UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One) | |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012 OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____ to ____ |
Commission file number 001-35009
Fortegra Financial Corporation
(Exact name of Registrant as specified in its charter)
Delaware | 58-1461399 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
10151 Deerwood Park Boulevard, Building 100, Suite 330, Jacksonville, FL | 32256 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code: | (866)-961-9529 | |
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 par value per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.
Large accelerated filer o Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting common equity held by non-affiliates of the registrant was $53,422,712 at June 29, 2012 (last day of the registrant's most recently completed second quarter) based on the closing sale price of $8.00 per share for the common stock on such date as traded on the New York Stock Exchange.
The number of outstanding shares of the registrant's Common Stock, $0.01 par value, outstanding as of March 14, 2013 was 19,831,697.
Documents Incorporated by Reference
Certain specifically designated portions of Fortegra Financial Corporation's definitive proxy statement for its 2013 Annual meeting of Stockholders (the "Proxy Statement"), which will be filed on or prior to 120 days following the end of Fortegra Financial Corporation's fiscal year ended December 31, 2012, are incorporated by reference into Parts III and IV of this Form 10-K.
EXPLANATORY NOTE
Fortegra Financial Corporation (the "Company") is filing this Amendment No. 1 on Form 10-K/A (this "Amendment No. 1") to amend the Company's Annual Report on Form 10-K for the year ended December 31, 2012 (the "Original Form 10-K"), as originally filed with the Securities and Exchange Commission (the "SEC") on April 1, 2013. This Amendment No. 1 is being filed to amend Item 8 of Part II of the Original Form 10-K to correct the omission of certain information by Johnson Lambert LLP ("Johnson Lambert") in its Report of Independent Registered Public Accounting Firm. Johnson Lambert has revised its report to state that the 2011 and 2010 consolidated financial statements of the Company were restated to correct misstatements and to include an explanatory paragraph stating that the Company changed its method of accounting for the capitalization of deferred acquisition costs in 2012. Except as described above, no other changes have been made to the Original Form 10-K, including no changes to the consolidated financial statements of the Company.
As required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), set forth in this Amendment No. 1 is the complete text of each of the following items, as amended, of the Original Form 10-K: Item 8 of Part II, amended solely to include the revised report of Johnson Lambert; Item 15 of Part IV, to include as exhibits the certifications of the Company's Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(a) and (b) of the Exchange Act; and an Exhibit 23, Consent of Independent Registered Public Accounting Firm.
This Amendment No. 1 speaks as of the date of filing of the Original Form 10-K and does not reflect any events that may have occurred after that date. The aforementioned changes do not modify or update in any way any other disclosures made in the Original Form 10-K. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Form 10-K and the Company's subsequent filings with the SEC.
FORTEGRA FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K/A (Amendment No. 1)
DECEMBER 31, 2012
TABLE OF CONTENTS
Page Number | ||
Item 8. | ||
Item 15. | ||
1
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Fortegra Financial Corporation
We have audited the accompanying consolidated balance sheets of Fortegra Financial Corporation (“the Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2012. Our audits also included the financial statement schedules listed in Item 15. These financial statements are the responsibility of the Company's 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 as of December 31, 2012 and 2011, and the results of its consolidated operations and its cash flows for each of the years in the three-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the 2011 and 2010 financial statements have been restated to correct for misstatements.
As discussed in Notes 3 and 4 to the consolidated financial statements, in response to a new accounting standard, the Company changed its method of accounting for the capitalization of deferred acquisition costs in 2012.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 29, 2013 expressed an adverse opinion thereon.
/s/ Johnson Lambert LLP
Jacksonville, Florida
March 29, 2013
2
