The Company recognized $1.7 million of transaction costs
associated with the B&G acquisition in 2009 and an
immaterial amount of transaction costs in 2008. Transaction
costs of $3.2 million were recognized in the 2007 successor
period related to the acquisition by Summit Partners. Finally,
an immaterial amount of transaction costs were recognized in the
2007 predecessor period. Transaction costs are included in other
operating expenses in the consolidated statements of income.
Bliss and Glennon financial results have been included in the
Companys results beginning April 15, 2009. Revenue
and net income since the acquisition date included in the
Companys consolidated statement of income for the year
ended December 31, 2009 are as follows:
|
|
|
|
|
Revenue
|
|
$
|
16,820
|
|
|
|
|
|
|
Net income*
|
|
$
|
(156
|
)
|
|
|
|
|
|
|
|
* |
This result included $1,245 of transaction expenses.
|
The following unaudited pro forma summary presents the
Companys consolidated financial information as if Bliss
and Glennon had been acquired on January 1, 2009. These
amounts have been calculated after applying the Companys
accounting policies and adjusting the results of Bliss and
Glennon to
F-29
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
reflect the additional amortization that would have been charged
assuming the intangible assets would have existed on January 1,
2009 and excluding the transaction costs, together with the
consequential tax effect.
|
|
|
|
|
Revenue
|
|
$
|
91,231
|
|
|
|
|
|
|
Net income
|
|
$
|
14,039
|
|
|
|
|
|
|
The Company recognized amortization on intangibles of $2,706,
$2,097, $1,049 and $0 during the years ended December 31,
2009 and 2008, the 2007 successor period and the 2007
predecessor period, respectively.
Changes in goodwill balances are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
|
|
|
|
|
|
Wholesale
|
|
|
|
|
|
|
|
|
|
Protection
|
|
|
BPO
|
|
|
Brokerage
|
|
|
Total
|
|
|
|
|
|
Balance at January 1, 2008
|
|
$
|
23,587
|
|
|
$
|
9,223
|
|
|
$
|
|
|
|
$
|
32,810
|
|
|
|
|
|
Measurement period purchase accounting adjustments
|
|
|
(824
|
)
|
|
|
(321
|
)
|
|
|
|
|
|
|
(1,145
|
)
|
|
|
|
|
Goodwill acquired during 2008
|
|
|
642
|
|
|
|
1,337
|
|
|
|
|
|
|
|
1,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
23,405
|
|
|
|
10,239
|
|
|
|
|
|
|
|
33,644
|
|
|
|
|
|
Goodwill acquired during 2009
|
|
|
|
|
|
|
|
|
|
|
29,917
|
|
|
|
29,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
23,405
|
|
|
$
|
10,239
|
|
|
$
|
29,917
|
|
|
$
|
63,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
Year Ended December 31, 2008
|
|
|
|
Amortization
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Period
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Customer and agent relationships
|
|
|
7 - 10
|
|
|
$
|
18,457
|
|
|
$
|
(3,822
|
)
|
|
$
|
14,635
|
|
|
$
|
13,131
|
|
|
$
|
(1,969
|
)
|
|
$
|
11,162
|
|
Tradename
|
|
|
Indefinite
|
|
|
|
10,910
|
|
|
|
|
|
|
|
10,910
|
|
|
|
9,505
|
|
|
|
|
|
|
|
9,505
|
|
Software
|
|
|
10
|
|
|
|
3,971
|
|
|
|
(993
|
)
|
|
|
2,978
|
|
|
|
3,971
|
|
|
|
(596
|
)
|
|
|
3,375
|
|
Non-compete agreements
|
|
|
1.5 - 3
|
|
|
|
2,511
|
|
|
|
(1,037
|
)
|
|
|
1,474
|
|
|
|
581
|
|
|
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
35,849
|
|
|
$
|
(5,852
|
)
|
|
$
|
29,997
|
|
|
$
|
27,188
|
|
|
$
|
(3,146
|
)
|
|
$
|
24,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Changes in other intangible assets are as follows:
|
|
|
|
|
December 31, 2007
|
|
$
|
26,139
|
|
Amortization
|
|
|
(2,097
|
)
|
|
|
|
|
|
December 31, 2008
|
|
|
24,042
|
|
Intangible assets of acquired businesses
|
|
|
8,661
|
|
Amortization
|
|
|
(2,706
|
)
|
|
|
|
|
|
December 31, 2009
|
|
$
|
29,997
|
|
|
|
|
|
|
The estimated amortization of intangible assets for each of the
next five years ended December 31 is as follows:
|
|
|
|
|
2010
|
|
$
|
3,114
|
|
2011
|
|
|
3,114
|
|
2012
|
|
|
2,659
|
|
2013
|
|
|
2,471
|
|
2014
|
|
|
2,471
|
|
Thereafter
|
|
|
5,257
|
|
|
|
|
|
|
Total
|
|
$
|
19,086
|
|
|
|
|
|
|
|
|
8.
|
Accrued
Expenses and Accounts Payable
|
Accrued expenses and accounts payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Wholesale brokerage premiums payable to insurance carriers
|
|
$
|
24,404
|
|
|
$
|
|
|
Premiums collected on behalf of administered clients
|
|
|
9,823
|
|
|
|
7,543
|
|
Reinsurance payable
|
|
|
6,069
|
|
|
|
4,521
|
|
Income taxes payable
|
|
|
769
|
|
|
|
1,228
|
|
Premium tax payable
|
|
|
2,267
|
|
|
|
2,051
|
|
Unclaimed property
|
|
|
798
|
|
|
|
737
|
|
Deferred compensation
|
|
|
458
|
|
|
|
|
|
Interest payable Preferred Trust Funds
|
|
|
140
|
|
|
|
140
|
|
Other accrued expenses and accounts payable
|
|
|
389
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,117
|
|
|
$
|
16,901
|
|
|
|
|
|
|
|
|
|
|
F-31
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Line of credit Columbus Bank & Trust at
effective rate of 3.25%. Credit line of $15 million.
Matures 2012. Repaid June 2010
|
|
$
|
6,400
|
|
|
$
|
|
|
Line of credit Columbus Bank &
Trust effective interest rate of 5% floor. Credit
line of $15 million. Repaid June 2010
|
|
|
5,087
|
|
|
|
|
|
Subordinated debentures Summit Partners
fixed rate of 14%. Matures 2012
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
31,487
|
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
The $20,000 subordinated debentures are held by affiliates of
Summit Partners, a related party. Interest expense on these
debentures was $2,839, $2,847, $1,517 and $0 for the years ended
December 31, 2009 and 2008, the 2007 successor period and
the 2007 predecessor period, respectively.
On June 16, 2010, the Company amended the maturity date of the
subordinated debentures from June 2012 to
December 2013.
Preferred securities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Preferred trust securities FTN Financial
interest rate of 9.61%. Matures 2037
|
|
$
|
35,000
|
|
|
$
|
35,000
|
|
Redeemable preferred stock dividends paid quarterly:
|
|
|
|
|
|
|
|
|
Series A fixed rate of 8.25%. Matures 2034
|
|
|
7,440
|
|
|
|
7,440
|
|
Series B floating rate at 90 day LIBOR
plus 4%. Matures 2034
|
|
|
2,100
|
|
|
|
2,100
|
|
Series C fixed rate of 8.25%. Matures 2035
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,540
|
|
|
$
|
46,540
|
|
|
|
|
|
|
|
|
|
|
F-32
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Aggregate maturities of debt instruments are as follows:
|
|
|
|
|
|
|
At December
|
|
|
|
31, 2009
|
|
|
2010
|
|
$
|
5,087
|
|
2011
|
|
|
|
|
2012
|
|
|
26,400
|
|
2013
|
|
|
|
|
2014
|
|
|
|
|
Thereafter
|
|
|
46,540
|
|
|
|
|
|
|
|
|
$
|
78,027
|
|
|
|
|
|
|
The interest rates of debt instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2009
|
|
2008
|
|
Prime Rate Columbus Bank & Trust
|
|
|
3.25
|
%
|
|
|
3.25
|
%
|
Subordinated Debentures Summit Partners
|
|
|
14.00
|
%
|
|
|
14.00
|
%
|
Preferred Trust Securities FTN Financial
|
|
|
9.61
|
%
|
|
|
9.61
|
%
|
Redeemable Preferred Stock Series A &
C
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
Redeemable Preferred Stock Series B
|
|
|
4.29
|
%
|
|
|
7.88
|
%
|
Columbus
Bank & Trust lines of credit
The lines of credit with Columbus Bank & Trust are
secured with pledges of stock of various subsidiaries. Under
both lines of credit, the Company may not assign, sell, transfer
or dispose of any collateral or effect certain changes to its
capital structure and the capital structure of its subsidiaries
without Columbus Bank & Trusts prior consent. The
purpose of the lines is for working capital and acquisitions.
Interest on the lines of credit is payable monthly.
The following includes a summary of the Companys more
significant financial covenants related to its lines of credit
with Columbus Bank & Trust:
|
|
|
|
|
|
|
|
|
|
|
Covenant
|
|
At December 31, 2009
|
|
Minimum debt service charge ratio
|
|
|
2.25
|
|
|
|
4.44
|
|
Maximum debt to EBITDA ratio
|
|
|
4.75
|
|
|
|
2.25
|
|
Minimum audited net worth
|
|
$
|
50.0 million
|
|
|
$
|
80.8 million
|
|
The Company is in compliance with the above covenants.
On June 16, 2010, the lines of credit with Columbus Bank
& Trust were repaid and closed in connection with the entry
into a new revolving credit facility with SunTrust Bank,
discussed in Note 21.
F-33
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Subordinated
Debentures
In connection with the Summit Partners Transactions, LOTS
Intermediate Co. issued $20.0 million of subordinated
debentures to affiliates of Summit Partners. The subordinated
debentures mature on June 20, 2012 and bear interest at 14%
per annum of the principal amount of such subordinated
debentures and is payable quarterly.
The Company may redeem the subordinated debentures, in whole or
in part, at a price equal to 100% of the principal amount of
such subordinated debentures outstanding plus accrued and unpaid
interest. The agreement governing the subordinated debentures
contains non-competition and non-solicitation clauses for a
period of five years after the closing date.
The agreement governing the subordinated debentures also
contains customary events of default, including failure to pay
any principal or interest when due, failure to comply with
covenants or agreements contained in the agreement or
subordinated debentures, cross defaults with other indebtedness
of payment of principal or acceleration of principal payments,
unsatisfied judgments and bankruptcy events.
Preferred
Trust Securities
In connection with the Summit Partners Transactions, LOTS
Intermediate Co. issued $35.0 million of fixed/floating
rate preferred trust securities due 2037. The preferred trust
securities bear interest at a rate of 9.61% per annum until the
June 2012 interest payment date. Thereafter, interest on the
preferred trust securities will be at a rate of
3-month
LIBOR plus 4.10% for each interest rate period.
The Company may not redeem the preferred trust securities until
after the June 2012 interest payment date. After such date, the
Company may redeem the preferred trust securities, in whole or
in part, at a price equal to 100% of the principal amount of
such preferred trust securities outstanding plus accrued and
unpaid interest. Interest is payable quarterly.
The indenture governing the preferred trust securities contains
various affirmative and negative covenants, including
limitations on the sale of capital stock of our significant
subsidiaries, mergers and consolidations and the ability to
grant a lien on the capital stock of our significant
subsidiaries unless such security interests are secured
indebtedness of not more than $20 million, in the
aggregate, at any one time. The limitation on the ability to
issue, sell or dispose of the capital stock of significant
subsidiaries are not applicable if such transactions are made at
fair value and the Company retains at least 80% of the ownership
of such subsidiary.
The indenture governing the preferred trust securities also
contains customary events of default, including failure to pay
any principal or interest when due, failure to comply with
covenants or agreements contained in the indenture or preferred
trust securities, cross defaults with other indebtedness of
payment of principal or acceleration of principal payments and
bankruptcy events.
F-34
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Redeemable
Preferred Stock
The Company has Series A, Series B and Series C
redeemable preferred stock outstanding. The Series A and
Series B redeemable preferred stock were issued in 2005,
and the Series C redeemable preferred stock was issued in
2006. The Companys Series A and C redeemable
preferred stock each accrue cumulative cash dividends at a rate
of 8.25% per annum of the liquidation preference of $1,000 per
share of such series of redeemable preferred stock. The
Series B redeemable preferred stock accrues cash dividends
at a rate per annum of 4.0% plus 90 day LIBOR times the
liquidation preference of $1,000 per share of Series B
redeemable preferred stock. The Company pays dividends on its
Series A, B and C stock quarterly in arrears. Any
outstanding Series A and B redeemable preferred stock must
be redeemed in full on December 31, 2034 and any
outstanding Series C redeemable preferred stock must be
redeemed in full on December 31, 2035.
On or after January 1, 2010, the Company may redeem the
Series A and Series B redeemable preferred stock, in
whole or in part, based on the following timeframes at the
redemption prices set forth below (expressed in percentages of
the liquidation amount), plus accumulated and unpaid dividends
to the redemption date:
|
|
|
|
|
Year
|
|
Redemption Price
|
|
2010
|
|
|
103
|
%
|
2011
|
|
|
102
|
%
|
2012
|
|
|
101
|
%
|
2013 and thereafter
|
|
|
100
|
%
|
On or after January 1, 2011, the Company may redeem the
Series C redeemable preferred stock, in whole or in part,
based on the following timeframes at the redemption prices set
forth below (expressed in percentages of the liquidation
amount), plus accumulated and unpaid dividends to the redemption
date:
|
|
|
|
|
Year
|
|
Redemption Price
|
|
2011
|
|
|
103
|
%
|
2012
|
|
|
102
|
%
|
2013
|
|
|
101
|
%
|
2014 and thereafter
|
|
|
100
|
%
|
In addition, the Series A, B and C redeemable preferred
stock has optional redemption provisions for the holders upon
the death of the holder or if a change in control of the Company
occurs.
The Company leases certain office space and equipment under
operating leases. Rent expense for the years ended
December 31, 2009 and 2008, the 2007 successor period and
the 2007 predecessor period
F-35
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
was $2,753, $1,724, $811 and $752, respectively. The future
minimum lease payments for the years ending December 31 are as
follows:
|
|
|
|
|
2010
|
|
$
|
2,924
|
|
2011
|
|
|
2,698
|
|
2012
|
|
|
1,413
|
|
2013
|
|
|
649
|
|
2014
|
|
|
10
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,694
|
|
|
|
|
|
|
|
|
11.
|
Fair
Value of Financial Instruments
|
On January 1, 2008, the Company adopted accounting guidance
for reporting fair values in accordance with
ASC 820-10
Fair Value Measurements. There were no adjustments
required to the fair value of investments as a result of
adopting the new guidance. The market approach was the valuation
technique used to measure fair value of the investment
portfolio. The market approach uses prices and other relevant
information generated by market transactions involving identical
or comparable assets.
The guidance establishes a three-level hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value. The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). If the inputs used to
measure the assets or liabilities fall within different levels
of the hierarchy, the classification is based on the lowest
level input that is significant to the fair value measurement of
the asset or liability. Classification of assets and liabilities
within the hierarchy considers the markets in which the assets
and liabilities are traded and the reliability and transparency
of the assumptions used to determine fair value. The hierarchy
requires the use of observable market data when available. The
levels of the hierarchy and those investments included in each
are as follows:
Level 1 Inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities traded in active markets.
Level 2 Inputs to the valuation
methodology include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the
asset or liability and market-corroborated inputs.
Level 3 Inputs to the valuation
methodology are unobservable for the asset or liability and are
significant to the fair value measurement. Pricing is derived
from sources such as Interactive Data Corporation, Bloomberg
L.P., private placement matrices, broker quotes and internal
calculations.
The financial instruments guidance, ASC Topic 825, defines the
fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between
willing parties. The
F-36
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
guidance requires disclosure of fair value information about
financial instruments for which it is practicable to estimate
such fair value along with the significant assumptions used to
estimate the fair value.
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument:
Short-term
investments
The carrying amounts approximate fair value because of the short
maturities of these instruments.
Fixed
maturity securities
Fair values of fixed maturity securities were obtained from an
independent pricing service.
Common
and preferred stock
The fair value of publicly traded common and preferred stocks
were obtained from market value quotations provided by an
independent pricing service. The values of common stocks that
are not publicly traded were based on prices obtained from an
independent pricing service.
Notes
receivable
The carrying amounts approximate fair value because the interest
rates charged approximate current market rates for similar
credit risks. These values are net of allowance for doubtful
accounts.
Notes
payable, preferred trust securities, redeemable preferred stock
and guaranteed investment contracts
The carrying amounts approximate fair value because the
applicable interest rates approximate current rates offered to
the Company for similar instruments.
F-37
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The following table presents the Companys investment
securities within the fair value hierarchy, and the related
inputs used to measure those securities at December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fixed maturity securities
|
|
$
|
80,948
|
|
|
$
|
|
|
|
$
|
79,440
|
|
|
$
|
1,508
|
|
Common stock, marketable
|
|
|
369
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
Preferred stock, marketable
|
|
|
177
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
Common stock, other
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
662
|
|
Preferred stock, other
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
Short-term investments
|
|
|
1,220
|
|
|
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84,378
|
|
|
$
|
1,766
|
|
|
$
|
79,440
|
|
|
$
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys use of Level 3 of unobservable
inputs included 19 securities that accounted for 3.8% of
total investments at December 31, 2009.
The following table presents the Companys investment
securities within the fair value hierarchy and the related
inputs used to measure those securities at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fixed maturity securities
|
|
$
|
96,405
|
|
|
$
|
|
|
|
$
|
96,405
|
|
|
$
|
|
|
Common stock, marketable
|
|
|
423
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
Preferred stock, marketable
|
|
|
155
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
Common stock, other
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
586
|
|
Preferred stock, other
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Short-term investments
|
|
|
2,180
|
|
|
|
2,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
99,759
|
|
|
$
|
2,758
|
|
|
|
96,405
|
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys use of Level 3 of unobservable
inputs included 23 securities that accounted for less than
2% of total investments at December 31, 2008.
F-38
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The following table summarizes changes in Level 3 assets
measured at fair value for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
596
|
|
|
$
|
608
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
Included in net income
|
|
|
16
|
|
|
|
|
|
Included in comprehensive loss
|
|
|
367
|
|
|
|
(163
|
)
|
Amortization/accretion
|
|
|
|
|
|
|
7
|
|
Purchases, issuance and settlements
|
|
|
862
|
|
|
|
39
|
|
Net transfers into Level 3
|
|
|
1,331
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,172
|
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of Financial Instruments
The carrying value and fair value of financial instruments as of
December 31, 2009 and December 31, 2008 are presented
in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
29,940
|
|
|
$
|
29,940
|
|
|
$
|
22,082
|
|
|
$
|
22,082
|
|
Fixed maturity securities
|
|
|
80,948
|
|
|
|
80,948
|
|
|
|
96,405
|
|
|
|
96,405
|
|
Common stock, marketable
|
|
|
369
|
|
|
|
369
|
|
|
|
423
|
|
|
|
423
|
|
Preferred stock, marketable
|
|
|
177
|
|
|
|
177
|
|
|
|
155
|
|
|
|
155
|
|
Common stock, other
|
|
|
662
|
|
|
|
662
|
|
|
|
586
|
|
|
|
586
|
|
Preferred stock, other
|
|
|
1,002
|
|
|
|
1,002
|
|
|
|
10
|
|
|
|
10
|
|
Notes receivable
|
|
|
2,138
|
|
|
|
2,138
|
|
|
|
2,159
|
|
|
|
2,159
|
|
Other receivables
|
|
|
28,116
|
|
|
|
28,116
|
|
|
|
11,446
|
|
|
|
11,446
|
|
Short term investments
|
|
|
1,220
|
|
|
|
1,220
|
|
|
|
2,180
|
|
|
|
2,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
144,572
|
|
|
$
|
144,572
|
|
|
$
|
135,446
|
|
|
$
|
135,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
31,487
|
|
|
$
|
31,487
|
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
Preferred trust securities
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
35,000
|
|
Redeemable preferred stock
|
|
|
11,540
|
|
|
|
11,540
|
|
|
|
11,540
|
|
|
|
11,540
|
|
Guaranteed investment contract
|
|
|
|
|
|
|
|
|
|
|
1,010
|
|
|
|
1,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
78,027
|
|
|
$
|
78,027
|
|
|
$
|
67,550
|
|
|
$
|
67,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Years Ended
|
|
|
Period from June 20,
|
|
|
|
Period from
|
|
|
|
December 31,
|
|
|
2007 to December
|
|
|
|
January 1, 2007
|
|
|
|
2009
|
|
|
2008
|
|
|
31, 2007
|
|
|
|
to June 19, 2007
|
|
Current
|
|
$
|
3,140
|
|
|
$
|
4,064
|
|
|
$
|
1,851
|
|
|
|
$
|
2,377
|
|
Deferred
|
|
|
3,411
|
|
|
|
144
|
|
|
|
(90
|
)
|
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,551
|
|
|
$
|
4,208
|
|
|
$
|
1,761
|
|
|
|
$
|
1,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of income tax expense at the statutory rate
of 35% in 2009 and 34% in 2008, the 2007 successor period and
the 2007 predecessor period, respectively, to the effective
income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
Years Ended December 31,
|
|
|
June 20, 2007
|
|
|
|
January 1, 2007 to
|
|
|
|
2009
|
|
|
2008
|
|
|
to December 31, 2007
|
|
|
|
June 19, 2007
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Pre-Tax
|
|
|
|
|
|
Pre-Tax
|
|
|
|
|
|
Pre-Tax
|
|
|
|
|
|
|
Pre-Tax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
Amount
|
|
|
Income
|
|
Income taxes at federal income tax rate
|
|
$
|
6,347
|
|
|
|
35.00
|
%
|
|
$
|
4,132
|
|
|
|
34.00
|
%
|
|
$
|
1,862
|
|
|
|
34.00
|
%
|
|
|
$
|
1,983
|
|
|
|
34.00
|
%
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small life deduction
|
|
|
(489
|
)
|
|
|
(2.70
|
)
|
|
|
(414
|
)
|
|
|
(3.41
|
)
|
|
|
(259
|
)
|
|
|
(4.73
|
)
|
|
|
|
(259
|
)
|
|
|
(4.44
|
)
|
Non deductible expenses
|
|
|
602
|
|
|
|
3.32
|
|
|
|
175
|
|
|
|
1.44
|
|
|
|
58
|
|
|
|
1.06
|
|
|
|
|
604
|
|
|
|
10.36
|
|
Non deductible preferred dividends
|
|
|
308
|
|
|
|
1.70
|
|
|
|
319
|
|
|
|
2.62
|
|
|
|
212
|
|
|
|
3.87
|
|
|
|
|
126
|
|
|
|
2.16
|
|
Tax exempt interest
|
|
|
(99
|
)
|
|
|
(0.55
|
)
|
|
|
(190
|
)
|
|
|
(1.56
|
)
|
|
|
(44
|
)
|
|
|
(0.80
|
)
|
|
|
|
(44
|
)
|
|
|
(0.75
|
)
|
State taxes
|
|
|
314
|
|
|
|
1.73
|
|
|
|
49
|
|
|
|
0.40
|
|
|
|
8
|
|
|
|
0.15
|
|
|
|
|
9
|
|
|
|
0.15
|
|
Prior year tax true up
|
|
|
(324
|
)
|
|
|
(1.79
|
)
|
|
|
145
|
|
|
|
1.19
|
|
|
|
(28
|
)
|
|
|
(0.51
|
)
|
|
|
|
(362
|
)
|
|
|
(6.21
|
)
|
Other, net
|
|
|
(108
|
)
|
|
|
(0.59
|
)
|
|
|
(8
|
)
|
|
|
(0.06
|
)
|
|
|
(48
|
)
|
|
|
(0.89
|
)
|
|
|
|
(74
|
)
|
|
|
(1.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
6,551
|
|
|
|
36.12
|
%
|
|
$
|
4,208
|
|
|
|
34.62
|
%
|
|
$
|
1,761
|
|
|
|
32.15
|
%
|
|
|
$
|
1,983
|
|
|
|
34.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no unrecognized tax benefits for the years ended
December 31, 2009 and 2008.
The Company has reviewed its uncertain tax positions and has
concluded that they are immaterial and that they did not require
an adjustment to equity upon adoption of
ASC 740-10.
The Company is no longer subject to U.S. federal or state
tax examinations by tax authorities for 2005 or prior years.
F-40
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The components of the net deferred tax liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Gross deferred tax assets
|
|
|
|
|
|
|
|
|
Reinsurance funds payable
|
|
$
|
|
|
|
$
|
225
|
|
Unearned premiums
|
|
|
5,128
|
|
|
|
5,565
|
|
Retro reserves
|
|
|
|
|
|
|
119
|
|
Unpaid claims
|
|
|
146
|
|
|
|
90
|
|
Deferred compensation
|
|
|
236
|
|
|
|
225
|
|
General expense reserves
|
|
|
|
|
|
|
139
|
|
Bad debt allowance
|
|
|
135
|
|
|
|
114
|
|
Unrealized losses on investments
|
|
|
|
|
|
|
552
|
|
Other basis differences in investments
|
|
|
161
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
5,806
|
|
|
|
7,580
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
13,567
|
|
|
|
12,457
|
|
Intangible assets
|
|
|
9,776
|
|
|
|
9,126
|
|
Advanced commissions
|
|
|
1,465
|
|
|
|
216
|
|
Depreciation on fixed assets
|
|
|
466
|
|
|
|
273
|
|
Unrealized gains on investments
|
|
|
865
|
|
|
|
|
|
Other
|
|
|
395
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
26,534
|
|
|
|
22,348
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
20,728
|
|
|
$
|
14,768
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the Company did not have any non-life
regular tax operating loss carryforwards available to offset
future non-life federal taxable income and life federal taxable
income with certain limitations under Internal Revenue Code
Section 1503(c)(6)(1).
The Company currently has outstanding options under its Key
Employee Stock Option Plan (1995) and 2005 Equity Incentive
Plan.
The Key Employee Stock Option Plan (1995), which was effective
January 26, 1995, permits awards of incentive stock options
and nonqualified stock options. The Company was permitted to
issue up to 210,000 shares under this plan. Each option
granted under this plan has a maximum contractual term of
10 years. The 1995 plan (but not the outstanding options
granted under the plan) terminated on January 25, 2005. As
of December 31, 2009, there were 52,200 options outstanding
under the 1995 plan.
The 2005 Equity Incentive Plan was established on
October 18, 2005 and permits awards of (i) Incentive
Stock Options, (ii) Nonqualified Stock Options,
(iii) Stock Appreciation Rights, (iv) Restricted Stock
and (v) Restricted Stock Units. The Company was permitted
to issue up to 250,000 shares under this
F-41
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
plan. Each option granted under this plan has a maximum
contractual term of 10 years. As of December 31, 2009,
there were 250,000 options outstanding under the 2005 plan.
The Company also has 69,907 options outstanding as of
December 31, 2009 that were issued outside of its existing
plans.
During 2009, no options were granted while in 2008 and the 2007
successor period 7,972 and 161,935 options were granted,
respectively. No options were granted during the 2007
predecessor period.
The Company measures stock-based compensation using the
calculated value method. Under that method, the Company
estimates the fair value of each option on the grant date using
the Black-Scholes valuation model incorporating the assumptions
noted in the following table. The Company used historical data
to estimate expected employee behavior related to stock award
exercises and forfeitures. Since there is not an active market
for shares of the Companys stock, the Company has chosen
to estimate its volatility, by using the volatility of a similar
publicly traded companies operating in the same industry.
Expected dividends are based on the assumption that no dividends
were expected to be distributed in the near future. The
risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant for periods corresponding with the
expected life of the options.
Assumptions related to stock option awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period of
|
|
|
Period of
|
|
|
|
|
|
|
June 20,
|
|
|
January 1,
|
|
|
Year Ended
|
|
2007 to
|
|
|
2007
|
|
|
December 31,
|
|
December 31,
|
|
|
to June 19,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
2007
|
Expected term (years)
|
|
|
*
|
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
|
*
|
|
Expected volatility
|
|
|
*
|
|
|
|
32.87
|
%
|
|
|
22.43
|
%
|
|
|
|
*
|
|
Expected dividends
|
|
|
*
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
*
|
|
Risk-free rate
|
|
|
*
|
|
|
|
4.96
|
%
|
|
|
5.24
|
%
|
|
|
|
*
|
|
|
|
|
*
|
|
No options were granted during 2009
or the period from January 1, 2007 to June 19, 2007.
|
F-42
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
A summary of options granted, exercised and cancelled under
these agreements for the years ended December 31, 2009 and
2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
Balance, December 31, 2007
|
|
|
472,135
|
|
|
$
|
13.64
|
|
|
|
220,200
|
|
|
$
|
10.21
|
|
Granted
|
|
|
7,972
|
|
|
|
23.11
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
90,220
|
|
|
|
16.69
|
|
Exercised
|
|
|
(105,000
|
)
|
|
|
7.99
|
|
|
|
(105,000
|
)
|
|
|
7.99
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
375,107
|
|
|
|
15.42
|
|
|
|
205,420
|
|
|
|
14.16
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
73,639
|
|
|
|
16.86
|
|
Exercised
|
|
|
(3,000
|
)
|
|
|
8.12
|
|
|
|
(3,000
|
)
|
|
|
8.12
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
372,107
|
|
|
$
|
15.48
|
|
|
|
276,059
|
|
|
$
|
14.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term at December 31,
2009 (years)
|
|
|
6.12
|
|
|
|
|
|
|
|
5.73
|
|
|
|
|
|
Additional information regarding options granted, vested and
exercised is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period of
|
|
|
Period of
|
|
|
Years Ended
|
|
June 20,
|
|
|
January 1, 2007
|
|
|
December 31,
|
|
2007 to
|
|
|
to June 19,
|
|
|
2009
|
|
2008
|
|
December 31, 2007
|
|
|
2007
|
Weighted-average grant date fair value of options granted (in
dollars)
|
|
|
*
|
|
|
$
|
7.90
|
|
|
$
|
4.69
|
|
|
|
|
*
|
|
Total fair value of options vested during the year
|
|
$
|
209
|
|
|
$
|
244
|
|
|
$
|
56
|
|
|
|
$
|
2
|
|
Total intrinsic value of options exercised
|
|
$
|
112
|
|
|
$
|
1,327
|
|
|
$
|
|
|
|
|
$
|
1,890
|
|
Cash received from option exercises
|
|
$
|
24
|
|
|
$
|
846
|
|
|
$
|
|
|
|
|
$
|
1,044
|
|
Tax benefits realized from exercised stock options
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
$
|
|
|
Cash used to settle equity instruments granted under stock-based
compensation awards
|
|
$
|
|
|
|
$
|
2,069
|
|
|
$
|
1,400
|
|
|
|
$
|
|
|
The intrinsic value reported above is calculated as the
difference between the market value as of the exercise date and
the exercise price of the shares.
|
|
|
*
|
|
No options were granted during 2009
or the period from January 1, 2007 to June 19, 2007.
|
F-43
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The Companys policy is to issue new shares upon the
exercise of stock options. Shares of Company stock issued upon
the exercise of stock options in 2009, 2008, the 2007 successor
period and the 2007 predecessor period were 3,000, 105,000,
129,400 and 0, respectively.
Stock-based compensation cost is measured at the grant date
based on the fair value of the award and is typically recognized
as expense on a straight-line basis over the requisite service
period, which is the vesting period. Total stock-based
compensation recognized on the consolidated statements of income
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period of
|
|
|
Period of
|
|
|
|
|
|
|
June 20,
|
|
|
January 1, 2007
|
|
|
Years Ended
|
|
2007 to
|
|
|
to June 19,
|
|
|
2009
|
|
2008
|
|
December 31, 2007
|
|
|
2007
|
Other operating expenses
|
|
$
|
209
|
|
|
$
|
244
|
|
|
$
|
56
|
|
|
|
$
|
2
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net share-based compensation
|
|
$
|
209
|
|
|
$
|
244
|
|
|
$
|
56
|
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized compensation cost related to non-vested share
based compensation at December 31, 2009 was $327 with a
weighted-average recognition period of 1.4 years.
|
|
14.
|
Deferred
Compensation Plan
|
The Company has a nonqualified deferred compensation plan for
certain officers. Provision has been made for the compensation
which is payable upon their retirement or death. The deferred
compensation is to be paid to the individual or their heirs over
a period of ten years commencing with the first year following
retirement or death.
At December 31, 2009 and 2008, total liabilities of $21 and
$51 were accrued under the plan. The liabilities were estimated
using a discount rate of 5.00% for both 2009 and 2008. The
amounts are reflected in the consolidated balance sheet as
accrued expenses and accounts payable.
The Company also has deferred bonus agreements with several key
executives whereby funds are contributed to rabbi
trusts held for the benefit of the executives. The funds held in
the rabbi trusts are reflected in the consolidated balance sheet
as cash and cash equivalents. The corresponding deferred
compensation obligation is recorded in the consolidated balance
sheet as accrued expenses and accounts payable. In 2009, the
executives elected to invest a portion of the funds held in the
rabbi trusts in shares of common stock of the Company. Pursuant
to GAAP, the portion of the rabbi trusts invested in shares of
the Company has been reflected as treasury stock in the
consolidated balance sheet for 2009.
|
|
15.
|
Statutory
Reporting and Dividend Restrictions
|
The Companys insurance subsidiaries may pay dividends to
the Company, subject to statutory restrictions. Payments in
excess of statutory restrictions (extraordinary dividends) to
the Company are permitted only with prior approval of the
insurance departments of the applicable states of domicile. In
2009, Life of the South Insurance Company, Insurance Company of
the South and Southern Financial Life Insurance Company received
approval from the insurance departments of their respective
states of domicile to pay
F-44
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
extraordinary dividends of $7,920, $3,500 and $683,
respectively, to the Company. Also in 2009, Bankers Life of
Louisiana and Insurance Company of the South received approval
from the insurance departments of their respective states of
domicile to pay an extraordinary dividend of $2,550 and $1,500,
respectively, to Life of the South Insurance Company. Southern
Financial Life Insurance Company also received approval from the
Kentucky Department of Insurance and paid an extraordinary
dividend of $124 to its non-controlling interest stockholder in
2009. All dividends were eliminated in the consolidated
financial statements except for the $124 dividend paid to the
non-controlling interest stockholder.
The combined statutory capital and surplus of the Companys
insurance subsidiaries was $48,210 and $57,077 as of
December 31, 2009 and 2008, respectively. The combined
amount available for ordinary dividends of the Companys
insurance subsidiaries was $1,486 and $6,129 as of
December 31, 2009 and 2008, respectively.
The Companys insurance subsidiaries are required by the
laws of the states in which they are domiciled to maintain
certain statutory capital and surplus requirements. The required
statutory capital and surplus totaled $13,000 and $11,800 for
the years ended December 31, 2009 and 2008, respectively.
Under the National Association of Insurance Commissioners
(NAIC) Risk-Based Capital Act of 1995, a
companys risk-based capital (RBC) is
calculated by applying certain risk factors to various asset,
claims and reserve items. If a companys adjusted surplus
falls below calculated RBC thresholds, regulatory intervention
or oversight is required. The insurance companies RBC
level as calculated in accordance with the NAICs RBC
instructions exceeded all RBC thresholds as of December 31,
2009 and December 31, 2008.
|
|
16.
|
Commitments
and Contingencies
|
The Company is party to claims and litigation in the normal
course of its operations. Management believes that the ultimate
outcome of these matters will not have a material adverse effect
on the consolidated financial position, results of operations or
cash flows of the Company.
In its Payment Protection business, the Company is currently a
defendant in lawsuits which relate to marketing
and/or
pricing issues that involve claims for punitive, exemplary or
extracontractual damages in amounts substantially in excess of
the covered claim. Management considers such litigation
customary in the Companys line of business. In
managements opinion, the ultimate resolution of such
litigation, which the Company is vigorously defending, will not
be material to the consolidated financial position, results of
operations or cash flows of the Company.
The liability for unpaid claims includes estimates of the
ultimate cost of known claims plus supplemental reserves
calculated based upon loss projections utilizing certain
actuarial assumptions and historical and industry data. In
establishing its liability for unpaid claims, the Company
utilizes the findings of actuaries.
Considerable uncertainty and variability are inherent in such
estimates, and accordingly, the subsequent development of these
reserves may not conform to the assumptions inherent in the
determination. Management believes that the amounts recorded as
the liability for policy and claim liabilities represent its
best estimate of such amounts. However, actual loss experience
may not conform to the assumptions used in determining the
estimated amounts for such liability at the balance sheet date.
Accordingly, such ultimate amounts could be significantly in
excess of or less than the amounts indicated in the
F-45
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
consolidated financial statements. As adjustments to these
estimates become necessary, such adjustments are reflected in
the then current statement of income.
The changes in unpaid claims for each of the years ending
December 31 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance at January 1
|
|
$
|
36,363
|
|
|
$
|
38,279
|
|
Less reinsurance recoverable
|
|
|
(23,402
|
)
|
|
|
(21,344
|
)
|
|
|
|
|
|
|
|
|
|
Net balance at January 1
|
|
|
12,961
|
|
|
|
16,935
|
|
|
|
|
|
|
|
|
|
|
Incurred related to
|
|
|
|
|
|
|
|
|
Current year
|
|
|
33,186
|
|
|
|
32,155
|
|
Prior years
|
|
|
(620
|
)
|
|
|
(2,301
|
)
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
32,566
|
|
|
|
29,854
|
|
|
|
|
|
|
|
|
|
|
Paid related to
|
|
|
|
|
|
|
|
|
Current year
|
|
|
26,083
|
|
|
|
26,394
|
|
Prior years
|
|
|
5,810
|
|
|
|
7,434
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
31,893
|
|
|
|
33,828
|
|
|
|
|
|
|
|
|
|
|
Net balance at December 31
|
|
|
13,634
|
|
|
|
12,961
|
|
Plus reinsurance receivables
|
|
|
22,518
|
|
|
|
23,402
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
36,152
|
|
|
$
|
36,363
|
|
|
|
|
|
|
|
|
|
|
Prior years incurred claims decreased $620 during 2009 due
to the favorable development in payment patterns for the credit
property lines of business in 2009. The $2,301 decrease during
2008 primarily resulted from a single bank customer that assumed
the exposure on their block of business during that period.
The Company conducts its business through three business
segments: (i) Payment Protection; (ii) Business
Processing Outsourcing (BPO); and (iii) Wholesale
Brokerage. The Company does not allocate certain revenues and
costs to its segments. These items primarily consist of
corporate-related income and overhead expenses, which are
reflected as Corporate in the following table,
amortization, depreciation, interest income and expense and
income taxes. The Company measures the profitability of its
operating segments without allocation of these expenses. The
Company refers to this measure of profitability as segment
EBITDA (earnings before interest, taxes, depreciation and
amortization) and segment EBITDA margin. The variability of
segment EBITDA and segment EBITDA margin is significantly
affected by segment revenues because a large component of
operating expenses are fixed.
F-46
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The following table reconciles segment information to the
Companys consolidated results of operations and provides a
summary of other key financial information for each of the
Companys segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
June 20, to
|
|
|
January 1 to
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
Segment Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and administrative Fees
|
|
$
|
8,355
|
|
|
$
|
10,375
|
|
|
$
|
5,574
|
|
|
$
|
3,858
|
|
Ceding commission
|
|
|
24,075
|
|
|
|
26,215
|
|
|
|
13,733
|
|
|
|
10,753
|
|
Net investment income
|
|
|
4,759
|
|
|
|
5,560
|
|
|
|
3,411
|
|
|
|
2,918
|
|
Net realized gains
|
|
|
54
|
|
|
|
(1,921
|
)
|
|
|
(348
|
)
|
|
|
516
|
|
Other income
|
|
|
462
|
|
|
|
178
|
|
|
|
28
|
|
|
|
353
|
|
Net earned premium
|
|
|
108,116
|
|
|
|
112,774
|
|
|
|
68,219
|
|
|
|
64,906
|
|
Net losses and loss adjustment expenses
|
|
|
(32,566
|
)
|
|
|
(29,854
|
)
|
|
|
(20,324
|
)
|
|
|
(21,224
|
)
|
Commissions
|
|
|
(70,449
|
)
|
|
|
(81,226
|
)
|
|
|
(45,275
|
)
|
|
|
(42,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
42,806
|
|
|
|
42,101
|
|
|
|
25,018
|
|
|
|
19,442
|
|
BPO
|
|
|
23,521
|
|
|
|
13,904
|
|
|
|
5,112
|
|
|
|
4,307
|
|
Wholesale Brokerage
|
|
|
16,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
83,098
|
|
|
|
56,005
|
|
|
|
30,130
|
|
|
|
23,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
23,814
|
|
|
|
24,676
|
|
|
|
14,443
|
|
|
|
12,287
|
|
BPO
|
|
|
13,753
|
|
|
|
7,136
|
|
|
|
2,128
|
|
|
|
2,496
|
|
Wholesale Brokerage
|
|
|
12,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
3,199
|
|
|
|
2,155
|
|
|
|
2,659
|
|
|
|
1,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
53,656
|
|
|
|
33,967
|
|
|
|
19,230
|
|
|
|
16,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
18,992
|
|
|
|
17,425
|
|
|
|
10,575
|
|
|
|
7,155
|
|
BPO
|
|
|
9,768
|
|
|
|
6,768
|
|
|
|
2,984
|
|
|
|
1,811
|
|
Wholesale Brokerage
|
|
|
3,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(3,248
|
)
|
|
|
(2,155
|
)
|
|
|
(2,659
|
)
|
|
|
(1,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,442
|
|
|
|
22,038
|
|
|
|
10,900
|
|
|
|
7,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
1,815
|
|
|
|
2,164
|
|
|
|
994
|
|
|
|
170
|
|
BPO
|
|
|
566
|
|
|
|
465
|
|
|
|
298
|
|
|
|
51
|
|
Wholesale Brokerage
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,507
|
|
|
|
2,629
|
|
|
|
1,292
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
6,709
|
|
|
|
6,252
|
|
|
|
3,577
|
|
|
|
979
|
|
BPO
|
|
|
428
|
|
|
|
1,003
|
|
|
|
553
|
|
|
|
190
|
|
Wholesale Brokerage
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,800
|
|
|
|
7,255
|
|
|
|
4,130
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
June 20, to
|
|
|
January 1 to
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
Income before income taxes and non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
10,468
|
|
|
|
9,009
|
|
|
|
6,004
|
|
|
|
6,006
|
|
BPO
|
|
|
8,774
|
|
|
|
5,300
|
|
|
|
2,133
|
|
|
|
1,570
|
|
Wholesale Brokerage
|
|
|
2,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(3,248
|
)
|
|
|
(2,155
|
)
|
|
|
(2,659
|
)
|
|
|
(1,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,135
|
|
|
$
|
12,154
|
|
|
$
|
5,478
|
|
|
$
|
5,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Reconciliation
of Segment Net Revenue and EBITDA to Total Revenue and Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period From
|
|
|
Period From
|
|
|
|
|
|
|
June 20
|
|
|
January 1
|
|
|
|
Years Ended December 31
|
|
|
to December 31,
|
|
|
to June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
$
|
42,806
|
|
|
$
|
42,101
|
|
|
$
|
25,018
|
|
|
$
|
19,442
|
|
BPO
|
|
|
23,521
|
|
|
|
13,904
|
|
|
|
5,112
|
|
|
|
4,307
|
|
Wholesale Brokerage
|
|
|
16,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net revenue
|
|
|
83,098
|
|
|
|
56,005
|
|
|
|
30,130
|
|
|
|
23,749
|
|
Net losses and loss adjustment expenses
|
|
|
32,566
|
|
|
|
29,854
|
|
|
|
20,324
|
|
|
|
21,224
|
|
Commissions
|
|
|
70,449
|
|
|
|
81,226
|
|
|
|
45,275
|
|
|
|
42,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
186,113
|
|
|
|
167,085
|
|
|
|
95,729
|
|
|
|
87,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
23,814
|
|
|
|
24,676
|
|
|
|
14,443
|
|
|
|
12,287
|
|
BPO
|
|
|
13,753
|
|
|
|
7,136
|
|
|
|
2,128
|
|
|
|
2,496
|
|
Wholesale Brokerage
|
|
|
12,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
3,199
|
|
|
|
2,155
|
|
|
|
2,659
|
|
|
|
1,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
53,656
|
|
|
|
33,967
|
|
|
|
19,230
|
|
|
|
16,527
|
|
Net losses and loss adjustment expenses
|
|
|
32,566
|
|
|
|
29,854
|
|
|
|
20,324
|
|
|
|
21,224
|
|
Commissions
|
|
|
70,449
|
|
|
|
81,226
|
|
|
|
45,275
|
|
|
|
42,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses before depreciation, amortization and interest
|
|
|
156,671
|
|
|
|
145,047
|
|
|
|
84,829
|
|
|
|
80,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
18,992
|
|
|
|
17,425
|
|
|
|
10,575
|
|
|
|
7,155
|
|
BPO
|
|
|
9,768
|
|
|
|
6,768
|
|
|
|
2,984
|
|
|
|
1,811
|
|
Wholesale Brokerage
|
|
|
3,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(3,248
|
)
|
|
|
(2,155
|
)
|
|
|
(2,659
|
)
|
|
|
(1,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,442
|
|
|
|
22,038
|
|
|
|
10,900
|
|
|
|
7,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
1,815
|
|
|
|
2,164
|
|
|
|
994
|
|
|
|
170
|
|
BPO
|
|
|
566
|
|
|
|
465
|
|
|
|
298
|
|
|
|
51
|
|
Wholesale Brokerage
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,507
|
|
|
|
2,629
|
|
|
|
1,292
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Period From
|
|
|
Period From
|
|
|
|
|
|
|
June 20
|
|
|
January 1
|
|
|
|
Years Ended December 31
|
|
|
to December 31,
|
|
|
to June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
6,709
|
|
|
|
6,252
|
|
|
|
3,577
|
|
|
|
979
|
|
BPO
|
|
|
428
|
|
|
|
1,003
|
|
|
|
553
|
|
|
|
190
|
|
Wholesale Brokerage
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,800
|
|
|
|
7,255
|
|
|
|
4,130
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
10,468
|
|
|
|
9,009
|
|
|
|
6,004
|
|
|
|
6,006
|
|
BPO
|
|
|
8,774
|
|
|
|
5,300
|
|
|
|
2,133
|
|
|
|
1,570
|
|
Wholesale Brokerage
|
|
|
2,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(3,248
|
)
|
|
|
(2,155
|
)
|
|
|
(2,659
|
)
|
|
|
(1,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before income taxes and non-controlling interest
|
|
|
18,135
|
|
|
|
12,154
|
|
|
|
5,478
|
|
|
|
5,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
(6,551
|
)
|
|
|
(4,208
|
)
|
|
|
(1,761
|
)
|
|
|
(1,983
|
)
|
Less: net income (loss) attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-controlling interest
|
|
|
26
|
|
|
|
(82
|
)
|
|
|
64
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,558
|
|
|
$
|
8,028
|
|
|
$
|
3,653
|
|
|
$
|
3,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.