FORTEGRA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(All Amounts in Thousands Except Share and Per Share Amounts)
At December 31, | |||||||
2012 | 2011 | ||||||
Assets: | As Restated | ||||||
Investments: | |||||||
Fixed maturity securities available-for-sale, at fair value (amortized cost of $107,095 at December 31, 2012 and $92,311 at December 31, 2011) | $ | 110,641 | $ | 93,509 | |||
Equity securities available-for-sale, at fair value (cost of $6,082 at December 31, 2012 and $1,203 at December 31, 2011) | 6,220 | 1,219 | |||||
Short-term investments | 1,222 | 1,070 | |||||
Total investments | 118,083 | 95,798 | |||||
Cash and cash equivalents | 15,209 | 31,339 | |||||
Restricted cash | 31,142 | 14,180 | |||||
Accrued investment income | 1,235 | 929 | |||||
Notes receivable, net | 11,290 | 3,603 | |||||
Accounts and premiums receivable, net | 27,026 | 19,690 | |||||
Other receivables | 13,511 | 9,465 | |||||
Reinsurance receivables | 203,988 | 194,740 | |||||
Deferred acquisition costs | 79,165 | 55,628 | |||||
Property and equipment, net | 17,946 | 15,314 | |||||
Goodwill | 119,512 | 104,888 | |||||
Other intangible assets, net | 79,340 | 54,410 | |||||
Income taxes receivable | 2,897 | — | |||||
Other assets | 7,667 | 5,369 | |||||
Total assets | $ | 728,011 | $ | 605,353 | |||
Liabilities: | |||||||
Unpaid claims | $ | 33,007 | $ | 32,583 | |||
Unearned premiums | 235,900 | 227,929 | |||||
Policyholder account balances | 26,023 | 28,040 | |||||
Accrued expenses, accounts payable and other liabilities | 58,563 | 33,982 | |||||
Income taxes payable | — | 1,344 | |||||
Deferred revenue | 70,452 | 22,420 | |||||
Note payable | 89,438 | 73,000 | |||||
Preferred trust securities | 35,000 | 35,000 | |||||
Deferred income taxes, net | 28,658 | 23,969 | |||||
Total liabilities | 577,041 | 478,267 | |||||
Commitments and Contingencies (Note 23) | |||||||
Stockholders' Equity: | |||||||
Preferred stock, par value $0.01; 10,000,000 shares authorized; none issued | — | — | |||||
Common stock, par value $0.01; 150,000,000 shares authorized; 20,710,370 and 20,561,328 shares issued at December 31, 2012 and 2011, respectively, including shares in treasury | 207 | 206 | |||||
Treasury stock, at cost; 1,024,212 shares and 516,132 shares at December 31, 2012 and 2011, respectively | (6,651 | ) | (2,728 | ) | |||
Additional paid-in capital | 97,641 | 96,199 | |||||
Accumulated other comprehensive loss, net of tax | (631 | ) | (1,754 | ) | |||
Retained earnings | 49,817 | 34,652 | |||||
Stockholders' equity before non-controlling interests | 140,383 | 126,575 | |||||
Non-controlling interests | 10,587 | 511 | |||||
Total stockholders' equity | 150,970 | 127,086 | |||||
Total liabilities and stockholders' equity | $ | 728,011 | $ | 605,353 |
See accompanying notes to these consolidated financial statements.
3
FORTEGRA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(All Amounts in Thousands Except Share and Per Share Amounts)
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Revenues: | As Restated | As Restated | |||||||||
Service and administrative fees | $ | 90,550 | $ | 94,464 | $ | 56,254 | |||||
Brokerage commissions and fees | 35,306 | 34,396 | 24,620 | ||||||||
Ceding commission | 34,825 | 29,495 | 28,767 | ||||||||
Net investment income | 3,068 | 3,368 | 4,073 | ||||||||
Net realized investment gains | 3 | 4,193 | 650 | ||||||||
Net earned premium | 127,625 | 115,503 | 111,805 | ||||||||
Other income | 269 | 170 | 230 | ||||||||
Total revenues | 291,646 | 281,589 | 226,399 | ||||||||
Expenses: | |||||||||||
Net losses and loss adjustment expenses | 40,219 | 37,949 | 36,035 | ||||||||
Member benefit claims | 4,642 | 4,409 | 466 | ||||||||
Commissions | 128,741 | 126,918 | 92,646 | ||||||||
Personnel costs | 48,648 | 44,547 | 36,361 | ||||||||
Other operating expenses | 30,354 | 31,140 | 24,426 | ||||||||
Depreciation and amortization | 3,933 | 3,077 | 1,396 | ||||||||
Amortization of intangibles | 4,953 | 4,952 | 3,232 | ||||||||
Interest expense | 6,624 | 7,641 | 8,464 | ||||||||
Loss on sale of subsidiary | — | 477 | — | ||||||||
Total expenses | 268,114 | 261,110 | 203,026 | ||||||||
Income before income taxes and non-controlling interests | 23,532 | 20,479 | 23,373 | ||||||||
Income taxes | 8,295 | 7,140 | 8,159 | ||||||||
Income before non-controlling interests | 15,237 | 13,339 | 15,214 | ||||||||
Less: net income (loss) attributable to non-controlling interests | 72 | (170 | ) | 20 | |||||||
Net income | $ | 15,165 | $ | 13,509 | $ | 15,194 | |||||
Earnings per share: | |||||||||||
Basic | $ | 0.77 | $ | 0.66 | $ | 0.95 | |||||
Diluted | $ | 0.74 | $ | 0.64 | $ | 0.88 | |||||
Weighted average common shares outstanding: | |||||||||||
Basic | 19,655,492 | 20,352,027 | 15,929,181 | ||||||||
Diluted | 20,600,362 | 21,265,801 | 17,220,029 |
See accompanying notes to these consolidated financial statements.