|
Related
Party Transactions
|
In connection with the Summit Partners acquisition of the
Company on June 20, 2007, $20 million of subordinated
debentures were issued to affiliates of Summit Partners and
reported on the notes payable line of the balance sheet with the
corresponding interest expense recorded in the consolidated
statements of income of $2,839, $2,847 and $1,517 in 2009, 2008
and 2007, respectively. The subordinated debentures mature on
December 13, 2013 and bear interest at 14% per annum of the
principal amount of such subordinated debentures. The Company
may redeem the subordinated debentures, in whole or in part, at
a price equal to 100% of the principal amount of such
subordinated debentures outstanding plus accrued and unpaid
interest.
|
|
20.
|
401(k)
Profit Sharing Plan
|
The Company has a 401(k) plan that is available to employees
upon meeting certain eligibility requirements. The plan allows
employees to contribute to the plan a percentage of their
pre-tax annual compensation. Under the terms of the plan, the
Company will match 100% of each dollar of the
F-50
FORTEGRA
FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD FROM
JUNE 20, 2007
THROUGH DECEMBER 31, 2007 (SUCCESSOR) AND FOR THE PERIOD
FROM JANUARY 1, 2007
THROUGH JUNE 19, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
employee contribution up to the maximum of 5% of the
employees annual compensation. The contributions of the
plan are invested at the election of the employee in one or more
investment option by a third party plan administrator. The
Company contributions to the plan totaled $240, $532, $293 and
$349 for the years ended December 31, 2009 and 2008, the
2007 successor period and the 2007 predecessor period,
respectively.
401(k) Plan Curtailment. In July 2009, the
Company froze the matching of the employee contribution up to a
maximum of 5% of the employees annual compensation. This
contribution was put back in place in January 2010.
The approach for the Company 401(k) plan involves making an
array of investment opportunities available from which employees
may select, based on their individual investment goals and risk
tolerances. The Company does endeavor to maintain reasonable
parameters to ensure that prudence and care are exercised in the
investment options that are made available within the 401(k)
plan. The individual equity, bond and other investment
alternatives are monitored on an ongoing basis by the plan
trustees through periodic portfolio reviews. The investment
options may change over time.
On February 1, 2010, the Company purchased all of the stock
for South Bay Acceptance Corporation for $800. South Bay
Acceptance Corporation is a California premium finance company.
On May 15, 2010, the Company purchased all of the stock for
Continental Car Club, a Tennessee car club company, for $11,900.
On September 1, 2010, the Company purchased 100% of the
outstanding shares of United Motor Club, a Kentucky car club
company, for $9,096.
In June 2010, the Company entered into a $35,000 revolving
credit facility with SunTrust Bank, which matures in June 2013
(the Facility). The Facility bears interest at a
variable rate determined based upon the higher of (i) the
prime rate, (ii) the federal funds rate plus 0.50% or
(iii) LIBOR plus 1%, plus a margin tied to the
Companys leverage ratio. The Company is required to pay a
commitment fee of between 0.45% and 0.60% (based upon the
Companys leverage ratio) on the unused portion of the
Facility.
The Companys obligations under the Facility are guaranteed
by substantially all of its domestic subsidiaries, other than
South Bay Acceptance Corporation and the regulated insurance
subsidiaries.
The Companys obligations under the Facility may be
accelerated or the commitments terminated upon the occurrence of
an event of default under the Facility, including payment
defaults, defaults in the performance of affirmative and
negative covenants, the inaccuracy of representations or
warranties, bankruptcy and insolvency related defaults, cross
defaults to other material indebtedness, defaults arising in
connection with changes in control and other customary events of
default. As of June 30, 2010, the Company was in compliance
with such requirements.
As of June 30, 2010, the Company had $18,500 outstanding
under the Facility and the interest rate was 5.8%.
The Company has evaluated subsequent events for disclosure and
recognition through the date on which the consolidated financial
statements were issued.
F-51
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Invested assets and cash:
|
|
|
|
|
|
|
|
|
Fixed maturity securities available for sale at fair value
(amortized cost of $84,977 and $78,548 at September 30,
2010 and December 31, 2009), respectively
|
|
$
|
91,032
|
|
|
$
|
80,948
|
|
Equity securities available for sale (cost of $2,020 and $2,155
at September 30, 2010 and December 31, 2009,
respectively)
|
|
|
1,995
|
|
|
|
2,210
|
|
Short-term investments
|
|
|
1,170
|
|
|
|
1,220
|
|
Cash and cash equivalents
|
|
|
17,843
|
|
|
|
29,940
|
|
Restricted cash
|
|
|
15,119
|
|
|
|
18,090
|
|
|
|
|
|
|
|
|
|
|
Total invested assets and cash
|
|
|
127,159
|
|
|
|
132,408
|
|
Accrued investment income
|
|
|
878
|
|
|
|
910
|
|
Notes receivable
|
|
|
1,626
|
|
|
|
2,138
|
|
Other receivables
|
|
|
31,003
|
|
|
|
28,116
|
|
Reinsurance receivables
|
|
|
166,852
|
|
|
|
173,798
|
|
Deferred policy acquisition costs
|
|
|
43,255
|
|
|
|
41,083
|
|
Property and equipment
|
|
|
9,660
|
|
|
|
4,140
|
|
Goodwill and other intangible assets
|
|
|
112,675
|
|
|
|
93,558
|
|
Other assets
|
|
|
5,534
|
|
|
|
2,475
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
498,642
|
|
|
$
|
478,626
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Unpaid claims
|
|
$
|
33,446
|
|
|
$
|
36,152
|
|
Unearned premiums
|
|
|
208,140
|
|
|
|
215,652
|
|
Accrued expenses and accounts payable
|
|
|
44,028
|
|
|
|
45,117
|
|
Commissions payable
|
|
|
|
|
|
|
2,157
|
|
Notes payable
|
|
|
48,013
|
|
|
|
31,487
|
|
Preferred trust securities
|
|
|
35,000
|
|
|
|
35,000
|
|
Redeemable preferred securities
|
|
|
11,440
|
|
|
|
11,540
|
|
Deferred income taxes
|
|
|
23,694
|
|
|
|
20,728
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
403,761
|
|
|
|
397,833
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.331/3
per share (6,000,000 shares authorized and 3,007,031 and
3,007,031 issued at September 30, 2010 and
December 31, 2009, respectively)
|
|
|
1,002
|
|
|
|
1,002
|
|
Treasury stock (8,491 shares at September 30, 2010 and
December 31, 2009, respectively)
|
|
|
(176
|
)
|
|
|
(176
|
)
|
Additional paid-in capital
|
|
|
53,794
|
|
|
|
53,675
|
|
Accumulated other comprehensive income, net of deferred tax of
$(2,111) and $(865) at September 30, 2010 and
December 31, 2009, respectively
|
|
|
3,815
|
|
|
|
1,607
|
|
Retained earnings
|
|
|
34,903
|
|
|
|
23,210
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity before non-controlling interest
|
|
|
93,338
|
|
|
|
79,318
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
1,543
|
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
94,881
|
|
|
|
80,793
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
498,642
|
|
|
$
|
478,626
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these unaudited consolidated
financial statements.
F-52
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Service and administrative fees
|
|
$
|
26,047
|
|
|
$
|
23,247
|
|
Wholesale brokerage commissions and fees
|
|
|
19,168
|
|
|
|
11,106
|
|
Ceding commissions
|
|
|
22,468
|
|
|
|
18,275
|
|
Net investment income
|
|
|
2,799
|
|
|
|
3,652
|
|
Net realized gains (losses)
|
|
|
156
|
|
|
|
(787
|
)
|
Net earned premium
|
|
|
83,417
|
|
|
|
82,350
|
|
Other income
|
|
|
120
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
154,175
|
|
|
|
138,554
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
27,086
|
|
|
|
25,010
|
|
Commissions
|
|
|
53,631
|
|
|
|
54,938
|
|
Personnel costs
|
|
|
27,939
|
|
|
|
22,610
|
|
Other operating expenses
|
|
|
17,527
|
|
|
|
16,967
|
|
Depreciation and amortization
|
|
|
3,336
|
|
|
|
2,520
|
|
Interest expense
|
|
|
6,122
|
|
|
|
5,852
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
135,641
|
|
|
|
127,897
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
18,534
|
|
|
|
10,657
|
|
Income taxes
|
|
|
6,872
|
|
|
|
4,031
|
|
|
|
|
|
|
|
|
|
|
Income before non-controlling interest
|
|
|
11,662
|
|
|
|
6,626
|
|
Less: net income(loss)attributable to the non-controlling
interest
|
|
|
(31
|
)
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,693
|
|
|
$
|
6,580
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.90
|
|
|
$
|
2.26
|
|
Diluted
|
|
|
3.60
|
|
|
|
2.10
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,998,540
|
|
|
|
2,909,395
|
|
Diluted
|
|
|
3,248,982
|
|
|
|
3,128,876
|
|
See accompanying notes to these unaudited consolidated
financial statements.
F-53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Treasury
|
|
|
Common
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Non-controlling
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Interest
|
|
|
Equity
|
|
|
Balances, December 31, 2009
|
|
|
3,007,031
|
|
|
|
(8,491
|
)
|
|
$
|
1,002
|
|
|
$
|
53,675
|
|
|
$
|
(176
|
)
|
|
$
|
1,607
|
|
|
$
|
23,210
|
|
|
$
|
1,475
|
|
|
$
|
80,793
|
|
Net income for the nine months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,693
|
|
|
|
(31
|
)
|
|
|
11,662
|
|
Change in unrealized gains and losses, net of tax expense of
$(1,189)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,208
|
|
|
|
|
|
|
|
99
|
|
|
|
2,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,208
|
|
|
|
11,693
|
|
|
|
68
|
|
|
|
13,969
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2010
|
|
|
3,007,031
|
|
|
|
(8,491
|
)
|
|
$
|
1,002
|
|
|
$
|
53,794
|
|
|
$
|
(176
|
)
|
|
$
|
3,815
|
|
|
$
|
34,903
|
|
|
$
|
1,543
|
|
|
$
|
94,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
2,871,563
|
|
|
|
(100,000
|
)
|
|
$
|
957
|
|
|
$
|
45,894
|
|
|
$
|
(2,069
|
)
|
|
$
|
(1,072
|
)
|
|
$
|
11,652
|
|
|
$
|
1,659
|
|
|
$
|
57,021
|
|
Net income for the nine months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,580
|
|
|
|
46
|
|
|
|
6,626
|
|
Change in unrealized gains and losses, net of tax expense of
$(1,910)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,548
|
|
|
|
|
|
|
|
(191
|
)
|
|
|
3,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,548
|
|
|
|
6,580
|
|
|
|
(145
|
)
|
|
|
9,983
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock sold
|
|
|
|
|
|
|
91,509
|
|
|
|
|
|
|
|
1,982
|
|
|
|
1,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,875
|
|
Issuance of common stock
|
|
|
132,468
|
|
|
|
|
|
|
|
44
|
|
|
|
5,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
3,004,031
|
|
|
|
(8,491
|
)
|
|
$
|
1,001
|
|
|
$
|
53,600
|
|
|
$
|
(176
|
)
|
|
$
|
2,476
|
|
|
$
|
18,232
|
|
|
$
|
1,514
|
|
|
$
|
76,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these unaudited consolidated
financial statements.
F-54
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,693
|
|
|
$
|
6,580
|
|
Adjustments to reconcile net income to net cash flows provided
by operating activities:
|
|
|
|
|
|
|
|
|
Change in deferred policy acquisition costs
|
|
|
(2,172
|
)
|
|
|
(1,714
|
)
|
Depreciation and amortization
|
|
|
3,336
|
|
|
|
2,520
|
|
Deferred income taxes
|
|
|
1,886
|
|
|
|
1,702
|
|
Net realized (gains) losses
|
|
|
(156
|
)
|
|
|
787
|
|
Stock based compensation expense
|
|
|
119
|
|
|
|
157
|
|
Amortization of premiums and discounts on investments, net
|
|
|
238
|
|
|
|
147
|
|
Non-controlling interest
|
|
|
68
|
|
|
|
(146
|
)
|
Change in allowance for doubtful accounts
|
|
|
(30
|
)
|
|
|
(50
|
)
|
Changes in operating assets and liabilities, net of the effect
of acquisition:
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
33
|
|
|
|
323
|
|
Other receivables
|
|
|
(2,483
|
)
|
|
|
(1,255
|
)
|
Reinsurance receivables
|
|
|
6,946
|
|
|
|
21,894
|
|
Other assets
|
|
|
(1,406
|
)
|
|
|
(569
|
)
|
Unpaid claims
|
|
|
(2,705
|
)
|
|
|
(1,169
|
)
|
Unearned premiums
|
|
|
(7,511
|
)
|
|
|
(25,405
|
)
|
Accrued expenses and accounts payable
|
|
|
(2,856
|
)
|
|
|
6,764
|
|
Commissions payable
|
|
|
(2,156
|
)
|
|
|
(3,292
|
)
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operating activities
|
|
|
2,844
|
|
|
|
7,274
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from maturities of investments
|
|
|
8,214
|
|
|
|
12,201
|
|
Proceeds from sales of investments
|
|
|
5,023
|
|
|
|
901
|
|
Proceeds from maturities of short term investments
|
|
|
50
|
|
|
|
710
|
|
Purchase of investments
|
|
|
(19,660
|
)
|
|
|
(2,789
|
)
|
Purchase of property and equipment
|
|
|
(6,322
|
)
|
|
|
(1,508
|
)
|
Acquisitions
|
|
|
(20,598
|
)
|
|
|
(38,577
|
)
|
Proceeds from notes receivable
|
|
|
542
|
|
|
|
536
|
|
Change in restricted cash
|
|
|
2,971
|
|
|
|
(10,800
|
)
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities
|
|
|
(29,780
|
)
|
|
|
(39,326
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Additional borrowings under notes payable
|
|
|
35,035
|
|
|
|
25,088
|
|
Repayment of notes payable
|
|
|
(18,509
|
)
|
|
|
(3,000
|
)
|
Capitalized closing costs for notes payable
|
|
|
(1,587
|
)
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
5,610
|
|
Repayment of preferred securities
|
|
|
(100
|
)
|
|
|
|
|
Issuance of treasury stock
|
|
|
|
|
|
|
3,875
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by financing activities
|
|
|
14,839
|
|
|
|
31,573
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(12,097
|
)
|
|
|
(479
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
29,940
|
|
|
|
22,082
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
17,843
|
|
|
$
|
21,603
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash payments for interest
|
|
$
|
5,925
|
|
|
$
|
5,811
|
|
Income taxes
|
|
|
4,575
|
|
|
|
2,997
|
|
See accompanying notes to these unaudited consolidated
financial statements.
F-55
|
|
1.
|
Organization
and Basis of Presentation
|
Organization
The Company is a diversified insurance services company that
provides distribution and administration services on a wholesale
basis to insurance brokers and agents and other financial
services companies in the United States. Most of the
Companys insurance business is generated through networks
of small to mid-sized community and regional banks, small loan
companies and automobile dealerships.
Basis of
Presentation
The Company operates in three business segments: Payment
Protection, Business Process Outsourcing (BPO) and
Wholesale Brokerage. Payment Protection specializes in
protecting lenders and their consumers from death, disability or
other events that could otherwise impair their ability to repay
a debt. BPO provides an assortment of administrative services
tailored to insurance and other financial services companies
through a virtual insurance company platform. Wholesale
Brokerage uses a pure wholesale sell-through model to sell
specialty casualty and surplus lines insurance.
The consolidated interim financial statements include the
accounts of the Company and all of its majority-owned and
controlled subsidiaries. The third party ownership of 15% of the
common stock of Southern Financial Life Insurance Company and
52% of the preferred stock of CRC Reassurance Company, Ltd. has
been reflected as non-controlling interest on the consolidated
balance sheets. Income attributable to those companies
minority shareholders has been reflected on the consolidated
statements of income and comprehensive income as income
attributable to non-controlling interest. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The December 31, 2009 balance sheet amounts
have been derived from the Companys December 31, 2009
audited financial statements.
On February 1, 2010, the Company purchased 100% of the
outstanding stock ownership interests of South Bay Acceptance
Corporation. South Bay Acceptance Corporation is a property
casualty commercial lines premium financing company and is
included in the Companys Wholesale Brokerage segment.
The following presents assets acquired and liabilities assumed
with the acquisition of South Bay Acceptance Corporation, based
on their fair values as of February 1, 2010:
|
|
|
|
|
Assets:
|
|
|
|
|
Cash
|
|
$
|
79
|
|
Other receivables
|
|
|
360
|
|
Other assets
|
|
|
21
|
|
Net deferred tax asset
|
|
|
167
|
|
Accrued expenses and accounts payable
|
|
|
(305
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
322
|
|
Purchase consideration
|
|
|
800
|
|
|
|
|
|
|
Goodwill
|
|
$
|
478
|
|
|
|
|
|
|
F-56
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
On May 15, 2010, the Company purchased 100% of the
outstanding stock ownership interests of Continental Car Club
Inc., a Tennessee car club company.
The following presents assets acquired and liabilities assumed
with the acquisition of Continental Car Club Inc., based on
their fair values as of May 15, 2010:
|
|
|
|
|
Assets:
|
|
|
|
|
Cash
|
|
$
|
961
|
|
Property and equipment
|
|
|
181
|
|
Other intangible assets
|
|
|
50
|
|
Other assets
|
|
|
44
|
|
Accrued expenses and accounts payable
|
|
|
(811
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
425
|
|
Purchase consideration
|
|
|
11,944
|
|
|
|
|
|
|
Goodwill
|
|
$
|
11,519
|
|
|
|
|
|
|
On September 1, 2010, the Company purchased 100% of the
outstanding stock ownership interests of United Motor Club of
America Inc., a Kentucky car club company.
The following presents assets acquired and liabilities assumed
with the acquisition of United Motor Club of America Inc., based
upon their fair values at September 1, 2010:
|
|
|
|
|
Assets:
|
|
|
|
|
Cash
|
|
$
|
660
|
|
Property and equipment
|
|
|
75
|
|
Other intangible assets
|
|
|
408
|
|
Other assets
|
|
|
53
|
|
Accrued expenses and accounts payable
|
|
|
(700
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
496
|
|
Purchase consideration
|
|
|
9,504
|
|
|
|
|
|
|
Goodwill
|
|
$
|
9,008
|
|
|
|
|
|
|
|
|
2.
|
Summary
of Significant Accounting Policies
|
The accompanying unaudited interim consolidated financial
statements have been prepared in conformity with accounting
principles generally accepted in the United States of America
(GAAP) for interim financial information.
Accordingly, these statements do not include all of the
information and footnotes required by GAAP for complete
financial statements.
The statements reflect all normal recurring adjustments that, in
the opinion of management, are necessary for the fair statement
of the information contained herein. The consolidated interim
statements should be read in conjunction with the audited
financial statements and notes thereto for the
F-57
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
year ended December 31, 2009. The Company adheres to the
same accounting policies in preparation of its interim financial
statements.
The Company has evaluated for disclosure events that occurred up
to the date the Companys financial statements were issued.
The amortized cost, gross unrealized gains, gross unrealized
losses and fair values of fixed maturity securities available
for sale and equity securities available for sale at
September 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
|
$
|
25,485
|
|
|
$
|
1,111
|
|
|
$
|
(8
|
)
|
|
$
|
26,588
|
|
Municipal securities
|
|
|
12,466
|
|
|
|
472
|
|
|
|
|
|
|
|
12,938
|
|
Corporate securities
|
|
|
40,779
|
|
|
|
4,031
|
|
|
|
(5
|
)
|
|
|
44,805
|
|
Mortgage-backed securities
|
|
|
3,781
|
|
|
|
143
|
|
|
|
|
|
|
|
3,924
|
|
Asset-backed securities
|
|
|
2,466
|
|
|
|
311
|
|
|
|
|
|
|
|
2,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
84,977
|
|
|
$
|
6,068
|
|
|
$
|
(13
|
)
|
|
$
|
91,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock publicly traded
|
|
$
|
537
|
|
|
$
|
54
|
|
|
$
|
(199
|
)
|
|
$
|
392
|
|
Preferred stock publicly traded
|
|
|
202
|
|
|
|
3
|
|
|
|
(8
|
)
|
|
|
197
|
|
Common stock non-publicly traded
|
|
|
280
|
|
|
|
125
|
|
|
|
|
|
|
|
405
|
|
Preferred stock non-publicly traded
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
2,020
|
|
|
$
|
182
|
|
|
$
|
(207
|
)
|
|
$
|
1,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-58
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The amortized cost, gross unrealized gains, gross unrealized
losses and fair values of fixed maturity securities available
for sale and equity securities available for sale at
December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Obligations of the U.S. Treasury and U.S. Government agencies
|
|
$
|
18,832
|
|
|
$
|
674
|
|
|
$
|
(26
|
)
|
|
$
|
19,480
|
|
Municipal securities
|
|
|
14,343
|
|
|
|
336
|
|
|
|
(97
|
)
|
|
|
14,582
|
|
Corporate securities
|
|
|
35,276
|
|
|
|
1,506
|
|
|
|
(271
|
)
|
|
|
36,511
|
|
Mortgage-backed securities
|
|
|
5,594
|
|
|
|
97
|
|
|
|
|
|
|
|
5,691
|
|
Asset-backed securities
|
|
|
4,503
|
|
|
|
181
|
|
|
|
|
|
|
|
4,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
78,548
|
|
|
$
|
2,794
|
|
|
$
|
(394
|
)
|
|
$
|
80,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock publicly traded
|
|
$
|
423
|
|
|
$
|
100
|
|
|
$
|
(154
|
)
|
|
$
|
369
|
|
Preferred stock publicly traded
|
|
|
199
|
|
|
|
1
|
|
|
|
(23
|
)
|
|
|
177
|
|
Common stock non-publicly traded
|
|
|
528
|
|
|
|
179
|
|
|
|
(45
|
)
|
|
|
662
|
|
Preferred stock non-publicly traded
|
|
|
1,005
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
2,155
|
|
|
$
|
280
|
|
|
$
|
(225
|
)
|
|
$
|
2,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of fixed maturity securities
at September 30, 2010 by contractual maturity are shown
below. Expected maturities will differ from contractual
maturities as borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Due in one year or less
|
|
$
|
5,201
|
|
|
$
|
5,267
|
|
Due after one year through five years
|
|
|
31,352
|
|
|
|
32,995
|
|
Due after five years through ten years
|
|
|
24,905
|
|
|
|
27,993
|
|
Due after ten years through twenty years
|
|
|
4,664
|
|
|
|
4,828
|
|
Due after twenty years
|
|
|
12,608
|
|
|
|
13,248
|
|
Mortgage-backed securities
|
|
|
3,781
|
|
|
|
3,924
|
|
Asset backed securities
|
|
|
2,466
|
|
|
|
2,777
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
84,977
|
|
|
$
|
91,032
|
|
|
|
|
|
|
|
|
|
|
F-59
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The amortized cost and fair value of fixed maturity securities
at December 31, 2009 by contractual maturity are shown
below. Expected maturities will differ from contractual
maturities as borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Due in one year or less
|
|
$
|
2,358
|
|
|
$
|
2,384
|
|
Due after one year through five years
|
|
|
18,552
|
|
|
|
19,290
|
|
Due after five years through ten years
|
|
|
29,966
|
|
|
|
30,973
|
|
Due after ten years through twenty years
|
|
|
3,944
|
|
|
|
3,898
|
|
Due after twenty years
|
|
|
13,631
|
|
|
|
14,028
|
|
Mortgage-backed securities
|
|
|
5,594
|
|
|
|
5,691
|
|
Asset backed securities
|
|
|
4,503
|
|
|
|
4,684
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
78,548
|
|
|
$
|
80,948
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2010 and 2009,
the Company realized gains on sales of fixed maturity securities
of $51 and $0, respectively. Realized losses on the sale of
fixed maturity securities totaled $0 and $(787) for the nine
months ended September 30, 2010 and 2009. Gross proceeds
from the sale of these fixed maturity securities totaled $4,784
and $901 for the nine months ended September 30, 2010 and
2009, respectively.
During the nine months ended September 30, 2010 and 2009,
the Company realized gains on sales of equity securities of $105
and $0, respectively. Realized losses on the sale of equity
securities totaled $0 and $0 for the nine months ended
September 30, 2010 and 2009, respectively.
Fixed maturity and equity securities are assessed for
other-than-temporarily impairment (OTTI) when the
decline in fair value is below the cost or amortized cost for
the security and determined to be other-than-temporary by
management. OTTI losses related to the credit component of the
impairment on fixed maturity securities and equity securities
are recorded in the consolidated statement of income as realized
losses on investments and result in a permanent reduction of the
cost basis of the underlying investment. Losses relating to the
non-credit component of OTTI losses on fixed maturity securities
are recorded in other comprehensive income. The determination of
OTTI is a subjective process, and different judgments and
assumptions could affect the timing of loss realization.
During the nine months ended September 30, 2010 and 2009,
no impairments were determined to be OTTI.
F-60
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
At September 30, 2010 and December 31, 2009, the
aggregate amount of unrealized losses and the aggregate related
fair values of investments with unrealized losses were
segregated into the following time periods during which the
investments had been in unrealized loss positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
Less Than Twelve Months
|
|
|
Twelve Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Security
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Obligations of the U.S. Treasury and U.S. government agencies
|
|
$
|
1,288
|
|
|
$
|
(8
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,288
|
|
|
$
|
(8
|
)
|
Municipal securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
1,388
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
1,388
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
2,676
|
|
|
$
|
(13
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,676
|
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock publicly traded
|
|
$
|
42
|
|
|
$
|
(3
|
)
|
|
$
|
214
|
|
|
$
|
(196
|
)
|
|
$
|
256
|
|
|
$
|
(199
|
)
|
Preferred stock publicly traded
|
|
|
144
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
144
|
|
|
|
(8
|
)
|
Common stock non-publicly traded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock non-publicly traded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
186
|
|
|
$
|
(8
|
)
|
|
$
|
214
|
|
|
$
|
(199
|
)
|
|
$
|
400
|
|
|
$
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Less Than Twelve Months
|
|
|
Twelve Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Security
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Obligations of the U.S. Treasury and U.S. government agencies
|
|
$
|
4,510
|
|
|
$
|
(26
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,510
|
|
|
$
|
(26
|
)
|
Municipal securities
|
|
|
4,226
|
|
|
|
(81
|
)
|
|
|
544
|
|
|
|
(16
|
)
|
|
|
4,770
|
|
|
|
(97
|
)
|
Corporate securities
|
|
|
|
|
|
|
|
|
|
|
1,894
|
|
|
|
(271
|
)
|
|
|
1,894
|
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
8,736
|
|
|
$
|
(107
|
)
|
|
$
|
2,438
|
|
|
$
|
(287
|
)
|
|
$
|
11,174
|
|
|
$
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock publicly traded
|
|
$
|
|
|
|
$
|
|
|
|
$
|
186
|
|
|
$
|
(154
|
)
|
|
$
|
186
|
|
|
$
|
(154
|
)
|
Preferred stock publicly traded
|
|
|
|
|
|
|
|
|
|
|
126
|
|
|
|
(23
|
)
|
|
|
126
|
|
|
|
(23
|
)
|
Common stock non-publicly traded
|
|
|
42
|
|
|
|
(3
|
)
|
|
|
78
|
|
|
|
(42
|
)
|
|
|
120
|
|
|
|
(45
|
)
|
Preferred stock non-publicly traded
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
42
|
|
|
$
|
(6
|
)
|
|
$
|
390
|
|
|
$
|
(219
|
)
|
|
$
|
432
|
|
|
$
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, there were 7 fixed maturity
securities in an unrealized loss position. The Company does not
intend to sell nor does it expect to be required to sell these
securities prior to recovery of its amortized cost. As such,
management considers the impairments (i.e., excess of cost over
fair value) to be temporary.
F-61
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
As of December 31, 2009, there were 13 fixed maturity
securities in an unrealized loss position. The Company does not
intend to sell nor does it expect to be required to sell these
securities prior to recovery of its cost. As such, management
considers the impairments (i.e., excess of cost over fair value)
to be temporary.
As of September 30, 2010, there were 20 equity securities
in an unrealized loss position. As of December 31, 2009,
there were 21 equity securities in an unrealized loss position.
Pursuant to certain reinsurance agreements and statutory
licensing requirements, the Company has deposited invested
assets in custody accounts or insurance department safekeeping
accounts. The Company is not permitted to remove invested assets
from these accounts without prior approval of the contractual
party or regulatory authority. At September 30, 2010 and
December 31, 2009, the Company had restricted investments
with carrying values of $19,882 and $20,292, respectively, of
which $12,176 and $14,860 relates to special deposits required
by various state insurance departments.
Net investment income for the nine months ended
September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Fixed maturity securities
|
|
$
|
2,782
|
|
|
$
|
3,456
|
|
Cash on hand and on deposit
|
|
|
224
|
|
|
|
451
|
|
Common and preferred stock dividends
|
|
|
44
|
|
|
|
18
|
|
Debenture interest
|
|
|
124
|
|
|
|
114
|
|
Investment expenses
|
|
|
(375
|
)
|
|
|
(387
|
)
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
2,799
|
|
|
$
|
3,652
|
|
|
|
|
|
|
|
|
|
|
The Company has various reinsurance agreements in place whereby
the amount of risk in excess of the Companys retention is
reinsured by unrelated domestic and foreign insurance companies.
The Company remains liable to policyholders in the event that
the assuming companies are unable to meet their obligations.
Fronting arrangements These arrangements are
typically with insurance companies affiliated with banks, auto
dealers or financial institutions whereby the Company cedes up
to 100% of the business written. The Company generally retains a
fee for issuing the policies and for providing administrative
services.
Coinsurance Under coinsurance arrangements, the
Company cedes a fixed percentage of business written to
reinsurers while continuing to provide all policy
administration. The Company receives an administration fee and
generally participates in the underwriting profits, in
accordance with a contractual formula.
F-62
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Excess of loss arrangements The Company seeks to
protect itself from the financial impact of large individual
claims by reinsuring credit life exposures in excess of $45 and
forced placed mortgage insurance exposures in excess of $200.
The effects of reinsurance on premiums written and earned and
incurred claims are presented in the table below:
Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Direct and assumed
|
|
$
|
220,757
|
|
|
$
|
228,390
|
|
|
$
|
199,973
|
|
|
$
|
224,498
|
|
Ceded
|
|
|
(137,972
|
)
|
|
|
(144,973
|
)
|
|
|
(124,305
|
)
|
|
|
(142,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
82,785
|
|
|
$
|
83,417
|
|
|
$
|
75,668
|
|
|
$
|
82,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred
Claims
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Direct and assumed
|
|
$
|
59,630
|
|
|
$
|
60,388
|
|
Ceded
|
|
|
(32,544
|
)
|
|
|
(35,378
|
)
|
|
|
|
|
|
|
|
|
|
Incurred claims
|
|
$
|
27,086
|
|
|
$
|
25,010
|
|
|
|
|
|
|
|
|
|
|
F-63
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Reinsurance receivables include amounts related to paid and
unpaid benefits as well ceded unearned premiums. The following
reflects the components of the reinsurance recoverables:
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Ceded unearned premium:
|
|
|
|
|
|
|
|
|
Life
|
|
$
|
50,483
|
|
|
$
|
60,281
|
|
Accident and health
|
|
|
29,235
|
|
|
|
29,844
|
|
Property
|
|
|
60,906
|
|
|
|
57,379
|
|
|
|
|
|
|
|
|
|
|
Total ceded unearned premium
|
|
|
140,624
|
|
|
|
147,504
|
|
|
|
|
|
|
|
|
|
|
Ceded claim reserves:
|
|
|
|
|
|
|
|
|
Life
|
|
|
1,618
|
|
|
|
1,929
|
|
Accident and health
|
|
|
10,033
|
|
|
|
9,981
|
|
Property
|
|
|
9,448
|
|
|
|
10,608
|
|
|
|
|
|
|
|
|
|
|
Total ceded claim reserves recoverable
|
|
|
21,099
|
|
|
|
22,518
|
|
Other reinsurance settlements recoverable
|
|
|
5,129
|
|
|
|
3,776
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivables
|
|
$
|
166,852
|
|
|
$
|
173,798
|
|
|
|
|
|
|
|
|
|
|
These receivables are based upon estimates and are reported on
the consolidated balance sheet separately as assets, as
reinsurance does not relieve the Company of its legal liability
to policyholders. The Company is required to pay losses even if
a reinsurer fails to meet its obligations under the applicable
reinsurance agreement. Management continually monitors the
financial condition and agency ratings of the Companys
reinsurers and believes that the reinsurance receivables accrued
are collectible. Included in reinsurance receivables for
September 30, 2010 and December 31, 2009 are $121,801
and $132,735 recoverable from three unrelated reinsurers. These
amounts are collateralized by assets held in trust and letters
of credit. At September 30, 2010, the Company does not
believe there is a risk of loss as a result of the concentration
of credit risk in the reinsurance program.
|
|
5.
|
Goodwill
and Other Intangible Assets
|
Changes in goodwill balances are as follows:
|
|
|
|
|
December 31, 2009
|
|
$
|
63,561
|
|
Goodwill of South Bay Acceptance Corporation acquisition
|
|
|
478
|
|
Goodwill of Continental Car Club acquisition
|
|
|
11,519
|
|
Goodwill of United Motor Club of America acquisition
|
|
|
9,008
|
|
|
|
|
|
|
September 30, 2010
|
|
$
|
84,566
|
|
|
|
|
|
|
F-64
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Goodwill as assigned by segment is as follows:
|
|
|
|
|
Payment Protection:
|
|
|
|
|
Summit Transaction
|
|
$
|
22,763
|
|
Darby & Associates
|
|
|
642
|
|
Continental Car Club
|
|
|
11,519
|
|
United Motor Club of America
|
|
|
9,008
|
|
|
|
|
|
|
Total Payment Protection
|
|
|
43,932
|
|
BPO:
|
|
|
|
|
Summit Transaction
|
|
|
8,902
|
|
CIRG
|
|
|
1,337
|
|
|
|
|
|
|
Total BPO
|
|
|
10,239
|
|
Wholesale Brokerage:
|
|
|
|
|
Bliss & Glennon
|
|
|
29,917
|
|
South Bay Acceptance Corporation
|
|
|
478
|
|
|
|
|
|
|
Total Wholesale Brokerage
|
|
|
30,395
|
|
|
|
|
|
|
Total goodwill
|
|
$
|
84,566
|
|
|
|
|
|
|
Changes in other intangible assets are as follows:
|
|
|
|
|
December 31, 2009
|
|
$
|
29,997
|
|
Intangible assets Continental Car Club and United Motor Club
|
|
|
458
|
|
Intangible assets amortized
|
|
|
(2,346
|
)
|
|
|
|
|
|
September 30, 2010
|
|
$
|
28,109
|
|
|
|
|
|
|
|
|
6.
|
Fair
Value of Financial Instruments
|
On January 1, 2008, the Company adopted accounting guidance
for reporting fair values in accordance with
ASC 820-10
Fair Value Measurements. There were no adjustments
required to the fair value of investments as a result of
adopting the new guidance. The market approach was the valuation
technique used to measure fair value of the investment
portfolio. The market approach uses prices and other relevant
information generated by market transactions involving identical
or comparable assets.
The guidance establishes a three-level hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value. The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). If the inputs used to
measure the assets or liabilities fall within different levels
of the hierarchy, the classification is based on the lowest
level input that is significant to the fair value measurement of
the asset or liability.
Classification of assets and liabilities within the hierarchy
considers the markets in which the assets and liabilities are
traded and the reliability and transparency of the assumptions
used to determine fair
F-65
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
value. The hierarchy requires the use of observable market data
when available. The levels of the hierarchy and those
investments included in each are as follows:
Level 1 Inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets
or liabilities traded in active markets.
Level 2 Inputs to the valuation
methodology include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable for the
asset or liability and market-corroborated inputs.
Level 3 Inputs to the valuation
methodology are unobservable for the asset or liability and are
significant to the fair value measurement. Pricing is derived
from sources such as Interactive Data Corporation, Bloomberg
L.P., private placement matrices, broker quotes and internal
calculations by the investment portfolio manager.
The following table presents the Companys investment
securities within the fair value hierarchy, and the related
inputs used to measure those securities at September 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fixed maturity securities
|
|
$
|
91,032
|
|
|
$
|
|
|
|
$
|
91,032
|
|
|
$
|
|
|
Common stock, marketable
|
|
|
392
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
Preferred stock, marketable
|
|
|
197
|
|
|
|
53
|
|
|
|
144
|
|
|
|
|
|
Common stock, other
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
Preferred stock, other
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
|
|
1,001
|
|
Short-term investments
|
|
|
1,170
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94,197
|
|
|
$
|
1,615
|
|
|
$
|
91,176
|
|
|
$
|
1,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys use of Level 3 of unobservable
inputs included 5 securities that accounted for 1.5% of
total investments at September 30, 2010.
The following table presents the Companys investment
securities within the fair value hierarchy and the related
inputs used to measure those securities at December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fixed maturity securities
|
|
$
|
80,948
|
|
|
$
|
|
|
|
$
|
79,440
|
|
|
$
|
1,508
|
|
Common stock, marketable
|
|
|
369
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
Preferred stock, marketable
|
|
|
177
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
Common stock, other
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
662
|
|
Preferred stock, other
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
Short-term investments
|
|
|
1,220
|
|
|
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84,378
|
|
|
$
|
1,766
|
|
|
$
|
79,440
|
|
|
$
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-66
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The Companys use of Level 3 of unobservable
inputs included 19 securities that accounted for 3.8% of
total investments at December 31, 2009.
The following table summarizes changes in Level 3 assets
measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning balance
|
|
$
|
3,172
|
|
|
$
|
596
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
Included in net income
|
|
|
(2
|
)
|
|
|
|
|
Included in comprehensive income
|
|
|
156
|
|
|
|
343
|
|
Purchases, issuance and settlements
|
|
|
|
|
|
|
|
|
Net transfers (out of) into Level 3
|
|
|
(1,920
|
)
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,406
|
|
|
$
|
2,270
|
|
|
|
|
|
|
|
|
|
|
The carrying value and fair value of financial instruments as of
September 30, 2010 and December 31, 2009 are presented
in the following table. For more information regarding the fair
value of financial instruments see Note 3.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,843
|
|
|
$
|
17,843
|
|
|
$
|
29,940
|
|
|
$
|
29,940
|
|
Short-term investments
|
|
|
1,170
|
|
|
|
1,170
|
|
|
|
1,220
|
|
|
|
1,220
|
|
Restricted cash
|
|
|
15,119
|
|
|
|
15,119
|
|
|
|
18,090
|
|
|
|
18,090
|
|
Notes receivable
|
|
|
1,626
|
|
|
|
1,626
|
|
|
|
2,138
|
|
|
|
2,138
|
|
Other receivables
|
|
|
31,003
|
|
|
|
31,003
|
|
|
|
28,116
|
|
|
|
28,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
66,761
|
|
|
$
|
66,761
|
|
|
$
|
79,504
|
|
|
$
|
79,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
48,013
|
|
|
$
|
48,013
|
|
|
$
|
31,487
|
|
|
$
|
31,487
|
|
Preferred trust securities
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
35,000
|
|
Redeemable preferred stock
|
|
|
11,440
|
|
|
|
11,440
|
|
|
|
11,540
|
|
|
|
11,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
94,453
|
|
|
$
|
94,453
|
|
|
$
|
78,027
|
|
|
$
|
78,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company determined there are no material unrecognized tax
benefits and no adjustments to liabilities or operations were
required.
F-67
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current income tax
|
|
$
|
4,979
|
|
|
$
|
2,376
|
|
Deferred income tax
|
|
|
1,893
|
|
|
|
1,655
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
6,872
|
|
|
$
|
4,031
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of income tax expense at the statutory rate of
35% for the nine months ended September 30, 2010 and 2009
to the effective income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
of Pre-Tax
|
|
|
|
|
|
of Pre-Tax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
Income taxes at federal income tax rate
|
|
$
|
6,487
|
|
|
|
35.00
|
%
|
|
$
|
3,730
|
|
|
|
35.00
|
%
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small life deduction
|
|
|
(370
|
)
|
|
|
(2.00
|
)
|
|
|
(381
|
)
|
|
|
(3.58
|
)
|
Non deductible preferred dividends
|
|
|
226
|
|
|
|
1.22
|
|
|
|
224
|
|
|
|
2.11
|
|
Tax exempt interest
|
|
|
(92
|
)
|
|
|
(0.49
|
)
|
|
|
(141
|
)
|
|
|
(1.32
|
)
|
State income taxes (net of federal benefit)
|
|
|
516
|
|
|
|
2.78
|
|
|
|
172
|
|
|
|
1.62
|
|
Non deductible expenses
|
|
|
132
|
|
|
|
0.71
|
|
|
|
489
|
|
|
|
4.58
|
|
Other, net
|
|
|
(26
|
)
|
|
|
(0.14
|
)
|
|
|
(62
|
)
|
|
|
(0.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
6,873
|
|
|
|
37.08
|
%
|
|
$
|
4,031
|
|
|
|
37.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is no longer subject to U.S. federal or state
tax examinations by tax authorities for 2006 or prior years.
The components of the net deferred tax liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
$
|
4,836
|
|
|
$
|
5,128
|
|
Unpaid claims
|
|
|
110
|
|
|
|
146
|
|
Deferred compensation
|
|
|
251
|
|
|
|
236
|
|
Basis difference in investments
|
|
|
|
|
|
|
161
|
|
Bad debt allowance
|
|
|
123
|
|
|
|
135
|
|
Net operating loss carryforward
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
5,487
|
|
|
|
5,806
|
|
|
|
|
|
|
|
|
|
|
F-68
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Gross deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
14,416
|
|
|
|
13,567
|
|
Intangible assets
|
|
|
9,011
|
|
|
|
9,776
|
|
Advanced commissions
|
|
|
1,508
|
|
|
|
1,465
|
|
Depreciation on fixed assets
|
|
|
1,523
|
|
|
|
466
|
|
Unrealized gains on investments
|
|
|
2,111
|
|
|
|
865
|
|
Basis difference in investments
|
|
|
33
|
|
|
|
|
|
Other deferred tax liabilities
|
|
|
579
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
29,181
|
|
|
|
26,534
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
23,694
|
|
|
$
|
20,728
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Commitments
and Contingencies
|
The Company is party to claims and litigation in the normal
course of its operations. Management believes that the ultimate
outcome of these matters will not have a material adverse effect
on the consolidated financial position, results of operations or
cash flows of the Company. In its Payment Protection business,
the Company is currently a defendant in lawsuits which relate to
marketing
and/or
pricing issues that involve claims for punitive, exemplary or
extracontractual damages in amounts substantially in excess of
the covered claim. Management considers such litigation
customary in the Companys line of business. In
managements opinion, the ultimate resolution of such
litigation, which the Company is vigorously defending, will not
be material to the consolidated financial position, results of
operations or cash flows of the Company.