4
FORTEGRA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(All Amounts in Thousands)
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
As Restated | As Restated | ||||||||||
Net income | $ | 15,165 | $ | 13,509 | $ | 15,194 | |||||
Other comprehensive income (loss), net of tax: | |||||||||||
Unrealized gains (losses) on available-for-sale securities: | |||||||||||
Unrealized holding gains arising during the period | 2,466 | 1,568 | 1,810 | ||||||||
Related tax (expense) benefit | (862 | ) | (550 | ) | (634 | ) | |||||
Less: reclassification of losses (gains) included in net income | 3 | (4,193 | ) | (650 | ) | ||||||
Related tax (expense) benefit | (1 | ) | 1,468 | 228 | |||||||
Unrealized gains (losses) on available-for-sale securities, net of tax | 1,606 | (1,707 | ) | 754 | |||||||
Interest rate swap: | |||||||||||
Unrealized loss on interest rate swap | (611 | ) | (3,601 | ) | — | ||||||
Related tax benefit | 214 | 1,260 | — | ||||||||
Add: reclassification of losses included in net income | (126 | ) | — | — | |||||||
Related tax expense | 44 | — | — | ||||||||
Unrealized loss on interest rate swap, net of tax | (479 | ) | (2,341 | ) | — | ||||||
Other comprehensive income (loss) before non-controlling interests, net of tax | 1,127 | (4,048 | ) | 754 | |||||||
Less: comprehensive income (loss) attributable to non-controlling interests | 4 | (1 | ) | 68 | |||||||
Other comprehensive income (loss) | 1,123 | (4,047 | ) | 686 | |||||||
Comprehensive income | $ | 16,288 | $ | 9,462 | $ | 15,880 |
See accompanying notes to these consolidated financial statements.
5
FORTEGRA FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(All Amounts in Thousands Except Share Amounts)
Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Non-controlling Interests | Total Stockholders' Equity | |||||||||||||||||||||||||
Restated | Restated | Restated | Restated | ||||||||||||||||||||||||||||||
Balance, January 1, 2010, as previously reported | 15,786,913 | $ | 1,002 | (44,578 | ) | $ | (176 | ) | $ | 53,675 | $ | 1,607 | $ | 23,210 | $ | 1,475 | $ | 80,793 | |||||||||||||||
Cumulative effect of adjustment resulting from new accounting guidance | — | — | — | — | — | — | (3,156 | ) | (21 | ) | (3,177 | ) | |||||||||||||||||||||
Balance, January 1, 2010, restated | 15,786,913 | $ | 1,002 | (44,578 | ) | $ | (176 | ) | $ | 53,675 | $ | 1,607 | $ | 20,054 | $ | 1,454 | $ | 77,616 | |||||||||||||||
Net income, as restated | — | — | — | — | — | — | 15,194 | 20 | 15,214 | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 686 | — | 68 | 754 | ||||||||||||||||||||||||
Change in par value | — | (844 | ) | — | — | 844 | — | — | — | — | |||||||||||||||||||||||
Stock-based compensation | 160,000 | 2 | — | — | 174 | — | — | — | 176 | ||||||||||||||||||||||||
Redemption of minority interest | — | — | — | — | — | — | — | (860 | ) | (860 | ) | ||||||||||||||||||||||
Options exercised, net of forfeitures | 44,185 | — | — | — | 203 | — | — | — | 203 | ||||||||||||||||||||||||
Conversion of Class A common stock | — | — | — | — | — | — | (14,105 | ) | — | (14,105 | ) | ||||||||||||||||||||||
Issuance of common stock | 4,265,637 | 43 | — | — | 40,660 | — | — | — | 40,703 | ||||||||||||||||||||||||
Balance, December 31, 2010, restated | 20,256,735 | $ | 203 | (44,578 | ) | $ | (176 | ) | $ | 95,556 | $ | 2,293 | $ | 21,143 | $ | 682 | $ | 119,701 | |||||||||||||||
Net income, as restated | — | — | — | — | — | — | 13,509 | (170 | ) | 13,339 | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (4,047 | ) | — | (1 | ) | (4,048 | ) | |||||||||||||||||||||
Stock-based compensation | — | — | — | — | 763 | — | — | — | 763 | ||||||||||||||||||||||||
Shares issued for the Employee Stock Purchase Plan | 10,167 | — | — | — | 58 | — | — | — | 58 | ||||||||||||||||||||||||
Treasury stock purchased | — | — | (471,554 | ) | (2,552 | ) | — | — | — | — | (2,552 | ) | |||||||||||||||||||||
Options exercised, net of forfeitures | 294,426 | 3 | — | — | 648 | — | — | — | 651 | ||||||||||||||||||||||||
Initial public offering costs | — | — | — | — | (826 | ) | — | — | — | (826 | ) | ||||||||||||||||||||||
Balance, December 31, 2011, restated | 20,561,328 | $ | 206 | (516,132 | ) | $ | (2,728 | ) | $ | 96,199 | $ | (1,754 | ) | $ | 34,652 | $ | 511 | $ | 127,086 | ||||||||||||||
Net income | — | — | — | — | — | — | 15,165 | 72 | 15,237 | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 1,123 | — | 4 | 1,127 | ||||||||||||||||||||||||
Stock-based compensation | 87,011 | 1 | — | — | 1,043 | — | — | — | 1,044 | ||||||||||||||||||||||||
Direct stock awards to employees | 6,020 | — | — | — | 49 | — | — | 49 | |||||||||||||||||||||||||
Shares issued for the Employee Stock Purchase Plan | 53,511 | — | — | — | 330 | 330 | |||||||||||||||||||||||||||
Treasury stock purchased | — | — | (508,080 | ) | (3,923 | ) | — | — | — | — | (3,923 | ) | |||||||||||||||||||||
Options exercised, net of forfeitures | 2,500 | — | — | — | 20 | — | — | — | 20 | ||||||||||||||||||||||||
Non-controlling interest attributable to ProtectCELL acquisition | — | — | — | — | — | — | — | 10,000 | 10,000 | ||||||||||||||||||||||||
Balance, December 31, 2012 | 20,710,370 | $ | 207 | (1,024,212 | ) | $ | (6,651 | ) | $ | 97,641 | $ | (631 | ) | $ | 49,817 | $ | 10,587 | $ | 150,970 |
See accompanying notes to these consolidated financial statements.