The claims liabilities includes estimates of the ultimate cost
of known claims plus supplemental reserves calculated based upon
loss projections utilizing certain actuarial assumptions and
historical and industry data. In establishing its liability for
policy and claim liabilities, the Company utilizes the findings
of actuaries.
Considerable uncertainty and variability are inherent in such
estimates, and accordingly, the subsequent development of these
reserves may not conform to the assumptions inherent in the
determination. Management believes that the amounts recorded as
the liability for policy and claim liabilities represent its
best estimate of such amounts. However, actual loss experience
may not conform to the assumptions used in determining the
estimated amounts for such liability at the balance sheet date.
Accordingly, such ultimate amounts could be significantly in
excess of or less than the amounts indicated in the consolidated
financial statements. As adjustments to these estimates become
necessary, such adjustments are reflected in the then current
statement operations.
In June 2010, the Company entered into a $35,000 revolving
credit facility with SunTrust Bank, which matures in June 2013
(the Facility). The Facility bears interest at a
variable rate determined based upon the higher of (i) the
prime rate, (ii) the federal funds rate plus 0.50% or
(iii) LIBOR plus 1%, plus
F-69
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
a margin tied to the Companys leverage ratio. The Company
is required to pay a commitment fee of between 0.45% and 0.60%
(based upon the Companys leverage ratio) on the unused
portion of the Facility.
The Companys obligations under the Facility are guaranteed
by substantially all of its domestic subsidiaries, other than
South Bay Acceptance Corporation and the regulated insurance
subsidiaries.
The Companys obligations under the Facility may be
accelerated or the commitments terminated upon the occurrence of
an event of default under the Facility, including payment
defaults, defaults in the performance of affirmative and
negative covenants, the inaccuracy of representations or
warranties, bankruptcy and insolvency related defaults, cross
defaults to other material indebtedness, defaults arising in
connection with changes in control and other customary events of
default. As of September 30, 2010, the Company was in
compliance with such requirements.
As of September 30, 2010, the Company had $28,013
outstanding under the Facility and the interest rate was 6.0%.
The Company conducts its business through three business
segments: (i) Payment Protection; (ii) Business
Process Outsourcing (BPO); and (iii) Wholesale Brokerage.
The Company does not allocate certain revenues and costs to its
segments. These items primarily consist of corporate-related
income and overhead expenses, which are reflected as
Corporate in the following table, amortization,
depreciation, interest income and expense and income taxes. The
Company measures the profitability of its operating segments
without allocation of these expenses. The Company refers to this
measure of profitability as segment EBITDA (earnings before
interest, taxes, depreciation and amortization) and segment
EBITDA margin. The variability of segment EBITDA and segment
EBITDA margin is significantly affected by segment revenues
because a large component of operating expenses are fixed.
The following table reconciles segment information to the
Companys consolidated statements of income and provides a
summary of other key financial information for each of the
Companys segments:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Segment Net Revenue
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
|
|
|
|
|
|
Service and administrative fees
|
|
$
|
8,572
|
|
|
$
|
6,280
|
|
Ceding commission
|
|
|
22,468
|
|
|
|
18,275
|
|
Net investment income
|
|
|
2,799
|
|
|
|
3,652
|
|
Net realized gains
|
|
|
156
|
|
|
|
(787
|
)
|
Other income
|
|
|
64
|
|
|
|
408
|
|
Net earned premium
|
|
|
83,417
|
|
|
|
82,350
|
|
Net losses and loss adjustment expenses
|
|
|
(27,086
|
)
|
|
|
(25,010
|
)
|
Commissions
|
|
|
(53,631
|
)
|
|
|
(54,938
|
)
|
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
36,759
|
|
|
|
30,230
|
|
F-70
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
BPO
|
|
|
16,881
|
|
|
|
17,003
|
|
Wholesale Brokerage
|
|
|
19,818
|
|
|
|
11,373
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
73,458
|
|
|
|
58,606
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
17,720
|
|
|
|
18,992
|
|
BPO
|
|
|
10,853
|
|
|
|
9,986
|
|
Wholesale Brokerage
|
|
|
14,831
|
|
|
|
8,552
|
|
Corporate
|
|
|
2,062
|
|
|
|
2,047
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
45,466
|
|
|
|
39,577
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
19,039
|
|
|
|
11,238
|
|
BPO
|
|
|
6,028
|
|
|
|
7,017
|
|
Wholesale Brokerage
|
|
|
4,987
|
|
|
|
2,821
|
|
Corporate
|
|
|
(2,062
|
)
|
|
|
(2,047
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,992
|
|
|
|
19,029
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
1,382
|
|
|
|
1,280
|
|
BPO
|
|
|
745
|
|
|
|
505
|
|
Wholesale Brokerage
|
|
|
1,209
|
|
|
|
735
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,336
|
|
|
|
2,520
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
5,238
|
|
|
|
5,050
|
|
BPO
|
|
|
324
|
|
|
|
320
|
|
Wholesale Brokerage
|
|
|
560
|
|
|
|
482
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,122
|
|
|
|
5,852
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and non-controlling interest
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
12,419
|
|
|
|
4,908
|
|
BPO
|
|
|
4,959
|
|
|
|
6,192
|
|
Wholesale Brokerage
|
|
|
3,218
|
|
|
|
1,604
|
|
Corporate
|
|
|
(2,062
|
)
|
|
|
(2,047
|
)
|
|
|
|
|
|
|
|
|
|
Total income before income taxes and
non-controlling
interest
|
|
|
18,534
|
|
|
|
10,657
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
(6,872
|
)
|
|
|
(4,031
|
)
|
Less: net income (loss) attributable to
|
|
|
|
|
|
|
|
|
non-controlling interest
|
|
|
(31
|
)
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,693
|
|
|
$
|
6,580
|
|
|
|
|
|
|
|
|
|
|
F-71
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
Reconciliation
of Segment Net Revenue and EBITDA to Total Revenue and Net
Income
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
$
|
36,759
|
|
|
$
|
30,230
|
|
BPO
|
|
|
16,881
|
|
|
|
17,003
|
|
Wholesale Brokerage
|
|
|
19,818
|
|
|
|
11,373
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net revenue
|
|
|
73,458
|
|
|
|
58,606
|
|
Net losses and loss adjustment expenses
|
|
|
27,086
|
|
|
|
25,010
|
|
Commissions
|
|
|
53,631
|
|
|
|
54,938
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
154,175
|
|
|
|
138,554
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
17,720
|
|
|
|
18,992
|
|
BPO
|
|
|
10,853
|
|
|
|
9,986
|
|
Wholesale Brokerage
|
|
|
14,831
|
|
|
|
8,552
|
|
Corporate
|
|
|
2,062
|
|
|
|
2,047
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
45,466
|
|
|
|
39,577
|
|
Net losses and loss adjustment expenses
|
|
|
27,086
|
|
|
|
25,010
|
|
Commissions
|
|
|
53,631
|
|
|
|
54,938
|
|
|
|
|
|
|
|
|
|
|
Total expenses before depreciation, amortization and interest
|
|
|
126,183
|
|
|
|
119,525
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
19,039
|
|
|
|
11,238
|
|
BPO
|
|
|
6,028
|
|
|
|
7,017
|
|
Wholesale Brokerage
|
|
|
4,987
|
|
|
|
2,821
|
|
Corporate
|
|
|
(2,062
|
)
|
|
|
(2,047
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,992
|
|
|
|
19,029
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
1,382
|
|
|
|
1,280
|
|
BPO
|
|
|
745
|
|
|
|
505
|
|
Wholesale Brokerage
|
|
|
1,209
|
|
|
|
735
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,336
|
|
|
|
2,520
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
5,238
|
|
|
|
5,050
|
|
BPO
|
|
|
324
|
|
|
|
320
|
|
Wholesale Brokerage
|
|
|
560
|
|
|
|
482
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,122
|
|
|
|
5,852
|
|
|
|
|
|
|
|
|
|
|
F-72
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Income before income taxes and non-controlling interest
|
|
|
|
|
|
|
|
|
Payment Protection
|
|
|
12,419
|
|
|
|
4,908
|
|
BPO
|
|
|
4,959
|
|
|
|
6,192
|
|
Wholesale Brokerage
|
|
|
3,218
|
|
|
|
1,604
|
|
Corporate
|
|
|
(2,062
|
)
|
|
|
(2,047
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,534
|
|
|
|
10,657
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
(6,872
|
)
|
|
|
(4,031
|
)
|
Less: net income (loss) attributable to non-controlling interest
|
|
|
(31
|
)
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,693
|
|
|
$
|
6,580
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Related
Party Transactions
|
In connection with the Summit Partners acquisition of Fortegra
Financial Corporation on June 20, 2007, $20,000 of
subordinated debentures were issued to affiliates of Summit
Partners and reported on the Notes Payable line of the Balance
Sheet with the corresponding interest expense recorded in the
Statement of Income of $2,123 and $2,123 for the nine months
ended September 30, 2010 and 2009, respectively. The
subordinated debentures mature on December 13, 2013 and
bear interest at 14% per annum of the principal amount of such
subordinated debentures. The Company may redeem the subordinated
debentures, in whole or in part, at a price equal to 100% of the
principal amount of such subordinated debentures outstanding
plus accrued and unpaid interest to the redemption date.
|
|
13.
|
401(k)
Profit Sharing Plan
|
The Company has a 401(k) plan that is available to employees
upon meeting certain eligibility requirements. The plan allows
employees to contribute to the plan a percentage of their
pre-tax annual compensation. Under the terms of the plan, the
Company will match 100% of each dollar of the employee
contribution up to the maximum of five percent of the
employees annual compensation. The contributions of the
plan are invested at the election of the employee in one or more
investment option by a third party plan administrator. The
Company contributions to the plan totaled $568 and $319 for the
nine months ended September 30, 2010 and 2009, respectively.
The approach for the Company 401(k) plan involves making an
array of investment opportunities available from which employees
may select, based on their individual investment goals and risk
tolerances. The Company does endeavor to maintain reasonable
parameters to ensure that prudence and care are exercised in the
investment options that are made available within the 401(k)
plan. The individual equity, bond and other investment
alternatives are monitored on an ongoing basis by the plan
trustees through periodic portfolio reviews. The investment
options may change over time.
F-73
FORTEGRA
FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The Company has evaluated subsequent events for disclosure and
recognition through the date on which these financial statements
were issued.
On November 30, 2010, CB&T, a division of Synovus
Bank, entered into a joinder agreement to the revolving credit
facility and became a new lender under the revolving credit
facility with a revolving commitment of $20.0 million,
which increased the size of the revolving credit facility to
$55.0 million.
F-74
REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS
To Board of Directors and Stockholder of
Bliss and Glennon, Inc.:
In our opinion, the accompanying balance sheets and the related
statements of income, stockholders equity and cash flows
present fairly, in all material respects, the financial position
of Bliss and Glennon, Inc. (the Company) at
December 31, 2008 (Successor) and 2007 (Predecessor), and
the results of its operations and its cash flows for the period
from October 1, 2008 to December 31, 2008 (Successor),
for the period from January 1, 2008 to September 30,
2008 (Predecessor), and for the year ended December 31,
2007 in conformity with accounting principles generally accepted
in the United States of America. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Jacksonville, Florida
September 23, 2010
F-75
BLISS AND
GLENNON, INC.
(All
Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,809
|
|
|
|
$
|
12,879
|
|
Restricted cash
|
|
|
7,806
|
|
|
|
|
9,473
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal invested assets and cash
|
|
|
17,615
|
|
|
|
|
22,352
|
|
Other receivables, net of allowance of $93 and $140 as of
December 31, 2008 and 2007, respectively
|
|
|
16,204
|
|
|
|
|
15,009
|
|
Other assets
|
|
|
76
|
|
|
|
|
207
|
|
Property and equipment
|
|
|
1,373
|
|
|
|
|
974
|
|
Goodwill and other intangible assets
|
|
|
25,042
|
|
|
|
|
45,103
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
60,310
|
|
|
|
$
|
83,645
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued expenses and accounts payable
|
|
$
|
26,597
|
|
|
|
$
|
26,330
|
|
Commissions payable
|
|
|
166
|
|
|
|
|
172
|
|
Deferred income taxes
|
|
|
1,059
|
|
|
|
|
3,667
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
27,822
|
|
|
|
|
30,169
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
32,118
|
|
|
|
|
50,399
|
|
Retained earnings
|
|
|
370
|
|
|
|
|
3,077
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
32,488
|
|
|
|
|
53,476
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
60,310
|
|
|
|
$
|
83,645
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these financial statements.
F-76
BLISS AND
GLENNON, INC.
(All
Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
October 1,
|
|
|
|
January 1,
|
|
|
Year
|
|
|
|
2008 to
|
|
|
|
2008 to
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale brokerage commissions
|
|
$
|
5,829
|
|
|
|
$
|
22,981
|
|
|
$
|
29,516
|
|
Net investment income
|
|
|
173
|
|
|
|
|
632
|
|
|
|
788
|
|
Other income
|
|
|
37
|
|
|
|
|
50
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
6,039
|
|
|
|
|
23,663
|
|
|
|
30,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
3,583
|
|
|
|
|
11,423
|
|
|
|
14,663
|
|
Other operating expenses
|
|
|
1,680
|
|
|
|
|
4,854
|
|
|
|
7,907
|
|
Depreciation and amortization
|
|
|
127
|
|
|
|
|
1,806
|
|
|
|
2,481
|
|
Interest expense
|
|
|
|
|
|
|
|
6
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
5,390
|
|
|
|
|
18,089
|
|
|
|
25,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
649
|
|
|
|
|
5,574
|
|
|
|
5,296
|
|
Income taxes
|
|
|
279
|
|
|
|
|
2,399
|
|
|
|
2,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
370
|
|
|
|
$
|
3,175
|
|
|
$
|
3,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these financial statements.
F-77
BLISS AND
GLENNON, INC.
(All
Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In
|
|
|
Retained
|
|
|
Total Stockholders
|
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balances, January 1, 2007 (Predecessor)
|
|
$
|
51,798
|
|
|
$
|
4,039
|
|
|
$
|
55,837
|
|
Net income
|
|
|
|
|
|
|
3,166
|
|
|
|
3,166
|
|
Additional contribution to paid in capital
|
|
|
4,601
|
|
|
|
|
|
|
|
4,601
|
|
Dividends
|
|
|
|
|
|
|
(4,128
|
)
|
|
|
(4,128
|
)
|
Return of capital
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007 (Predecessor)
|
|
|
50,399
|
|
|
|
3,077
|
|
|
|
53,476
|
|
Net income for the period from January 1, 2008 to
September 30, 2008
|
|
|
|
|
|
|
3,175
|
|
|
|
3,175
|
|
Dividends
|
|
|
|
|
|
|
(3,138
|
)
|
|
|
(3,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2008 (Predecessor)
|
|
|
50,399
|
|
|
|
3,114
|
|
|
|
53,513
|
|
Acquisition transactions
|
|
|
(17,368
|
)
|
|
|
(3,114
|
)
|
|
|
(20,482
|
)
|
|
|
Balance, October 1, 2008 (Successor)
|
|
|
33,031
|
|
|
|
|
|
|
|
33,031
|
|
Net income for the period from October 1, 2008 to
December 31, 2008
|
|
|
|
|
|
|
370
|
|
|
|
370
|
|
Return of capital
|
|
|
(913
|
)
|
|
|
|
|
|
|
(913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008 (Successor)
|
|
$
|
32,118
|
|
|
$
|
370
|
|
|
$
|
32,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these financial statements.
F-78
BLISS AND
GLENNON, INC.
(All
Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
October 1, 2008 to
|
|
|
|
January 1, 2008 to
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
September 30,
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
|
2008
|
|
|
|
2007
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
370
|
|
|
|
$
|
3,175
|
|
|
|
$
|
3,166
|
|
Adjustments to reconcile net income to net cash flows provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
135
|
|
|
|
|
1,806
|
|
|
|
|
2,481
|
|
Deferred income taxes benefit
|
|
|
|
114
|
|
|
|
|
(274
|
)
|
|
|
|
(410
|
)
|
Change in allowance for doubtful accounts
|
|
|
|
15
|
|
|
|
|
(62
|
)
|
|
|
|
57
|
|
Changes in operating assets and liabilities, net of effect of
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
|
1,959
|
|
|
|
|
(3,107
|
)
|
|
|
|
3,017
|
|
Other assets
|
|
|
|
70
|
|
|
|
|
61
|
|
|
|
|
(95
|
)
|
Accrued expenses and accounts payable
|
|
|
|
(1,871
|
)
|
|
|
|
2,138
|
|
|
|
|
(1,992
|
)
|
Commissions payable
|
|
|
|
(23
|
)
|
|
|
|
17
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operating activities
|
|
|
|
769
|
|
|
|
|
3,754
|
|
|
|
|
6,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and other non-operating assets
|
|
|
|
(61
|
)
|
|
|
|
(730
|
)
|
|
|
|
(314
|
)
|
Change in restricted cash
|
|
|
|
1,602
|
|
|
|
|
65
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) investing activities
|
|
|
|
1,541
|
|
|
|
|
(665
|
)
|
|
|
|
(312
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on common stock
|
|
|
|
|
|
|
|
|
(3,138
|
)
|
|
|
|
(4,128
|
)
|
Return of capital
|
|
|
|
(913
|
)
|
|
|
|
|
|
|
|
|
(6,000
|
)
|
Contributed capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,601
|
|
Acquisitions
|
|
|
|
(4,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in financing activities
|
|
|
|
(5,331
|
)
|
|
|
|
(3,138
|
)
|
|
|
|
(5,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
|
(3,021
|
)
|
|
|
|
(49
|
)
|
|
|
|
429
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
12,830
|
|
|
|
|
12,879
|
|
|
|
|
12,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
|
$
|
9,809
|
|
|
|
$
|
12,830
|
|
|
|
$
|
12,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash payments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
$
|
|
|
|
|
$
|
6
|
|
|
|
$
|
55
|
|
Income taxes
|
|
|
|
(1,568
|
)
|
|
|
|
3,640
|
|
|
|
|
2,957
|
|
See accompanying notes to these financial statements.
F-79
|
|
1.
|
Organization
and Basis of Presentation
|
Bliss and Glennon, Inc. (the Company) is a wholesale
brokerage company domiciled in California. The Company was
formed in 1965. It was purchased in 2003 by Hilb, Rogal, and
Hobbs Company (HRH).
On October 1, 2008, the Companys parent, HRH was acquired
by Willis Group Holdings PLC (Willis).
The acquisition was accounted for using the purchase method.
Under the purchase method of accounting, the assets and
liabilities of HRH and its subsidiaries (including the Company)
were recorded at their fair values at the acquisition date.
Consideration of $37,500 has been allocated to the Company. The
following presents assets acquired and liabilities assumed by
the indirect acquisition of the Company by Willis.
|
|
|
|
|
Assets:
|
|
|
|
|
Cash
|
|
$
|
12,830
|
|
Restricted cash
|
|
|
9,408
|
|
Other receivables
|
|
|
18,178
|
|
Property and equipment
|
|
|
1,447
|
|
Other intangible assets
|
|
|
8,661
|
|
Other assets
|
|
|
146
|
|
Liabilities:
|
|
|
|
|
Accrued expenses and accounts payable
|
|
|
(644
|
)
|
Brokered insurance payable
|
|
|
(27,822
|
)
|
Commissions payable
|
|
|
(189
|
)
|
Net deferred tax liability
|
|
|
(945
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
21,070
|
|
Purchase consideration
|
|
|
37,500
|
|
|
|
|
|
|
Goodwill
|
|
$
|
16,430
|
|
|
|
|
|
|
The Company uses a wholesale model to sell specialty
property and casualty (P&C) and surplus lines
insurance through retail insurance brokers and agents. The
Company puts an emphasis on customer service, rapid
responsiveness to submissions and underwriting integrity.
The Company provides retail insurance brokers and agents the
ability to obtain various types of commercial insurance
coverages outside of the agent or brokers core areas of
focus, broader access to insurance markets and the expertise to
place as a managing general agent (MGA) for surplus lines and
other specialty insurance carriers. This enables the Company to
provide insurance carriers with access to new complex risks. The
Company also provides underwriting services for ancillary or
niche insurance products markets without the need for costly
distribution infrastructure.
F-80
BLISS AND
GLENNON, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
THE PERIOD FROM OCTOBER 1, 2008 THROUGH DECEMBER 31, 2008
(SUCCESSOR) AND THE PERIOD FROM JANUARY 1, 2008 THROUGH
SEPTEMBER 30, 2008
AND THE YEAR ENDED DECEMBER 31, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The Company utilizes its technology platform to provide its
clients with administrative services, including policy
underwriting, premium and claim administration and actuarial
analysis.
The Company earns wholesale brokerage commissions and fees for
the placement of specialty insurance products. The Company also
earns contingent commissions, which are commissions that we
receive from carriers based upon the ultimate profitability of
the insurance policies that we place with those carriers. The
Company does not take any insurance underwriting risk.
These financial statements reflect the financial statements of
the Company. The financial statements presented are for the year
ended December 31, 2007 and the period from January 1, 2008
through September 30, 2008 (the 2008 predecessor
period) and the period from October 1, 2008 through
December 31, 2008 (the 2008 successor period). HRH
is referred to as the predecessor entity.
|
|
2.
|
Summary
of Significant Accounting Policies
|
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America (GAAP) promulgated by the
Financial Accounting Standards Board Accounting Standards
Codification (ASC or the guidance).
Preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and
Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid
investments, other than certificates of deposit, with original
maturities of three months or less, when purchased. At various
times throughout the year, the Company has cash deposited with
financial institutions that exceed the federally insured deposit
amount. Management reviews the financial viability of these
institutions on a periodic basis and does not anticipate
nonperformance by the financial institutions.