6
FORTEGRA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands)
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Operating Activities | As Restated | As Restated | |||||||||
Net income | $ | 15,165 | $ | 13,509 | $ | 15,194 | |||||
Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||||||
Change in deferred acquisition costs | (3,692 | ) | 3,908 | (4,201 | ) | ||||||
Depreciation and amortization | 8,886 | 8,029 | 4,628 | ||||||||
Deferred income tax expense | 4,252 | 1,721 | 4,337 | ||||||||
Net realized investment (gains) losses | (3 | ) | (4,193 | ) | (650 | ) | |||||
Loss on sale of subsidiary | — | 477 | — | ||||||||
Stock-based compensation expense | 1,044 | 763 | 176 | ||||||||
Direct stock awards to employees | 49 | — | — | ||||||||
Amortization of premiums and accretion of discounts on investments | 1,283 | 609 | 348 | ||||||||
Non-controlling interests | 72 | (170 | ) | (772 | ) | ||||||
Change in allowance for doubtful accounts | (90 | ) | (31 | ) | (30 | ) | |||||
Changes in operating assets and liabilities, net of the effects of acquisitions and dispositions: | |||||||||||
Accrued investment income | (306 | ) | (16 | ) | 30 | ||||||
Accounts and premiums receivable, net | (4,933 | ) | (898 | ) | 3,808 | ||||||
Other receivables | (4,139 | ) | (1,769 | ) | 1,884 | ||||||
Reinsurance receivables | (9,248 | ) | (5,181 | ) | 4,416 | ||||||
Income taxes receivable | (3,628 | ) | 818 | (818 | ) | ||||||
Other assets | 865 | (389 | ) | (1,600 | ) | ||||||
Unpaid claims | 248 | (315 | ) | (3,459 | ) | ||||||
Unearned premiums | 7,971 | 14,373 | (5,222 | ) | |||||||
Policyholder account balances | (2,017 | ) | (45 | ) | — | ||||||
Accrued expenses, accounts payable and other liabilities | 20,190 | (14,909 | ) | (7,379 | ) | ||||||
Income taxes payable | (1,344 | ) | 1,344 | (769 | ) | ||||||
Deferred revenue | 1,363 | (6,469 | ) | 3,181 | |||||||
Net cash flows provided by operating activities | 31,988 | 11,166 | 13,102 | ||||||||
Investing activities | |||||||||||
Proceeds from maturities, calls and prepayments of available-for-sale investments | 11,138 | 9,691 | 12,114 | ||||||||
Proceeds from sales of available-for-sale investments | 8,364 | 62,300 | 8,769 | ||||||||
Net change in short-term investments | 100 | 100 | 50 | ||||||||
Purchases of available-for-sale investments | (40,445 | ) | (62,147 | ) | (24,047 | ) | |||||
Purchases of property and equipment | (5,830 | ) | (6,280 | ) | (9,191 | ) | |||||
Net paid for acquisitions of subsidiaries, net of cash received | (21,820 | ) | (49,873 | ) | (20,548 | ) | |||||
Sale of subsidiary, net of cash paid | — | (153 | ) | — | |||||||
Net (issuance) proceeds from notes receivable | (1,346 | ) | (975 | ) | 684 | ||||||
Change in restricted cash, net of restricted cash received from acquisitions | (9,452 | ) | 1,542 | 2,368 | |||||||
Net cash flows used in investing activities | (59,291 | ) | (45,795 | ) | (29,801 | ) | |||||
Financing activities | |||||||||||
Payments on notes payable | (130,450 | ) | (74,263 | ) | (20,000 | ) | |||||
Proceeds from notes payable | 146,888 | 110,550 | 25,226 | ||||||||
Capitalized closing costs for notes payable | (1,692 | ) | — | (1,379 | ) | ||||||
Net proceeds from the issuance of common stock | — | — | 40,703 | ||||||||
Payments for initial public offering costs | — | (826 | ) | — | |||||||
Payments on redeemable preferred stock | — | (11,040 | ) | (500 | ) | ||||||
Stockholder funds disbursed at purchase | — | — | (14,105 | ) | |||||||
Net proceeds from exercise of stock options | 20 | 607 | 117 | ||||||||
Excess tax benefits from stock-based compensation | — | 45 | 86 | ||||||||
Purchase of treasury stock | (3,923 | ) | (2,552 | ) | — | ||||||
Net proceeds received from stock issued in the Employee Stock Purchase Plan | 330 | 58 | — | ||||||||
Net cash flows provided by financing activities | 11,173 | 22,579 | 30,148 | ||||||||
Net (decrease) increase in cash and cash equivalents | (16,130 | ) | (12,050 | ) | 13,449 | ||||||
Cash and cash equivalents, beginning of period | 31,339 | 43,389 | 29,940 | ||||||||
Cash and cash equivalents, end of period | $ | 15,209 | $ | 31,339 | $ | 43,389 | |||||
Supplemental disclosures of cash payments for: | |||||||||||
Interest | $ | 5,292 | $ | 6,184 | $ | 7,246 | |||||
Income taxes | 8,684 | 3,451 | 5,316 | ||||||||
Non-cash investing activities | |||||||||||
Non-cash consideration received from the sale of subsidiary | $ | — | $ | 1,143 | $ | — |
See accompanying notes to these consolidated financial statements.