Restricted
Cash
Restricted cash represents unremitted premiums received from
agents and unremitted claims received from insurers. Restricted
cash is generally required to be kept in certain regulated bank
accounts subject to guidelines which emphasize capital
preservation and liquidity pursuant to the laws of certain
states in which the Company operates; such funds are not
available to service the Companys debt or for other
general corporate purposes. The Company is entitled to retain
investment income earned on fiduciary funds. Included in
restricted cash are cash and cash equivalents.
Other
Receivables and Accounts Payable
In its capacity as a wholesale broker, the Company collects
premiums from agents and, after deducting its commissions,
remits the premiums to the respective insurers; the Company also
collects claims or refunds from insurers on behalf of insureds.
Uncollected premiums from agents and uncollected claims or
refunds from insurers are recorded as other receivables on the
Companys balance sheets. Unremitted
F-81
BLISS AND
GLENNON, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
THE PERIOD FROM OCTOBER 1, 2008 THROUGH DECEMBER 31, 2008
(SUCCESSOR) AND THE PERIOD FROM JANUARY 1, 2008 THROUGH
SEPTEMBER 30, 2008
AND THE YEAR ENDED DECEMBER 31, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
insurance premiums and claims are held in a fiduciary capacity.
The obligation to remit these funds is recorded as accounts
payable on the Companys balance sheets. The period for
which the Company holds such funds is dependent upon the date
the agent remits the payment of the premium to the Company and
the date the Company is required to forward such payment to the
insurer.
Allowances are recorded, when necessary, in an amount considered
by management to be sufficient to meet probable future losses
related to uncollectible accounts.
Property
and Equipment
Property and equipment are carried at cost, net of accumulated
depreciation. Gains and losses on sales and disposals of
property and equipment are based on the net book value of the
related asset at the disposal date using the specific
identification method. Maintenance and repairs, which do not
materially extend asset useful life and minor replacements, are
charged to earnings when incurred. Depreciation is provided
using the straight-line method over the estimated useful lives
of the respective assets.
Goodwill
and Other Intangible Assets
Goodwill is reviewed for impairment annually or more frequently
if certain indicators arise. The goodwill impairment review is a
two-step process. Step one consists of a comparison of the fair
value of a reporting unit with its carrying amount. An
impairment loss may be recognized if the review indicates that
the carrying value of a reporting unit exceeds its fair value.
Estimates of fair value are primarily determined by using
discounted cash flows. If the carrying amount of a reporting
unit exceeds its fair value, step two requires the fair value of
the reporting unit to be allocated to the underlying assets and
liabilities of that reporting unit, resulting in an implied fair
value of goodwill. If the carrying amount of the goodwill of the
reporting unit exceeds the implied fair value, an impairment
charge is recorded equal to the excess.
The impairment review is highly judgmental and involves the use
of significant estimates and assumptions. The estimates and
assumptions have a significant impact on the amount of any
impairment charge recorded. Discount cash flow methods are
dependent upon the assumption of future sales trends, market
conditions and cash flows of each reporting unit over several
years. Actual cash flow in the future may differ significantly
from those previously forecasted. Other significant assumptions
include growth rates and the discount rate applicable to future
cash flows.
The Company calculated the fair value at December 31, 2008
and 2007 utilizing a discount rate of 10%, projected earnings
and a forecasted annual growth rate of 4%. The calculations
resulted in a fair value which exceeded the respective carrying
value. Therefore, step two of the impairment test was not
necessary and an impairment charge was not recorded.
Wholesale
Brokerage Commissions and Fees
The Company earns wholesale brokerage commission and fee income
by providing wholesale brokerage services to retail insurance
brokers and agents and insurance companies. Wholesale brokerage
commission income is primarily recognized when the underlying
insurance policies are issued. A portion of the wholesale
brokerage commission income is derived from profit commission
agreements with insurance
F-82
BLISS AND
GLENNON, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
THE PERIOD FROM OCTOBER 1, 2008 THROUGH DECEMBER 31, 2008
(SUCCESSOR) AND THE PERIOD FROM JANUARY 1, 2008 THROUGH
SEPTEMBER 30, 2008
AND THE YEAR ENDED DECEMBER 31, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
carriers. Profit commission income is generally recognized as
revenue on the receipt of cash based on the terms of the
respective carrier contracts. In certain instances, profit
commission income may be recognized in advance of cash receipts
when the profit commission income due to be received has been
calculated or has been confirmed by the insurance carrier.
Net
Investment Income
Net investment income consists of investment income from the
Companys investment portfolio. The Company recognized
investment income from interest payments less portfolio
management expenses. The Companys investment portfolio is
invested in cash and cash equivalents. Investment income can be
significantly impacted by changes in interest rates. Interest
rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international
economic and political conditions and other factors beyond the
Companys control. Fluctuations in interest rates affect
the Companys returns.
Income
Taxes
The Company files its return on a separate company basis. Income
taxes are recorded in accordance with the asset and liability
method. Under the asset and liability method, deferred tax
assets and liabilities are recorded based on the difference
between the tax basis of assets and liabilities and their
carrying amounts for financial reporting purposes, referred to
as temporary differences.
Deferred income taxes are recorded for temporary differences
between the financial reporting and income tax bases of assets
and liabilities, based on enacted tax laws and statutory tax
rates applicable to the periods in which the Company expects the
temporary differences to reverse. A valuation allowance is
established for deferred tax assets when it is more likely than
not that an amount will not be realized. In determining whether
the Companys deferred tax asset is realizable, the Company
considered all available evidence, including both positive and
negative evidence. The realization of deferred tax assets
depends upon the existence of sufficient taxable income of the
same character during the carry-back or carry-forward period.
The Company considered all sources of taxable income available
to realize the deferred tax asset, including the future reversal
of existing temporary differences, future taxable income
exclusive of reversing temporary differences and carry forwards,
taxable income in carry-back years and tax-planning strategies.
The detailed components of the Companys deferred tax
assets and liabilities are included in Note 8.
Recent
Accounting Pronouncements
On January 1, 2009, the Company adopted the revised
business combinations guidance. The revised guidance retains the
fundamental requirements of the previous guidance in that the
acquisition method of accounting is used for all business
combinations, that an acquirer be identified for each business
combination and for goodwill to be recognized and measured as a
residual. The revised guidance expands the definition of
transactions and events that qualify as business combinations to
all transactions and other events in which one entity obtains
control over one or more other businesses. The revised guidance
broadens the fair value measurement and recognition of assets
acquired, liabilities
F-83
BLISS AND
GLENNON, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
THE PERIOD FROM OCTOBER 1, 2008 THROUGH DECEMBER 31, 2008
(SUCCESSOR) AND THE PERIOD FROM JANUARY 1, 2008 THROUGH
SEPTEMBER 30, 2008
AND THE YEAR ENDED DECEMBER 31, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
assumed and interests transferred as a result of business
combinations. It also increases the disclosure requirements for
business combinations in the consolidated financial statements.
The adoption of the revised guidance did not have an impact on
the Companys financial position, results of operations or
cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
October 1,
|
|
|
January 1,
|
|
|
|
|
2008 to
|
|
|
2008 to
|
|
Year Ended
|
|
|
December 31,
|
|
|
September 30,
|
|
December 31,
|
|
|
2008
|
|
|
2008
|
|
2007
|
Cash on hand and on deposit
|
|
$
|
173
|
|
|
|
$
|
632
|
|
|
$
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
173
|
|
|
|
$
|
632
|
|
|
$
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property
and Equipment
|
The components of property and equipment at December 31,
2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
At December 31,
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
Furniture, fixtures, and equipment
|
|
$
|
352
|
|
|
|
$
|
795
|
|
Computer equipment
|
|
|
440
|
|
|
|
|
1,432
|
|
Software
|
|
|
640
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
19
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,451
|
|
|
|
|
2,323
|
|
Less: accumulated depreciation and amortization
|
|
|
(78
|
)
|
|
|
|
(1,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,373
|
|
|
|
$
|
974
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the successor period from
October 1, 2008 through December 31, 2008 and the
predecessor periods from January 1, 2008 through September
30, 2008 and the year ended December 31, 2007 totaled $78,
$257 and $321, respectively.
F-84
BLISS AND
GLENNON, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
THE PERIOD FROM OCTOBER 1, 2008 THROUGH DECEMBER 31, 2008
(SUCCESSOR) AND THE PERIOD FROM JANUARY 1, 2008 THROUGH
SEPTEMBER 30, 2008
AND THE YEAR ENDED DECEMBER 31, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
|
|
5.
|
Goodwill
and Other Intangible Assets
|
Changes in goodwill balances are as follows:
|
|
|
|
|
December 31, 2006 (Predecessor)
|
|
$
|
35,275
|
|
|
|
|
|
|
December 31, 2007 (Predecessor)
|
|
|
35,275
|
|
Elimination of purchased goodwill
|
|
|
(35,275
|
)
|
|
|
|
|
|
Purchase price allocation
|
|
|
16,430
|
|
|
|
|
|
|
December 31, 2008 (Successor)
|
|
$
|
16,430
|
|
|
|
|
|
|
Changes in other intangible assets are as follows:
|
|
|
|
|
December 31, 2006 (Predecessor)
|
|
$
|
11,976
|
|
Amortization
|
|
|
(2,148
|
)
|
|
|
|
|
|
December 31, 2007 (Predecessor)
|
|
|
9,828
|
|
Amortization for the period January 1, 2008 to October 1, 2008
|
|
|
(672
|
)
|
Elimination of purchase intangible assets
|
|
|
(9,156
|
)
|
Purchase price allocation
|
|
|
8,661
|
|
Amortization for the period October 1, 2008 to December 31, 2008
|
|
|
(49
|
)
|
|
|
|
|
|
December 31, 2008 (Successor)
|
|
$
|
8,612
|
|
|
|
|
|
|
|
|
6.
|
Accrued
Expenses and Accounts Payable
|
Accrued expenses and accounts payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
At December 31,
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
Premiums payable to insurance carriers
|
|
$
|
24,658
|
|
|
|
$
|
24,540
|
|
Accrued bonuses
|
|
|
543
|
|
|
|
|
551
|
|
Other accrued expenses and accounts payable
|
|
|
1,396
|
|
|
|
|
1,239
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and accounts payable
|
|
$
|
26,597
|
|
|
|
$
|
26,330
|
|
|
|
|
|
|
|
|
|
|
|
The Company leases certain office space and equipment under
operating leases. Rent expense for the 2008 successor period and
the 2008 predecessor period and the year ended December 31,
2007 was
F-85
BLISS AND
GLENNON, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
THE PERIOD FROM OCTOBER 1, 2008 THROUGH DECEMBER 31, 2008
(SUCCESSOR) AND THE PERIOD FROM JANUARY 1, 2008 THROUGH
SEPTEMBER 30, 2008
AND THE YEAR ENDED DECEMBER 31, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
$381, $976 and $1,233, respectively. The future minimum
noncancelable lease payments for the years ended December 31 are
as follows:
|
|
|
|
|
2010
|
|
$
|
1,312
|
|
2011
|
|
|
1,244
|
|
2012
|
|
|
1,039
|
|
2013
|
|
|
649
|
|
2014
|
|
|
10
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,254
|
|
|
|
|
|
|
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
October 1, 2008 to
|
|
|
|
January 1, 2008 to
|
|
|
Year Ended
|
|
|
|
December 31, 2008
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Current income tax
|
|
$
|
165
|
|
|
|
$
|
2,673
|
|
|
$
|
2,540
|
|
Deferred income tax (benefit)
|
|
|
114
|
|
|
|
|
(274
|
)
|
|
|
(410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
279
|
|
|
|
$
|
2,399
|
|
|
$
|
2,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of income tax expense at the statutory rate of
35% for the 2008 successor period, the 2008 predecessor period
and the year ended December 31, 2007 to the effective
income tax expense is as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
October 1, 2008 to
|
|
|
|
January 1, 2008 to
|
|
|
Year Ended
|
|
|
|
December 31, 2008
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
of Pre-
|
|
|
|
|
|
|
of Pre-
|
|
|
|
|
|
of Pre-
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
Tax
|
|
|
|
Amount
|
|
|
Income
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
Income tax expense at 35% of pretax income
|
|
$
|
228
|
|
|
|
35.00
|
%
|
|
|
$
|
1,951
|
|
|
|
35.00
|
%
|
|
$
|
1,854
|
|
|
|
35.00
|
%
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes
|
|
|
38
|
|
|
|
5.91
|
|
|
|
|
329
|
|
|
|
5.91
|
|
|
|
313
|
|
|
|
5.91
|
|
Non deductible expenses
|
|
|
6
|
|
|
|
0.90
|
|
|
|
|
28
|
|
|
|
0.51
|
|
|
|
42
|
|
|
|
0.79
|
|
Other, net
|
|
|
7
|
|
|
|
1.08
|
|
|
|
|
91
|
|
|
|
1.62
|
|
|
|
(79
|
)
|
|
|
(1.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
279
|
|
|
|
42.99
|
%
|
|
|
$
|
2,399
|
|
|
|
43.04
|
%
|
|
$
|
2,130
|
|
|
|
40.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-86
BLISS AND
GLENNON, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
THE PERIOD FROM OCTOBER 1, 2008 THROUGH DECEMBER 31, 2008
(SUCCESSOR) AND THE PERIOD FROM JANUARY 1, 2008 THROUGH
SEPTEMBER 30, 2008
AND THE YEAR ENDED DECEMBER 31, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The Companys practice is to recognize penalties and
interest expense related to income tax matters in income tax
expense.
The Company is no longer subject to U.S. federal or state
tax examination by tax authorities for 2005 or prior years.
The components of the net deferred tax liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
At December 31,
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
Gross deferred tax asset
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
$
|
370
|
|
|
|
$
|
351
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
370
|
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
1,415
|
|
|
|
|
3,943
|
|
Depreciation on fixed assets
|
|
|
14
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
1,429
|
|
|
|
|
4,018
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
1,059
|
|
|
|
$
|
3,667
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the Company did not have any non-life
regular tax operating loss carry-forwards available to offset
future non-life federal taxable income and life federal taxable
income with certain limitations under Internal Revenue Code
Section 1503(c)(6)(1).
|
|
9. Commitments
and Contingencies
|
|
The Company is party to claims and litigation in the normal
course of its operations. Management believes that the ultimate
outcome of these matters will not have a material adverse effect
on the financial position, results of operations or cash flows
of the Company.
|
|
10.
|
Related
Party Transactions
|
With the Willis acquisition of Bliss & Glennon, the
successor company was charged from October 1, 2008 through
December 31, 2008 a corporate overhead charge of $454 to
cover expenses associated with various Willis corporate
functions that included legal, insurance, corporate payroll, IT
maintenance, office operations and facility expenses. In
addition, the Company entered into transactions with
brokers/agents who are subsidiaries of Willis. These
transactions accounted for $677 in net commissions and fees.
F-87
BLISS AND
GLENNON, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
THE PERIOD FROM OCTOBER 1, 2008 THROUGH DECEMBER 31, 2008
(SUCCESSOR) AND THE PERIOD FROM JANUARY 1, 2008 THROUGH
SEPTEMBER 30, 2008
AND THE YEAR ENDED DECEMBER 31, 2007 (PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
HRH charged $1,363 to the predecessor from January 1, 2008
through September 30, 2008 for corporate overhead charges
to cover expenses associated with various HRH corporate
functions that included legal, insurance, corporate payroll, IT
maintenance, office operations and facility expenses. In
addition, the Company entered into transactions with
brokers/agents who are subsidiaries of HRH. These transactions
accounted for $1,970 in net commissions fees revenue.
HRH charged $2,974 to the predecessor from January 1, 2007
through December 31, 2007 for corporate overhead charges to
cover expenses associated with various HRH corporate functions
that included legal, insurance, corporate payroll, IT
maintenance, office operations and facility expenses. In
addition, the Company entered into transactions with
brokers/agents who are subsidiaries of HRH. These transactions
accounted for $2,719 in net commissions fees revenue.
On April 15, 2009, all of the stock for the Company was
purchased by Fortegra Financial Corporation. The Company has
evaluated subsequent events for disclosure and recognition
through the date on which these financial statements were issued.
F-88
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,827
|
|
|
$
|
9,809
|
|
Restricted cash
|
|
|
7,486
|
|
|
|
7,806
|
|
|
|
|
|
|
|
|
|
|
Subtotal invested assets and cash
|
|
|
12,313
|
|
|
|
17,615
|
|
Other receivables, net of allowance of $187 and $93 as of
March 31, 2009 and December 31, 2008, respectively
|
|
|
17,841
|
|
|
|
16,204
|
|
Other assets
|
|
|
196
|
|
|
|
76
|
|
Property and equipment
|
|
|
1,298
|
|
|
|
1,373
|
|
Goodwill and other intangible assets
|
|
|
24,993
|
|
|
|
25,042
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
56,641
|
|
|
$
|
60,310
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses and accounts payable
|
|
$
|
27,065
|
|
|
$
|
26,597
|
|
Commissions payable
|
|
|
120
|
|
|
|
166
|
|
Deferred income taxes
|
|
|
1,160
|
|
|
|
1,059
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
28,345
|
|
|
|
27,822
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
27,287
|
|
|
|
32,118
|
|
Retained earnings
|
|
|
1,009
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
28,296
|
|
|
|
32,488
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
56,641
|
|
|
$
|
60,310
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these unaudited financial
statements.
F-89
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months Ended
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Wholesale brokerage commissions
|
|
$
|
6,500
|
|
|
|
$
|
8,748
|
|
Net investment income
|
|
|
83
|
|
|
|
|
246
|
|
Other income
|
|
|
29
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
6,612
|
|
|
|
|
9,011
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Personnel costs
|
|
|
3,523
|
|
|
|
|
4,122
|
|
Other operating expenses
|
|
|
1,854
|
|
|
|
|
1,707
|
|
Depreciation and amortization
|
|
|
125
|
|
|
|
|
602
|
|
Interest expense
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
5,502
|
|
|
|
|
6,433
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,110
|
|
|
|
|
2,578
|
|
Income taxes
|
|
|
471
|
|
|
|
|
1,037
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
639
|
|
|
|
$
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these unaudited financial
statements.
F-90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In
|
|
|
Retained (Deficit)
|
|
|
Total Stockholders
|
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balances, January 1, 2009 (Successor)
|
|
$
|
32,118
|
|
|
$
|
370
|
|
|
$
|
32,488
|
|
Net income for the three months ended March 31, 2009
|
|
|
|
|
|
|
639
|
|
|
|
639
|
|
Return of capital
|
|
|
(4,831
|
)
|
|
|
|
|
|
|
(4,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2009 (Successor)
|
|
$
|
27,287
|
|
|
$
|
1,009
|
|
|
$
|
28,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2008 (Predecessor)
|
|
$
|
50,399
|
|
|
$
|
3,077
|
|
|
$
|
53,476
|
|
Net income for the three months ended March 31, 2008
|
|
|
|
|
|
|
1,541
|
|
|
|
1,541
|
|
Return of capital
|
|
|
(844
|
)
|
|
|
|
|
|
|
(844
|
)
|
Dividends
|
|
|
|
|
|
|
(4,618
|
)
|
|
|
(4,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2008 (Predecessor)
|
|
$
|
49,555
|
|
|
$
|
|
|
|
$
|
49,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these unaudited financial
statements.
F-91
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months Ended
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2009
|
|
|
|
March 31, 2008
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
639
|
|
|
|
$
|
1,541
|
|
Adjustments to reconcile net income to net cash flows provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
125
|
|
|
|
|
602
|
|
Deferred income taxes
|
|
|
101
|
|
|
|
|
275
|
|
Changes in operating assets and liabilities, net effect of
acquisition:
|
|
|
|
|
|
|
|
|
|
Other receivables, net of allowance
|
|
|
(1,637
|
)
|
|
|
|
(5,181
|
)
|
Other assets
|
|
|
(120
|
)
|
|
|
|
(60
|
)
|
Accrued expenses and accounts payable
|
|
|
467
|
|
|
|
|
5,841
|
|
Commissions payable
|
|
|
(46
|
)
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided by operating activities
|
|
|
(471
|
)
|
|
|
|
3,115
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property, equipment
|
|
|
|
|
|
|
|
(529
|
)
|
Change in restricted cash
|
|
|
320
|
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) investing activities
|
|
|
320
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
Dividends paid on common stock
|
|
|
|
|
|
|
|
(4,618
|
)
|
Return of capital
|
|
|
(4,831
|
)
|
|
|
|
(844
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in financing activities
|
|
|
(4,831
|
)
|
|
|
|
(5,462
|
)
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(4,982
|
)
|
|
|
|
(2,528
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
9,809
|
|
|
|
|
12,879
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
4,827
|
|
|
|
$
|
10,351
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash payments for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
|
|
|
|
$
|
2
|
|
Income taxes
|
|
$
|
568
|
|
|
|
$
|
383
|
|
See accompanying notes to these unaudited financial
statements.
F-92
BLISS AND
GLENNON, INC.
THREE
MONTHS ENDED MARCH 31, 2009 (SUCCESSOR) AND 2008
(PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
|
|
1.
|
Organization
and Basis of Presentation
|
Organization
Bliss and Glennon, Inc. (the Company) is a wholesale
brokerage company domiciled in California. The Company was
formed in 1965. It was purchased in 2003 by Hilb, Rogal, and
Hobbs Company (HRH).
On October 1, 2008, the Companys parent HRH was
acquired by Willis Group Holdings PLC (Willis).
The Company uses a wholesale model to sell specialty property
and casualty (P&C) and surplus lines insurance through
retail insurance brokers and agents and insurance companies. The
Company puts an emphasis on customer service, rapid
responsiveness to submissions and underwriting integrity.
The Company provides retail insurance brokers and agents and
insurance companies the ability to obtain various types of
commercial insurance coverages outside of the agent or
brokers core areas of focus, broader access to insurance
markets and the expertise to place as a managing general agent
(MGA) for surplus lines and other specialty insurance carriers.
This enables the Company to provide insurance carriers with
access to new complex risks. The Company also provides
underwriting services for ancillary or niche insurance products
markets without the need for costly distribution infrastructure.
The Company utilizes its technology platform to provide its
clients with administrative services, including policy
underwriting, premium and claim administration and actuarial
analysis.
The Company earns wholesale brokerage commissions and fees for
the placement of specialty insurance products. The Company also
earns contingent commissions, which are commissions that we
receive from carriers based upon the ultimate profitability of
the insurance policies that we place with those carriers. The
Company does not take any insurance underwriting risk.