7
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Nature of Operations
Fortegra Financial Corporation (Traded on the New York Stock Exchange under the symbol: FRF), including its subsidiaries ("Fortegra" or the "Company"), is a diversified insurance services company headquartered in Jacksonville, Florida that provides distribution and administration services on a wholesale basis to insurance companies, insurance brokers and agents and other financial services companies primarily in the United States. In 2008, the Company changed its name from Life of the South Corporation to Fortegra Financial Corporation. The Company was incorporated in 1981 in the State of Georgia and re-incorporated in the State of Delaware in 2010. Most of the Company's business is generated through networks of small to mid-sized community and regional banks, small loan companies and automobile dealerships. The Company's majority-owned and controlled subsidiaries, are as follows:
• | LOTS Intermediate Co. ("LOTS IM") |
• | Bliss and Glennon, Inc. ("B&G") |
• | CRC Reassurance Company, Ltd. ("CRC") |
• | Insurance Company of the South ("ICOTS") |
• | Life of the South Insurance Company ("LOTS") and its subsidiary, Bankers Life of Louisiana ("Bankers Life") |
• | LOTS Reassurance Company ("LOTS RE") |
• | LOTSolutions, Inc. |
• | Lyndon Southern Insurance Company ("Lyndon Southern") |
• | Southern Financial Life Insurance Company ("SFLAC"), 85% owned |
• | South Bay Acceptance Corporation ("South Bay") |
• | Continental Car Club, Inc. ("Continental") |
• | United Motor Club of America, Inc. ("United") |
• | Auto Knight Motor Club, Inc. ("Auto Knight") |
• | eReinsure.com, Inc. ("eReinsure") |
• | Pacific Benefits Group Northwest, LLC ("PBG") |
• | Magna Insurance Company ("Magna") |
• | Digital Leash,LLC, d/b/a ProtectCELL ("ProtectCELL"), 62.4% owned |
• | 4Warranty Corporation ("4Warranty") |
The Company operates in three business segments: (i) Payment Protection, (ii) Business Process Outsourcing ("BPO") and (iii) 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 and also offers warranty and service contracts and motor club solutions. BPO provides an assortment of administrative services tailored to insurance and other financial services companies through a virtual insurance company platform. Brokerage uses a pure wholesale sell-through model to sell specialty casualty and surplus lines insurance and also provides web-hosted applications used by insurers, reinsurers and reinsurance brokers for the global reinsurance market.
1. Basis of Presentation
These Consolidated Financial Statements reflect the consolidated financial statements of Fortegra Financial Corporation and its subsidiaries. The accompanying Consolidated Financial Statements of Fortegra have been prepared in conformity with generally accepted accounting principles in the United States of America ("U.S. GAAP") promulgated by the Financial Accounting Standards Board ("FASB"), Accounting Standards Codification ("ASC" or "the guidance").
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in the preparation of the Consolidated Financial Statements:
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Fortegra Financial Corporation and its majority-owned and controlled subsidiaries. All material intercompany account balances and transactions have been eliminated. The third-party ownership of 15% of the common stock of SFLAC and 37.6% of the ownership interests of ProtectCELL have been reflected as non-controlling interests on the Consolidated Balance Sheets. Prior to 2011, third parties held a 52% ownership of the preferred stock of CRC Reassurance Company, Ltd. which were redeemed during the year ended December 31, 2010.
Income (loss) attributable to these non-controlling interests has been reflected on the Consolidated Statements of Income as income (loss) attributable to non-controlling interests and on the Consolidated Statements of Comprehensive Income as comprehensive income (loss) attributable to non-controlling interests.
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FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Comprehensive Income (Loss)
Comprehensive income (loss) includes both net income and other items of comprehensive income comprised of unrealized gains and losses on investment securities classified as available-for-sale and unrealized gains and losses on the interest rate swap, net of the related tax effects.
Use of Estimates
Preparation of financial statements in accordance with U.S. 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.
Reclassifications and Revision of Previously Issued Consolidated Financial Statements
Certain items in prior financial statements have been reclassified to conform to the current presentation, which had no impact on net income, comprehensive income or loss, net cash provided by operating activities or stockholders' equity.
Change in Accounting Estimate - Unearned Premium Reserves for the Payment Protection Segment
Prior to September 30, 2012, the Company's method of estimating unearned premium reserves in relation to the loss patterns and the related recognition of income for certain types of credit property and vendor single interest payment protection products was based on the pro-rata method. The use of the pro-rata method was based on the best information available at the time the Company's financial statements were prepared.
During the past two years the Company has increased the volume of business related to these product types, thereby increasing the volume of policy and claims data specific to the Company's product types. During the three months ended September 30, 2012, the Company determined it had accumulated a sufficient volume of policy and claims data to be able to perform an actuarial analysis in order to determine the preferable estimation approach. As a result of the analysis of the recently collected additional data, the Company has gained better insight into its product loss patterns and can provide improved judgment and estimation to more accurately calculate the unearned premium reserves and the associated recognition of income. Upon completion of the analysis, Management determined that the Rule of 78s applied on a daily basis provides a more accurate representation of historical loss patterns and the recognition of the related income; as such, the estimation method was changed. The change in approach has been accounted for as a change in accounting estimate that is effected by a change in accounting principle and is justifiable in that it is the preferable approach for income recognition based on the Company's actuarial study. This change in accounting estimate was applied prospectively in accordance with ASC 250-10-45-18. Summarized below is the effect of the change in accounting estimate on the Consolidated Statement of Income for the following period:
For the Nine Months Ended | |||
September 30, 2012 | |||
Revenues: | |||
Net earned premium | $ | 1,845 | |
Ceding commission | 2,135 | ||
Net increase to total revenues from the change in accounting estimate | 3,980 | ||
Expenses: | |||
Commissions | 2,739 | ||
Other operating expenses | (268 | ) | |
Net increase to total expenses from the change in accounting estimate | 2,471 | ||
Net increase to income before income taxes from the change in accounting estimate | 1,509 | ||
Income taxes | 533 | ||
Net increase to net income from the change in accounting estimate | $ | 976 | |
Increase to earnings per share from the change in accounting estimate: | |||
Basic | $ | 0.05 | |
Diluted | $ | 0.05 |
Subsequent Events
The Company reviewed all material subsequent events that occurred up to the date the Company's Consolidated Financial Statements were issued to determine whether any event required recognition or disclosure in the financial statements and/or disclosure in the notes thereto. For more information, please see the Note, "Subsequent Events."
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FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Fair Value
Fair value as defined in the ASC as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.ASC 820-10 - Fair Value Measurements established 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. These unobservable inputs are derived from the Company's internal calculations, estimates and assumptions and
require significant management judgment or estimation.
The Company's policy is to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents: The estimated fair value of cash and cash equivalents approximates their carrying value.
Fixed maturity securities: Fair values were obtained from market value quotations provided by an independent pricing service.
Equity securities: The fair values of publicly traded common and preferred stocks were obtained from market value quotations provided by an independent pricing service. The fair values of non-publicly traded common and preferred stocks 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.
Accounts and premiums receivable, net, and other receivables: The carrying amounts approximate fair value since no interest rate is charged on these short duration assets.
Short-term investments: The carrying amounts approximate fair value because of the short maturities of these instruments.
Notes payable and preferred trust securities: The carrying amounts approximate fair value because the applicable interest rates approximate current rates offered to the Company for similar instruments.
Interest rate swap: The fair value of the interest rate swap is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.
The estimated fair values presented for the Company's investment portfolio are based on prices provided by an independent pricing service and a third party investment manager. The prices provided by these services are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing. The independent pricing service and the third party investment manager provide a single price or quote per security. The Company obtains an understanding of the methods, models and inputs used by the independent pricing service and the third party investment manager, and has controls in place to validate that the amounts provided represent fair values.
Revenue Recognition
The Company's revenues are primarily derived from service and administrative fees, wholesale brokerage commissions and related fees, ceding commissions, net investment income and net earned premiums.
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FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Service and Administrative Fees
The Company earns service and administrative fees from a variety of activities, including the administration of credit insurance, the administration of debt cancellation programs, the administration of motor club programs, the administration of warranty programs and the administration of collateral tracking and asset recovery programs. The Payment Protection administrative service revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policies, debt cancellation contracts and motor club memberships being administered, using Rule of 78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available. The BPO service fee revenue is recognized as the services are performed. These services include fulfillment, BPO software development, and claims handling for the Company's 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, 2012, 2011 and 2010, the Company has not incurred a loss with respect to a specific significant BPO contract.
Brokerage Commissions and Fees
The Company earns brokerage commission and fee income by providing wholesale brokerage services to retail insurance brokers and agents and insurance companies and is primarily recognized when the underlying insurance policies are issued. A portion of the 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. The Company also derives fees from master license agreements to use the eReinsure system together with fees for the transactions completed through its platform.
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 and 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 the Company's benefit less earned commissions, incurred claims and the reinsurer's fee for the coverage.
Net Investment Income
The Company earns net investment income from interest and dividends received from the investment portfolio, less portfolio management expenses and interest earned on cash accounts and notes receivable. Investment income also includes any amortization of premiums and accretion of discounts on securities acquired at other than par value.
Net Earned Premium
Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of Payment Protection insurance policies by the Company's distributors and 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 using methods appropriate to the pattern of losses for the type of business. Methods used include the Rule of 78's, pro rata, and actuarial methods. Management selects the appropriate method based on available information, and periodically reviews the selections as additional information becomes available. Direct and assumed premiums are offset by premiums ceded to the Company's reinsurers, including producer owned reinsurance companies ("PORCs"), earned in the same manner. 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. The Company's 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 evaluated by our actuaries.