Basis of
Presentation
These financial statements reflect the financial statements of
the Company. The financial statements are presented for the
three months ended March 31, 2009 and 2008, respectively.
HRH is referred to as the predecessor entity.
|
|
2.
|
Summary
of Significant Accounting Policies
|
The accompanying unaudited interim consolidated financial
statements have been prepared in conformity with accounting
principles generally accepted in the United States of America
(GAAP) for interim financial information.
Accordingly, these statements do not include all of the
information and footnotes required by GAAP for complete
financial statements.
The statements reflect all normal recurring adjustments that, in
the option of management, are necessary for the fair
presentations of the information contained herein. The interim
statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended
F-93
BLISS AND
GLENNON, INC.
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
THREE
MONTHS ENDED MARCH 31, 2009 (SUCCESSOR) AND 2008
(PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
December 31, 2008. The Company adheres to the same
accounting policies in preparation of its interim financial
statements.
The Company has evaluated for disclosure events that occurred up
to the date the Companys financial statements were issued.
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
Ended March 31,
|
|
|
|
2009
|
|
|
|
2008
|
|
Cash on hand and on deposit
|
|
$
|
83
|
|
|
|
$
|
246
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
83
|
|
|
|
$
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Goodwill
and Other Intangible Assets
|
Changes in goodwill balances are as follows:
|
|
|
|
|
December 31, 2008
|
|
$
|
16,430
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
$
|
16,430
|
|
|
|
|
|
|
Changes in other intangible assets are as follows:
|
|
|
|
|
December 31, 2008
|
|
$
|
8,612
|
|
Amortization
|
|
|
(49
|
)
|
|
|
|
|
|
March 31, 2009
|
|
$
|
8,563
|
|
|
|
|
|
|
The Company leases certain office space and equipment under
operating leases. Rent expense for the three months ended
March 31, 2009 and 2008 was $231 and $328, respectively.
The Company adopted the relevant provisions of GAAP concerning
uncertainties in income taxes on January 1, 2009 in
accordance with ASC 740 Income Taxes. At
the adoption date and as of March 31, 2009, the Company
determined there are no material unrecognized tax benefits and
no adjustments to liabilities or operations were required.
F-94
BLISS AND
GLENNON, INC.
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
THREE
MONTHS ENDED MARCH 31, 2009 (SUCCESSOR) AND 2008
(PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
March 31, 2009
|
|
|
|
March 31, 2008
|
|
Current income tax
|
|
$
|
370
|
|
|
|
$
|
762
|
|
Deferred income tax
|
|
|
101
|
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax
|
|
$
|
471
|
|
|
|
$
|
1,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of income tax expense at the statutory rate of
35% for the three months ended March 31, 2009 and 2008 to
the effective income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
Three Months Ended March 31,
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
of Pre-Tax
|
|
|
|
|
|
|
of Pre-Tax
|
|
|
|
Amount
|
|
|
Income
|
|
|
|
Amount
|
|
|
Income
|
|
Income tax expense at 35% of pre-tax income
|
|
$
|
389
|
|
|
|
35.00
|
%
|
|
|
$
|
903
|
|
|
|
35.00
|
%
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes
|
|
|
69
|
|
|
|
6.22
|
|
|
|
|
152
|
|
|
|
5.91
|
|
Non-deductible expenses
|
|
|
7
|
|
|
|
0.63
|
|
|
|
|
6
|
|
|
|
0.23
|
|
Other, net
|
|
|
6
|
|
|
|
0.54
|
|
|
|
|
(24
|
)
|
|
|
(0.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
471
|
|
|
|
42.43
|
%
|
|
|
$
|
1,037
|
|
|
|
40.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no unrecognized tax benefits for the three
months ended March 31, 2009 and 2008.
The Company is no longer subject to U.S. federal or state
tax examinations by tax authorities for 2005 or prior years.
F-95
BLISS AND
GLENNON, INC.
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
THREE
MONTHS ENDED MARCH 31, 2009 (SUCCESSOR) AND 2008
(PREDECESSOR)
(All Amounts in Thousands Except Share Amounts, Per Share
Amounts or Unless Otherwise Noted)
The components of the net deferred tax liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
At March 31,
|
|
|
At December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Gross deferred tax assets
|
|
|
|
|
|
|
|
|
Reserves
|
|
$
|
419
|
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
419
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
1,555
|
|
|
|
1,415
|
|
Depreciation on fixed assets
|
|
|
24
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
1,579
|
|
|
|
1,429
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
1,160
|
|
|
$
|
1,059
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009, the Company did not have any non-life
regular tax operating loss carry-forwards available to offset
future non-life federal taxable income and life federal taxable
income with certain limitations under Internal Revenue Code
Section 1503(c)(6)(1).
|
|
7.
|
Commitments
and Contingencies
|
The Company is party to claims and litigation in the normal
course of its operations. Management believes that the ultimate
outcome of these matters will not have a material adverse effect
on the financial position, results of operations or cash flows
of the Company.
|
|
8.
|
Related
Party Transactions
|
The successor company was charged from January 1, 2009 through
March 31, 2009 a corporate overhead charge of $433 to cover
expenses associated with various Willis corporate functions that
included legal, insurance corporate payroll, IT maintenance,
office operations and facility expenses. In addition, the
Company entered into transactions with brokers/agents who are
subsidiaries of Willis. These transactions accounted for $525 in
net commissions and fees.
HRH charged $454 to the predecessor from January 1, 2008
through March 31, 2008 for corporate overhead charges to cover
expenses associated with various HRH corporate functions that
included legal, insurance corporate payroll, IT maintenance,
office operations and facility expenses. In addition, the
Company entered into transactions with brokers/agents who are
subsidiaries of Willis. These transactions accounted for $590 in
net commissions and fees revenue.
On April 15, 2009, all of the stock for the Company was
purchased by Fortegra Financial Corporation. The Company has
evaluated subsequent events for disclosure and recognition
through the date on which these financial statements were
available to be issued.
F-96
6,000,000 Shares
Fortegra Financial
Corporation
Common Stock
PROSPECTUS
Until ,
2011 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
Piper Jaffray
SunTrust Robinson
Humphrey
William Blair &
Company
FBR Capital Markets
Keefe, Bruyette &
Woods
Macquarie Capital
Liquidnet, Inc.
,
2010
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The expenses, other than underwriting commissions, expected to
be incurred by Fortegra Financial Corporation (the
Registrant) in connection with the issuance and
distribution of the securities being registered under this
Registration Statement are estimated to be as follows:
|
|
|
|
|
Securities and Exchange Commission Registration Fee
|
|
$
|
10,102
|
|
Financial Industry Regulatory Authority, Inc. Filing Fee
|
|
|
14,668
|
|
New York Stock Exchange Listing Fee
|
|
|
125,000
|
|
Printing and Engraving
|
|
|
675,000
|
|
Legal Fees and Expenses
|
|
|
1,750,000
|
|
Accounting Fees and Expenses
|
|
|
1,600,000
|
|
Transfer Agent and Registrar Fees
|
|
|
10,000
|
|
Miscellaneous
|
|
|
15,230
|
|
|
|
|
|
|
Total
|
|
$
|
4,200,000
|
|
|
|
|
|
|
|
|
|
*
|
|
To be completed by amendment.
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 145 of the Delaware General Corporation Law, or
DGCL, provides that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding
whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason
of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
Section 145 further provides that a corporation similarly
may indemnify any such person serving in any such capacity who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorneys
fees) actually and reasonably incurred in connection with the
defense or settlement of such action or suit if he acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or such other court in which such
action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all
of the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the
Delaware Court of Chancery or such other court shall deem proper.
The Registrants bylaws authorize the indemnification of
its officers and directors, consistent with Section 145 of
the Delaware General Corporation Law, as amended. The Registrant
intends to enter
II-1
into indemnification agreements with each of its directors and
executive officers. These agreements, among other things, will
require the Registrant to indemnify each director and executive
officer to the fullest extent permitted by Delaware law,
including indemnification of expenses such as attorneys
fees, judgments, fines and settlement amounts incurred by the
director or executive officer in any action or proceeding,
including any action or proceeding by or in right of the
Registrant, arising out of the persons services as a
director or executive officer.
Reference is made to Section 102(b)(7) of the DGCL, which
enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the
personal liability of a director for violations of the
directors fiduciary duty, except (i) for any breach
of the directors duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) pursuant to Section 174 of the DGCL,
which provides for liability of directors for unlawful payments
of dividends of unlawful stock purchase or redemptions or
(iv) for any transaction from which a director derived an
improper personal benefit.
Reference is also made to Section 145 of the DGCL, which
provides that a corporation may indemnify any person, including
an officer or director, who is, or is threatened to be made,
party to any threatened, pending or completed legal action, suit
or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of such
corporation, by reason of the fact that such person was an
officer, director, employee or agent of such corporation or is
or was serving at the request of such corporation as a director,
officer, employee or agent of another corporation or enterprise.
The indemnity may include expenses (including attorneys
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such officer, director,
employee or agent acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the
corporations best interest and, for criminal proceedings,
had no reasonable cause to believe that his conduct was
unlawful. A Delaware corporation may indemnify any officer or
director in an action by or in the right of the corporation
under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director
is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense
of any action referred to above, the corporation must indemnify
him against the expenses that such officer or director actually
and reasonably incurred.
The Registrant expects to maintain standard policies of
insurance that provide coverage (i) to its directors and
officers against loss rising from claims made by reason of
breach of duty or other wrongful act and (ii) to the
Registrant with respect to indemnification payments that it may
make to such directors and officers.
The proposed form of Underwriting Agreement to be filed as
Exhibit 1.1 to this Registration Statement provides for
indemnification to the Registrants directors and officers
by the underwriters against certain liabilities.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
During the last three years, we made sales of the following
unregistered securities:
1. On December 7, 2010, we issued and sold 3,000
shares of common stock to an employee for $8.12 per share
pursuant to the exercise of a stock option under our 1995 Stock
Option Plan.
2. On December 22, 2009, we issued and sold
3,000 shares of our common stock to an employee for $8.12
per share pursuant to the exercise of a stock option under our
1995 Stock Option Plan.
3. On April 15, 2009, we sold an aggregate of
141,676 shares of our Class A common stock to
affiliates of Summit Partners for $42.35 per share.
II-2
4. On April 15, 2009, we sold an aggregate of
20,898 shares of our Class A common stock to certain
members of Fortegra management or to a trust on their behalf for
$42.35 per share.
5. On April 15, 2009, we sold an aggregate of
69,894 shares of our common stock to certain members of
Bliss and Glennon management for $42.35 per share.
6. On May 22, 2008, we granted 7,972 stock options at
an exercise price of $23.11 per share to one director.
7. On October 25, 2007, we granted 161,135 stock
options at an exercise price of $17.07 per share to a total of
five employees.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance upon
Section 4(2) of the Securities Act or Rule 701
promulgated under Section 3(b) of the Securities Act as
transactions by an issuer not involving any public offering or
pursuant to benefit plans and contracts relating to compensation
as provided under Rule 701. The recipients of the
securities in each of these transactions represented their
intentions to acquire the securities for investment only and not
with a view to or for sale in connection with any distribution
thereof, and appropriate legends were placed upon the stock
certificates issued in these transactions. All recipients had
adequate access, through their relationships with Fortegra
Financial Corporation, to information about Fortegra Financial
Corporation.
|
|
Item 16.
|
Exhibits and
Financial Statement Schedules
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
1
|
.1**
|
|
Form of Underwriting Agreement.
|
|
2
|
.1**
|
|
Agreement and Plan of Merger, dated as of March 7, 2007, by
and among, Summit Partners Private Equity
Fund VII-A,
L.P., Summit Partners Private Equity
Fund VII-B,
L.P., Summit Subordinated Debt
Fund III-A,
L.P., Summit Subordinated Debt
Fund III-B,
L.P., Summit Investors VI, L.P., LOS Acquisition Co., the
signing stockholders and Life of the South Corporation and N.G.
Houston III, as Stockholder Representative.
|
|
2
|
.2**
|
|
First Amendment to Merger Agreement, dated as of June 20,
2007 by and among Summit Partners Private Equity
Fund VII-A,
L.P., Summit Partners Private Equity
Fund VII-B,
L.P., Summit Subordinated Debt
Fund III-A,
L.P., Summit Subordinated Debt
Fund III-B,
L.P., Summit Investors VI, L.P., LOS Acquisition Co. and N.G.
Houston, III, as Stockholder Representative.
|
|
2
|
.3**
|
|
Stock Purchase Agreement, dated as of April 15, 2009, by
and among Willis HRH, Inc., Bliss and Glennon, Inc., LOTS
Intermediate Co., Willis North America Inc. and Fortegra
Financial Corporation.
|
|
3
|
.1**
|
|
Second Amended and Restated Certificate of Incorporation
Fortegra Financial Corporation.
|
|
3
|
.2**
|
|
Amended and Restated Bylaws of Fortegra Financial Corporation.
|
|
3
|
.3**
|
|
Form of Third Amended and Restated Certificate of Incorporation
of Fortegra Financial Corporation to be in effect prior to the
offering made under this Registration Statement.
|
|
3
|
.4**
|
|
Form of Amended and Restated Bylaws of Fortegra Financial
Corporation to be in effect prior to the offering made under
this Registration Statement.
|
|
4
|
.1**
|
|
Form of Common Stock Certificate.
|
|
4
|
.2**
|
|
Stockholders Agreement, dated as of March 7, 2007, among
Life of the South Corporation, the Rollover Stockholders (as
defined therein), Employee Stockholders (as defined therein) and
Investors (as defined therein).
|
II-3
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
5
|
.1**
|
|
Opinion of Weil, Gotshal & Manges LLP.
|
|
10
|
.1**
|
|
Indenture, dated as of June 20, 2007, between LOTS
Intermediate Co. and Wilmington Trust Company.
|
|
10
|
.2**
|
|
Form of Fixed/Floating Rate Senior Debenture (included in
Exhibit 10.1).
|
|
10
|
.3**
|
|
Subordinated Debenture Purchase Agreement, dated as of
June 20, 2007, among Summit Subordinated Debt
Fund III-A,
L.P., Summit Subordinated Debt
Fund III-B,
L.P., Summit Investors VI, L.P. and LOTS Intermediate Co.
|
|
10
|
.4**
|
|
Form of Subordinated Debenture (included in Exhibit 10.3).
|
|
10
|
.5**
|
|
Amended Subordinated Debenture Purchase Agreement, dated
June 16, 2010, among Summit Subordinated Debt
Fund III-A,
L.P., Summit Subordinated Debt
Fund III-B,
L.P., Summit Investors VI, L.P. and LOTS Intermediate Co.
|
|
10
|
.6**
|
|
Revolving Credit Agreement, dated June 16, 2010, among
Fortegra Financial Corporation and LOTS Intermediate Co., as
borrowers, and the lenders from time to time a party thereto and
SunTrust Bank, as administrative agent.
|
|
10
|
.6.1**
|
|
First Amendment to Credit Agreement, dated as of October 6,
2010, by and among Fortegra Financial Corporation and LOTS
Intermediate Co., as borrowers, and the lenders from time to
time a party thereto and SunTrust Bank, as administrative agent.
|
|
10
|
.6.2**
|
|
Joinder Agreement, dated November 30, 2010, by CB&T, a
division of Synovus Bank, Suntrust Bank, as Administrative Agent
and Fortegra Financial Corporation and LOTS Intermediate Co., as
Borrowers.
|
|
10
|
.7**
|
|
Revolving Credit Note, dated June 16, 2010, among Fortegra
Financial Corporation and LOTS Intermediate Co., as borrowers,
and SunTrust Bank, as lender.
|
|
10
|
.8**
|
|
Subsidiary Guaranty Agreement, dated June 16, 2010, among
Bliss and Glennon, Inc., LOTSolutions, Inc., as guarantors
and SunTrust Bank, as administrative agent.
|
|
10
|
.9**
|
|
Security Agreement, dated June 16, 2010, by Fortegra
Financial Corporation and LOTS Intermediate Co., as borrowers
and SunTrust Bank, as administrative agent.
|
|
10
|
.10**
|
|
Pledge Agreement, dated June 16, 2010 by and among Fortegra
Financial Corporation, as pledgor and SunTrust Bank, as
administrative agent.
|
|
10
|
.11**
|
|
Line of Credit Note of Fortegra Financial Corporation, dated
April 6, 2009, issued to Columbus Bank and
Trust Company.
|
|
10
|
.12**
|
|
Stock Pledge and Security Agreement, dated as of April 6,
2009, by and between Fortegra Financial Corporation and Columbus
Bank and Trust Company.
|
|
10
|
.13**
|
|
Loan and Security Agreement, dated as of June 10, 2010, by
and between South Bay Acceptance Corporation, as borrower and
Wells Fargo Capital Finance, LLC, as lender.
|
|
10
|
.14**
|
|
General Continuing Guaranty, dated as of June 10, 2010, by
Fortegra Financial Corporation, as guarantor, in favor of Wells
Fargo Capital Finance, LLC
|
|
10
|
.15**
|
|
Servicing and Management Agreement, dated as of June 10,
2010, by and between South Bay Acceptance Corporation, and Wells
Fargo Capital Finance, LLC.
|
|
10
|
.16**
|
|
Line of Credit Agreement, dated as of April 6, 2009, by and
among Columbus Bank and Trust Company, Fortegra Financial
Corporation and LOTS Intermediate Co.
|
|
10
|
.17**
|
|
Modification Agreement, dated as of April 27, 2010, by and
among Fortegra Financial Corporation, LOTS Intermediate Co. and
Columbus Bank and Trust Company.
|
|
10
|
.18**
|
|
Form of Fortegra Financial Corporation Director Indemnification
Agreement for John R. Carroll and J.J. Kardwell.
|
|
10
|
.19**
|
|
Form of Fortegra Financial Corporation Director Indemnification
Agreement for Alfred R. Berkeley, III, Francis M.
Colalucci, Frank P. Filipps and Ted W. Rollins.
|
II-4
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
10
|
.20**
|
|
Form of Fortegra Financial Corporation Officer Indemnification
Agreement.
|
|
10
|
.21**
|
|
Form of Indemnity Agreement between Fortegra Financial
Corporation and the executive officers serving as plan committee
members for the Fortegra Financial Corporation 401(k) Savings
Plan.
|
|
10
|
.22**
|
|
Executive Employment and Non-Competition Agreement, dated as of
March 7, 2007, by and between Life of the South Corporation
and Richard S. Kahlbaugh.
|
|
10
|
.22.1**
|
|
Amendment No. 1 to Executive Employment and Non-Competition
Agreement, dated as of November 1, 2010, by and between
Fortegra Financial Corporation and Richard S. Kahlbaugh.
|
|
10
|
.23**
|
|
Executive Employment and Non-Competition Agreement, dated as of
January 1, 2009, by and between Life of the South
Corporation and Michael Vrban.
|
|
10
|
.24**
|
|
Executive Employment and Non-Competition Agreement, dated as of
January 1, 2009, by and between Life of the South
Corporation and Daniel A. Reppert.
|
|
10
|
.25**
|
|
Executive Employment and Non-Competition Agreement, dated as of
March 7, 2007, by and between Life of the South Corporation
and W. Dale Bullard.
|
|
10
|
.26**
|
|
Executive Employment and Non-Competition Agreement, dated as of
March 7, 2007, by and between Life of the South Corporation
and Robert S. Fullington.
|
|
10
|
.27**
|
|
Executive Employment and Non-Competition Agreement, dated as of
October 1, 2010, by and between Fortegra Financial
Corporation and Walter P. Mascherin.
|
|
10
|
.28**
|
|
2005 Equity Incentive Plan.
|
|
10
|
.29**
|
|
Key Employee Stock Option Plan (1995) Agreement.
|
|
10
|
.30**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Richard S. Kahlbaugh, dated as of
November 18, 2005, as amended on March 7, 2007 and
June 20, 2007
|
|
10
|
.31**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Richard Kahlbaugh, dated as of October 25,
2007
|
|
10
|
.32**
|
|
Form of 2010 Omnibus Incentive Plan.
|
|
10
|
.33**
|
|
Form of Employee Stock Purchase Plan.
|
|
10
|
.34**
|
|
Deferred Compensation Agreement, dated as of May 1, 2005
between Life of the South Corporation and W. Dale Bullard.
|
|
10
|
.35**
|
|
Deferred Compensation Agreement, dated January 1, 2006
between Life of the South Corporation and Richard S. Kahlbaugh.
|
|
10
|
.36**
|
|
Deferred Compensation Agreement, dated January 1, 2006
between Life of the South Corporation and Robert S. Fullington.
|
|
10
|
.37**+
|
|
Administrative Services Agreement, dated August 1, 2002, by
and between Life of the South Insurance Company and National
Union Fire Insurance Company of Pittsburgh, PA., as amended on
February 1, 2003, October 1, 2003 and August 1,
2008.
|
|
10
|
.38**+
|
|
Claims Services Agreement, dated December 1, 2008, by and
between LOTSolutions, Inc. and National Union Fire Insurance
Company of Pittsburgh, PA., as amended on August 1, 2010.
|
|
10
|
.39**
|
|
Incentive Stock Option Agreement by and between Life of the
South Corporation and W. Dale Bullard, dated as of
February 28, 2001, as amended on March 7, 2007 and
June 20, 2007
|
|
10
|
.40**
|
|
Stock Option Agreement by and between Life of the South
Corporation and W. Dale Bullard, dated as of November 18,
2005, as amended on March 7, 2007 and June 20, 2007
|
II-5
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
10
|
.41**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Dale Bullard, dated as of October 25, 2007
|
|
10
|
.42**
|
|
Incentive Stock Option Agreement by and between Life of the
South Corporation and Robert S. Fullington, dated as of
February 28, 2001, as amended on March 7, 2007 and
June 20, 2007
|
|
10
|
.43**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Robert S. Fullington, dated as of
November 18, 2005, as amended on March 7, 2007 and
June 20, 2007
|
|
10
|
.44**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Robert Fullington, dated as of October 25,
2007
|
|
10
|
.45**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Daniel Reppert, dated as of October 25, 2007
|
|
10
|
.46**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Michael Vrban, dated as of October 25, 2007
|
|
10
|
.47**
|
|
Form of Restricted Stock Award Agreement for Directors
|
|
10
|
.48**
|
|
Form of Restricted Stock Award Agreement for Employees
|
|
10
|
.49**
|
|
Form of Restricted Stock Award Agreement (Bonus Pool)
|
|
10
|
.50**
|
|
Form of Nonqualified Stock Option Award Agreement
|
|
10
|
.51**
|
|
Form of Nonqualified Stock Option Award Agreement for Walter P.