Unpaid claims are reserve estimates that are established in accordance with U.S. GAAP using generally accepted actuarial methods. Credit life and AD&D unpaid claims reserves include claims in the course of settlement and incurred but not reported ("IBNR").
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FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Credit disability unpaid claims reserves also include continuing claim reserves for open disability claims. For all other product lines, unpaid claims reserves are bulk reserves and are entirely IBNR. The Company uses a number of algorithms in establishing its 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.
In arriving at the unpaid claims reserves, the Company conducts an 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.
The unpaid claims reserves do not represent an exact calculation of exposure, but instead represent the Company's best estimates, generally involving actuarial projections at a given time. The process used in determining the 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. The Company periodically reviews and updates its methods of making such unpaid claims reserve estimates and establishing the related liabilities based on our actual experience. The Company has not made any changes to its methodologies for determining unpaid claims reserves in the periods presented.
Member Benefit Claims
Member Benefit Claims represent claims paid on behalf of contract holders directly to third parties providers for roadside assistance and for the repair or replacement of covered products. Claims can also be paid directly to contract holders as a reimbursement payment provided supporting documentation of loss is submitted to the Company. Claims are recognized as expense when incurred.
Investments
Both fixed maturity securities and equity 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. The cost of investments sold and any resulting gain or loss is based on the specific identification method and is recognized as of the trade date.
The Company conducts a quarterly review of all fixed maturity and equity securities with fair values less than their cost basis or amortized cost to determine if the decline in the fair value is other-than-temporary. In estimating other-than-temporary impairment ("OTTI") losses, the Company considers the following factors in assessing OTTI for fixed maturity and equity securities:
• | the length of time and the extent to which fair value has been less than cost; |
• | if an investment's fair value declines below cost, the Company determines if there is adequate evidence to overcome the presumption that the decline is other-than-temporary. Supporting evidence could include a recovery in the investment's fair value subsequent to the date of the statement of financial position, a return of the investee to profitability and the investee's improved financial performance and future prospects (such as earnings trends or recent dividend payments), or the improvement of financial condition and prospects for the investee's 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 investee's peers, downgrading of the investee's 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 investee's ability to achieve profitability in its operations; |
• | the Company's 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 pool's 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. |
When, in the opinion of management, a decline in the estimated fair value of an investment is considered to be other-than-temporary or management intends to sell or is required to sell the investment prior to the recovery of cost, the investment is written down to its estimated fair value with the impairment loss included in net realized gains (losses) in the Consolidated Statements of Income. OTTI losses on equity securities and losses related to the credit component of the impairment on fixed maturity securities are recorded in the Consolidated Statements 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 accumulated other comprehensive income (loss) ("AOCI") in the Consolidated Balance Sheets. The determination of
12
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
OTTI is a subjective process, and different judgments and assumptions could affect the fair value determination and the timing of loss realization.
Short-term Investments
Short-term investments consist of certificates of deposits issued by federally insured depository institutions and normally have maturities of less than one year. At various times throughout the year, the Company may have certificates of deposits with financial institutions that exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limit amount of $250,000.The Company had $0 and $0.1 million in certificates of deposit at December 31, 2012 and 2011, respectively, that exceeded the FDIC insurance limit of $250,000. Management reviews the financial viability of these financial institutions on a periodic basis and does not anticipate nonperformance by the financial institutions.
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 may have cash deposited with financial institutions that exceed the federally insured deposit amount. Management reviews the financial viability of these financial institutions on a periodic basis and does not anticipate nonperformance by the financial institutions. The Company had approximately $8.2 million and $9.0 million of cash in interest bearing money market accounts at December 31, 2012 and 2011, respectively, that exceeded the FDIC insurance limit of $250,000.
Restricted Cash
Restricted cash primarily represents 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 Company's subsidiaries operate and applicable contractual obligations, such funds are not available to service the Company's debt or for other general corporate purposes. The Company is entitled to retain investment income earned on these fiduciary funds. None of the restricted cash was held in interest bearing money market accounts, subject to the FDIC insurance limit of $250,000, at December 31, 2012 and 2011, respectively.
Accounts and Premiums Receivable, Net
Accounts and premiums receivable are presented net of the allowance for doubtful accounts and 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. The Company maintains an allowance for doubtful accounts based on an estimate of uncollectible accounts. The allowance for doubtful accounts totaled $0.5 million and $0.2 million at December 31, 2012 and 2011, respectively,
Other Receivables
Other receivables primarily represent amounts due to the Company from its business partners for retrospective commissions and for motor club fees.
Reinsurance Receivables
The Company has various reinsurance agreements in place whereby the amount of risk in excess of the Company's 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. Reinsurance receivables include amounts related to paid benefits, unpaid benefits and prepaid reinsurance premiums. Reinsurance receivables are based upon estimates and are reported on the Consolidated Balance Sheets 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 Company's reinsurers and believes that the reinsurance receivables accrued are collectible. 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 Acquisition Costs
Deferred Acquisition Costs - Insurance Related
The Company retrospectively adopted the new accounting standard ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, on January 1, 2012. Please see the Note "Recent Accounting Standards," for more information on the adoption and impact to the Consolidated Balance Sheets, Consolidated Statements of Income and Consolidated Statement of Stockholders' Equity, for the retrospective adoption of this new accounting standard.