Mascherin
|
|
11
|
.1**
|
|
Statement Regarding Computation of Per Share Earnings
(incorporated by reference to Notes to Consolidated Financial
Statements in Part I of this Registration Statement).
|
|
16
|
.1**
|
|
Letter re change in certifying accountant.
|
|
16
|
.2**
|
|
Letter re change in certifying accountant.
|
|
21
|
.1**
|
|
List of Subsidiaries of Fortegra Financial Corporation.
|
|
23
|
.1
|
|
Consent of Johnson Lambert & Co. LLP, Independent
Registered Public Accounting Firm.
|
|
23
|
.2
|
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm.
|
|
23
|
.3**
|
|
Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.1 hereto).
|
|
24
|
.1**
|
|
Power of Attorney (included on signature page).
|
|
99
|
.1**
|
|
Consent of Alfred R. Berkeley, III.
|
|
99
|
.2**
|
|
Consent of Francis M. Colalucci.
|
|
99
|
.3**
|
|
Consent of Frank P. Filipps.
|
|
99
|
.4**
|
|
Consent of Ted W. Rollins.
|
|
|
**
|
Previously filed
|
|
Management contract or compensatory plan or arrangement
|
+
|
Confidential treatment requested as to certain portions, which
portions have been filed separately with the Securities and
Exchange Commission
|
|
|
(b) |
Financial Statement Schedules
|
Schedule I Condensed Financial Information of
Registrant
II-6
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the provisions referenced in Item 14 of this registration
statement, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(ii) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 6 to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of
Jacksonville, State of Florida, on December 16, 2010.
FORTEGRA FINANCIAL CORPORATION
|
|
|
|
By:
|
/s/ Richard
S. Kahlbaugh
|
Name: Richard S. Kahlbaugh
|
|
|
|
Title:
|
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 6 to the Registration Statement has been
signed by the following persons in the capacities indicated on
December 16, 2010.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Richard
S. Kahlbaugh
Richard
S. Kahlbaugh
|
|
Chairman, President and Chief Executive Officer (Principal
Executive Officer)
|
|
|
|
/s/ Walter
P. Mascherin
Walter
P. Mascherin
|
|
Senior Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
/s/ Michael
Vrban
Michael
Vrban
|
|
Executive Vice President and Chief Accounting Officer (Principal
Accounting Officer)
|
|
|
|
*
John
R. Carroll
|
|
Director
|
|
|
|
*
J.J.
Kardwell
|
|
Director
|
|
|
|
*By: /s/ Richard
S. Kahlbaugh
Richard
S. Kahlbaugh
As
Attorney-in-Fact
|
|
|
II-8
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
1
|
.1**
|
|
Form of Underwriting Agreement.
|
|
2
|
.1**
|
|
Agreement and Plan of Merger, dated as of March 7, 2007, by
and among, Summit Partners Private Equity
Fund VII-A,
L.P., Summit Partners Private Equity
Fund VII-B,
L.P., Summit Subordinated Debt
Fund III-A,
L.P., Summit Subordinated Debt
Fund III-B,
L.P., Summit Investors VI, L.P., LOS Acquisition Co., the
signing stockholders and Life of the South Corporation and N.G.
Houston III, as Stockholder Representative.
|
|
2
|
.2**
|
|
First Amendment to Merger Agreement, dated as of June 20,
2007 by and among Summit Partners Private Equity
Fund VII-A,
L.P., Summit Partners Private Equity
Fund VII-B,
L.P., Summit Subordinated Debt
Fund III-A,
L.P., Summit Subordinated Debt
Fund III-B,
L.P., Summit Investors VI, L.P., LOS Acquisition Co. and N.G.
Houston, III, as Stockholder Representative.
|
|
2
|
.3**
|
|
Stock Purchase Agreement, dated as of April 15, 2009, by
and among Willis HRH, Inc., Bliss and Glennon, Inc., LOTS
Intermediate Co., Willis North America Inc. and Fortegra
Financial Corporation.
|
|
3
|
.1**
|
|
Second Amended and Restated Certificate of Incorporation
Fortegra Financial Corporation.
|
|
3
|
.2**
|
|
Amended and Restated Bylaws of Fortegra Financial Corporation.
|
|
3
|
.3**
|
|
Form of Third Amended and Restated Certificate of Incorporation
of Fortegra Financial Corporation to be in effect prior to the
offering made under this Registration Statement.
|
|
3
|
.4**
|
|
Form of Amended and Restated Bylaws of Fortegra Financial
Corporation to be in effect prior to the offering made under
this Registration Statement.
|
|
4
|
.1**
|
|
Form of Common Stock Certificate.
|
|
4
|
.2**
|
|
Stockholders Agreement, dated as of March 7, 2007, among
Life of the South Corporation, the Rollover Stockholders (as
defined therein), Employee Stockholders (as defined therein) and
Investors (as defined therein).
|
|
5
|
.1**
|
|
Opinion of Weil, Gotshal & Manges LLP.
|
|
10
|
.1**
|
|
Indenture, dated as of June 20, 2007, between LOTS
Intermediate Co. and Wilmington Trust Company.
|
|
10
|
.2**
|
|
Form of Fixed/Floating Rate Senior Debenture (included in
Exhibit 10.1).
|
|
10
|
.3**
|
|
Subordinated Debenture Purchase Agreement, dated as of
June 20, 2007, among Summit Subordinated Debt
Fund III-A,
L.P., Summit Subordinated Debt
Fund III-B,
L.P., Summit Investors VI, L.P. and LOTS Intermediate Co.
|
|
10
|
.4**
|
|
Form of Subordinated Debenture (included in Exhibit 10.3).
|
|
10
|
.5**
|
|
Amended Subordinated Debenture Purchase Agreement, dated
June 16, 2010, among Summit Subordinated Debt
Fund III-A,
L.P., Summit Subordinated Debt
Fund III-B,
L.P., Summit Investors VI, L.P. and LOTS Intermediate Co.
|
|
10
|
.6**
|
|
Revolving Credit Agreement, dated June 16, 2010, among
Fortegra Financial Corporation and LOTS Intermediate Co., as
borrowers, and the lenders from time to time a party thereto and
SunTrust Bank, as administrative agent.
|
|
10
|
.6.1**
|
|
First Amendment to Credit Agreement, dated as of October 6,
2010, by and among Fortegra Financial Corporation and LOTS
Intermediate Co., as borrowers, and the lenders from time to
time a party thereto and SunTrust Bank, as administrative agent.
|
|
10
|
.6.2**
|
|
Joinder Agreement, dated November 30, 2010, by CB&T, a
division of Synovus Bank, Suntrust Bank, as Administrative
Agent and Fortegra Financial Corporation and LOTS Intermediate
Co., as Borrowers.
|
|
10
|
.7**
|
|
Revolving Credit Note, dated June 16, 2010, among Fortegra
Financial Corporation and LOTS Intermediate Co., as borrowers,
and SunTrust Bank, as lender.
|
|
10
|
.8**
|
|
Subsidiary Guaranty Agreement, dated June 16, 2010, among
Bliss and Glennon, Inc., LOTSolutions, Inc., as guarantors
and SunTrust Bank, as administrative agent.
|
|
10
|
.9**
|
|
Security Agreement, dated June 16, 2010, by Fortegra
Financial Corporation and LOTS Intermediate Co., as borrowers
and SunTrust Bank, as administrative agent.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
10
|
.10**
|
|
Pledge Agreement, dated June 16, 2010 by and among Fortegra
Financial Corporation, as pledgor and SunTrust Bank, as
administrative agent.
|
|
10
|
.11**
|
|
Line of Credit Note of Fortegra Financial Corporation, dated
April 6, 2009, issued to Columbus Bank and
Trust Company.
|
|
10
|
.12**
|
|
Stock Pledge and Security Agreement, dated as of April 6,
2009, by and between Fortegra Financial Corporation and Columbus
Bank and Trust Company.
|
|
10
|
.13**
|
|
Loan and Security Agreement, dated as of June 10, 2010, by
and between South Bay Acceptance Corporation, as borrower and
Wells Fargo Capital Finance, LLC, as lender.
|
|
10
|
.14**
|
|
General Continuing Guaranty, dated as of June 10, 2010, by
Fortegra Financial Corporation, as guarantor, in favor of Wells
Fargo Capital Finance, LLC
|
|
10
|
.15**
|
|
Servicing and Management Agreement, dated as of June 10,
2010, by and between South Bay Acceptance Corporation, and Wells
Fargo Capital Finance, LLC.
|
|
10
|
.16**
|
|
Line of Credit Agreement, dated as of April 6, 2009, by and
among Columbus Bank and Trust Company, Fortegra Financial
Corporation and LOTS Intermediate Co.
|
|
10
|
.17**
|
|
Modification Agreement, dated as of April 27, 2010, by and
among Fortegra Financial Corporation, LOTS Intermediate Co. and
Columbus Bank and Trust Company.
|
|
10
|
.18**
|
|
Form of Fortegra Financial Corporation Director Indemnification
Agreement for John R. Carroll and J.J. Kardwell.
|
|
10
|
.19**
|
|
Form of Fortegra Financial Corporation Director Indemnification
Agreement for Alfred R. Berkeley, III, Francis M.
Colalucci, Frank P. Filipps and Ted W. Rollins.
|
|
10
|
.20**
|
|
Form of Fortegra Financial Corporation Officer Indemnification
Agreement.
|
|
10
|
.21**
|
|
Form of Indemnity Agreement between Fortegra Financial
Corporation and the executive officers serving as plan committee
members for the Fortegra Financial Corporation 401(k) Savings
Plan.
|
|
10
|
.22**
|
|
Executive Employment and Non-Competition Agreement, dated as of
March 7, 2007, by and between Life of the South Corporation
and Richard S. Kahlbaugh.
|
|
10
|
.22.1**
|
|
Amendment No. 1 to Executive Employment and Non-Competition
Agreement, dated as of November 1, 2010, by and between
Fortegra Financial Corporation and Richard S. Kahlbaugh.
|
|
10
|
.23**
|
|
Executive Employment and Non-Competition Agreement, dated as of
January 1, 2009, by and between Life of the South
Corporation and Michael Vrban.
|
|
10
|
.24**
|
|
Executive Employment and Non-Competition Agreement, dated as of
January 1, 2009, by and between Life of the South
Corporation and Daniel A. Reppert.
|
|
10
|
.25**
|
|
Executive Employment and Non-Competition Agreement, dated as of
March 7, 2007, by and between Life of the South Corporation
and W. Dale Bullard.
|
|
10
|
.26**
|
|
Executive Employment and Non-Competition Agreement, dated as of
March 7, 2007, by and between Life of the South Corporation
and Robert S. Fullington.
|
|
10
|
.27**
|
|
Executive Employment and Non-Competition Agreement, dated as of
October 1, 2010, by and between Fortegra Financial
Corporation and Walter P. Mascherin.
|
|
10
|
.28**
|
|
2005 Equity Incentive Plan.
|
|
10
|
.29**
|
|
Key Employee Stock Option Plan (1995) Agreement.
|
|
10
|
.30**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Richard S. Kahlbaugh, dated as of
November 18, 2005, as amended on March 7, 2007 and
June 20, 2007
|
|
10
|
.31**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Richard Kahlbaugh, dated as of October 25,
2007
|
|
10
|
.32**
|
|
Form of 2010 Omnibus Incentive Plan.
|
|
10
|
.33**
|
|
Form of Employee Stock Purchase Plan.
|
|
10
|
.34**
|
|
Deferred Compensation Agreement, dated as of May 1, 2005
between Life of the South Corporation and W. Dale Bullard.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
10
|
.35**
|
|
Deferred Compensation Agreement, dated January 1, 2006
between Life of the South Corporation and Richard S. Kahlbaugh.
|
|
10
|
.36**
|
|
Deferred Compensation Agreement, dated January 1, 2006
between Life of the South Corporation and Robert S. Fullington.
|
|
10
|
.37**+
|
|
Administrative Services Agreement, dated August 1, 2002, by
and between Life of the South Insurance Company and National
Union Fire Insurance Company of Pittsburgh, PA., as amended on
February 1, 2003, October 1, 2003 and August 1,
2008.
|
|
10
|
.38**+
|
|
Claims Services Agreement, dated December 1, 2008, by and
between LOTSolutions, Inc. and National Union Fire Insurance
Company of Pittsburgh, PA, as amended on August 1, 2010.
|
|
10
|
.39**
|
|
Incentive Stock Option Agreement by and between Life of the
South Corporation and W. Dale Bullard, dated as of
February 28, 2001, as amended on March 7, 2007 and
June 20, 2007
|
|
10
|
.40**
|
|
Stock Option Agreement by and between Life of the South
Corporation and W. Dale Bullard, dated as of November 18,
2005, as amended on March 7, 2007 and June 20, 2007
|
|
10
|
.41**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Dale Bullard, dated as of October 25, 2007
|
|
10
|
.42**
|
|
Incentive Stock Option Agreement by and between Life of the
South Corporation and Robert S. Fullington, dated as of
February 28, 2001, as amended on March 7, 2007 and
June 20, 2007
|
|
10
|
.43**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Robert S. Fullington, dated as of
November 18, 2005, as amended on March 7, 2007 and
June 20, 2007
|
|
10
|
.44**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Robert Fullington, dated as of October 25,
2007
|
|
10
|
.45**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Daniel Reppert, dated as of October 25, 2007
|
|
10
|
.46**
|
|
Stock Option Agreement by and between Life of the South
Corporation and Michael Vrban, dated as of October 25, 2007
|
|
10
|
.47**
|
|
Form of Restricted Stock Award Agreement for Directors
|
|
10
|
.48**
|
|
Form of Restricted Stock Award Agreement for Employees
|
|
10
|
.49**
|
|
Form of Restricted Stock Award Agreement (Bonus Pool)
|
|
10
|
.50**
|
|
Form of Nonqualified Stock Option Award Agreement
|
|
10
|
.51**
|
|
Form of Nonqualified Stock Option Award Agreement for Walter P.
Mascherin
|
|
11
|
.1**
|
|
Statement Regarding Computation of Per Share Earnings
(incorporated by reference to Notes to Consolidated Financial
Statements in Part I of this Registration Statement).
|
|
16
|
.1**
|
|
Letter re change in certifying accountant.
|
|
16
|
.2**
|
|
Letter re change in certifying accountant.
|
|
21
|
.1**
|
|
List of Subsidiaries of Fortegra Financial Corporation.
|
|
23
|
.1
|
|
Consent of Johnson Lambert & Co. LLP, Independent
Registered Public Accounting Firm.
|
|
23
|
.2
|
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm.
|
|
23
|
.3**
|
|
Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.1 hereto).
|
|
24
|
.1**
|
|
Power of Attorney
|
|
99
|
.1**
|
|
Consent of Alfred R. Berkeley, III.
|
|
99
|
.2**
|
|
Consent of Francis M. Colalucci.
|
|
99
|
.3**
|
|
Consent of Frank P. Filipps.
|
|
99
|
.4**
|
|
Consent of Ted W. Rollins.
|
|
|
**
|
Previously filed
|
|
Management contract or compensatory plan or arrangement
|
+
|
Confidential treatment requested as to certain portions, which
portions have been filed separately with the Securities and
Exchange Commission
|
Schedule
I Condensed Financial Information of
Registrant
FORTEGRA
FINANCIAL CORPORATION
PARENT COMPANY ONLY CONDENSED STATEMENTS OF INCOME
FOR THE PERIODS ENDED DECEMBER 31, 2009 AND 2008, AND
FOR THE PERIOD FROM JUNE 20, 2007 THROUGH
DECEMBER 31, 2007 (SUCCESSOR)
AND FOR THE PERIOD FROM JANUARY 1, 2007 THROUGH
JUNE 19, 2007 (PREDECESSOR)
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 20
|
|
|
|
June 1
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee from subsidiaries*
|
|
$
|
|
|
|
$
|
23,702
|
|
|
$
|
9,845
|
|
|
|
$
|
10,073
|
|
Net investment income
|
|
|
294
|
|
|
|
343
|
|
|
|
311
|
|
|
|
|
429
|
|
Other income
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
378
|
|
|
|
24,045
|
|
|
|
10,156
|
|
|
|
|
10,502
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs*
|
|
|
|
|
|
|
20,376
|
|
|
|
9,840
|
|
|
|
|
9,409
|
|
Other operating expenses
|
|
|
139
|
|
|
|
(26
|
)
|
|
|
241
|
|
|
|
|
2,559
|
|
Interest expense
|
|
|
926
|
|
|
|
1,022
|
|
|
|
679
|
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,065
|
|
|
|
21,372
|
|
|
|
10,760
|
|
|
|
|
12,766
|
|
Income before interest and income taxes interest
|
|
|
(687
|
)
|
|
|
2,673
|
|
|
|
(604
|
)
|
|
|
|
(2,264
|
)
|
Income taxes
|
|
|
(267
|
)
|
|
|
1,015
|
|
|
|
(229
|
)
|
|
|
|
(859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net income in subsidiaries
|
|
|
(420
|
)
|
|
|
1,658
|
|
|
|
(375
|
)
|
|
|
|
(1,405
|
)
|
Equity in net income of subsidiaries*
|
|
|
11,978
|
|
|
|
6,370
|
|
|
|
4,028
|
|
|
|
|
5,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,558
|
|
|
$
|
8,028
|
|
|
$
|
3,653
|
|
|
|
$
|
3,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminated in consolidation |
S-1
FORTEGRA
FINANCIAL CORPORATION
PARENT COMPANY ONLY CONDENSED STATEMENTS OF FINANCIAL
POSITION
AS OF DECEMBER 31, 2009 AND 2008
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
$
|
78,315
|
|
|
$
|
53,961
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Due from subsidiaries, net*
|
|
|
17,820
|
|
|
|
6,170
|
|
Notes receivable*
|
|
|
4,138
|
|
|
|
5,159
|
|
Other assets
|
|
|
2,525
|
|
|
|
3,931
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
102,798
|
|
|
$
|
69,221
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
23,027
|
|
|
$
|
11,540
|
|
Other liabilities
|
|
|
453
|
|
|
|
2,319
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,480
|
|
|
|
13,859
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.331/3
per share (6,000,000 shares authorized and $3,007,031 and
2,871,563 shares issued at December 31, 2009 and 2008,
respectively)
|
|
|
1,002
|
|
|
|
957
|
|
Treasury stock (8,491 and 100,000 shares at
December 31, 2009 and 2008, respectively)
|
|
|
(176
|
)
|
|
|
(2,069
|
)
|
Additional
paid-in-capital
|
|
|
53,675
|
|
|
|
45,894
|
|
Accumulated other comprehensive income (loss), net of tax
(provision) benefit of $(865) and $552 at December 31, 2009
and 2008, respectively
|
|
|
1,607
|
|
|
|
(1,072
|
)
|
Retained earnings
|
|
|
23,210
|
|
|
|
11,652
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
79,318
|
|
|
|
55,362
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
102,798
|
|
|
$
|
69,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminated in consolidation |
S-2
FORTEGRA
FINANCIAL CORPORATION
PARENT COMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 31, 2009 AND 2008, AND
FOR THE PERIOD FROM JUNE 20, 2007 THROUGH
DECEMBER 31, 2007 (SUCCESSOR)
AND FOR THE PERIOD FROM JANUARY 1, 2007 THROUGH
JUNE 19, 2007 (PREDECESSOR)
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
June 19
|
|
|
|
June 1
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
June 19,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
2007
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,558
|
|
|
$
|
8,028
|
|
|
$
|
3,653
|
|
|
|
$
|
3,815
|
|
Adjustments to reconcile net income to net cash flows provided
by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of subsidiaries*
|
|
|
(11,978
|
)
|
|
|
(6,370
|
)
|
|
|
(4,028
|
)
|
|
|
|
(5,220
|
)
|
Cash dividend from subsidiaries
|
|
|
|
|
|
|
10,481
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit) expense
|
|
|
36
|
|
|
|
738
|
|
|
|
595
|
|
|
|
|
(592
|
)
|
Stock based compensation
|
|
|
209
|
|
|
|
244
|
|
|
|
56
|
|
|
|
|
2
|
|
Other changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net due (to) from subsidiaries
|
|
|
(11,650
|
)
|
|
|
(7,587
|
)
|
|
|
(477
|
)
|
|
|
|
939
|
|
Other assets and other liabilities
|
|
|
(2,487
|
)
|
|
|
(1,435
|
)
|
|
|
1,572
|
|
|
|
|
(1,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) operating activities
|
|
|
(14,312
|
)
|
|
|
4,099
|
|
|
|
1,371
|
|
|
|
|
(2,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of investments
|
|
|
2,139
|
|
|
|
(1,518
|
)
|
|
|
559
|
|
|
|
|
(485
|
)
|
Net (paid) received for acquisition of subsidiaries
|
|
|
(9,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
6,277
|
|
Proceeds from notes receivable
|
|
|
1,021
|
|
|
|
(741
|
)
|
|
|
711
|
|
|
|
|
2,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided by investing activities
|
|
|
(6,685
|
)
|
|
|
(2,259
|
)
|
|
|
1,270
|
|
|
|
|
8,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of notes payable and capitalized lease obligations
|
|
|
|
|
|
|
(1,079
|
)
|
|
|
(16,201
|
)
|
|
|
|
(320
|
)
|
Additional borrowings under notes payable
|
|
|
11,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
5,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on common stock
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
(428
|
)
|
Net proceeds from exercise of stock options
|
|
|
24
|
|
|
|
1,273
|
|
|
|
771
|
|
|
|
|
273
|
|
Issuance (purchase) of treasury stock
|
|
|
3,876
|
|
|
|
(2,069
|
)
|
|
|
|
|
|
|
|
|
|
Shareholder funds disbursed at purchase
|
|
|
|
|
|
|
|
|
|
|
7,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) financing activities
|
|
|
20,997
|
|
|
|
(1,904
|
)
|
|
|
(8,350
|
)
|
|
|
|
(475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
|
(64
|
)
|
|
|
(5,709
|
)
|
|
|
|
5,220
|
|
Cash and cash equivalents at beginning of period
|
|
|
|
|
|
|
64
|
|
|
|
5,773
|
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
64
|
|
|
|
$
|
5,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Eliminated in Consolidation
|
S-3