13
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The Company defers certain costs of acquiring new business and retaining existing business in accordance with the guidance in ASU 2010-26. These costs are limited to direct costs that resulted from successful contract transactions and would not have been incurred by the Company's insurance entities had the transactions not occurred. These capitalized costs are amortized as the related premium is earned. The following table shows the amortization of deferred acquisition costs for the Company's insurance subsidiaries:
Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Total amortization of deferred acquisition costs - insurance related | $ | 61,042 | $ | 55,958 | $ | 57,300 |
The Company evaluates whether deferred acquisition costs-insurance related are recoverable at year-end, and considers investment income in the recoverability analysis. As a result of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ending December 31, 2012, 2011 and 2010.
Deferred Acquisition Costs - Non-insurance Related
The Company defers certain costs of acquiring new business and retaining existing business in its Payment Protection Segment related to non-insurance subsidiary transactions. These costs are limited to direct costs, typically commissions and contract transaction fees, that resulted from successful contract transactions and would not have been incurred by the Company had the transactions not occurred. These capitalized costs are amortized as the related service and administrative fees are earned. The following table shows the amortization of deferred acquisition costs for the Company's non-insurance subsidiaries:
Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Total amortization of deferred acquisition costs - non-insurance related | $ | 52,539 | $ | 57,358 | $ | 26,504 |
The Company evaluates whether deferred acquisition costs - non-insurance related are recoverable at year-end. As a result of the Company's evaluations, no write-offs for unrecoverable deferred acquisition costs were recognized during the years ending December 31, 2012, 2011 and 2010.
Inventory
Inventory, which is included in other assets as a result of the 2012 acquisition of ProtectCELL, consists of cell phone handsets and totaled $1.4 million at December 31, 2012. All inventoried handsets are recorded at actual cost, using the specific identification method, with the exception of repaired devices received from a single supplier relationship, which are recorded using an average cost method. Damaged or obsolete inventory is adjusted out of inventory on a monthly basis and recorded as an expense for the period. Handsets that are either obsolete or beyond economical repair are sent to be recycled. Handsets that are refurbished are recorded into inventory at their repair costs.
Property and Equipment
Property and equipment is carried at cost, net of accumulated depreciation and amortization of capitalized software. 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 with the corresponding gain or loss recorded to operations when incurred. Maintenance and repairs, which do not materially extend asset useful life and minor replacements, are charged to earnings when incurred. Depreciation expense is computed 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 and equipment. Leasehold improvements are depreciated over the remaining life of the lease.
The Company leases certain equipment under a single capital lease. The assets and liabilities under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets under the capital lease are depreciated over the remaining life of the lease or their estimated productive lives.
The Company also leases certain office space and equipment under operating leases. The Company evaluates the impact of rent escalation clauses, renewal options, lease incentives, including rent abatements included in its operating leases. Rent escalation clauses, renewal options and lease incentives are considered in determining total rent expense to be recognized during the term of the lease, which begins on the date the Company takes control of the leased space. Rent expense related to lease agreements which contain escalation clauses are recorded on a straight-line basis. Renewal options are considered by evaluating the overall term of the lease. In the event that the Company terminates a lease prior to the expiration, the agreed upon lease termination penalty is charged to expense with a corresponding liability recorded on the Consolidated Balance Sheet. The liability is adjusted for changes, if any, resulting from revisions to the termination amount after the cease-use date.
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FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Internally Developed Software
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 are 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 is computed using the straight-line method over the estimated useful life of 5 years and begins when the software is ready for its intended use.
Business Combinations and Purchase Price Adjustments
Business Combinations
The Company accounts for business combinations in accordance with ASC 805, Business Combinations, ("ASC 805"). These transactions are accounted for using the purchase method with the related net assets and results of operations being included in the Company’s Consolidated Financial Statements as of the respective acquisition date(s).
The assets acquired may consist of a book of business, management contracts, customer relationships, non-compete agreements, trade name, and the excess of purchase price over the fair value of identifiable net assets acquired, or goodwill (see Summary of Significant Accounting Policies, "Goodwill" for more information ). The determination of estimated useful lives and the allocation of the purchase price to the intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges.
In certain instances, the Company may acquire less than 100% ownership of an entity, resulting in the recording of a non-controlling interest. The non-controlling interest is initially established at a preliminary estimate of fair value and may be adjusted during the measurement period based upon the results of a valuation study applicable to the business combination. See "Purchase Price Adjustments" below for more information on measurement period adjustments.
Purchase Price Adjustments
The values of certain assets and liabilities acquired in acquisitions are preliminary in nature, and are subject to adjustment as additional information is obtained, including, but not limited to, valuation of separately identifiable intangibles, fixed assets, deferred taxes and deferred revenue. The valuations will be finalized within one year of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets acquired or liabilities assumed may result in adjustments to separately identifiable intangible assets and goodwill. A change to the acquisition date value of the identifiable net assets during the measurement period (up to one year from the acquisition date) affects the amount of the purchase price allocated to goodwill. Changes to the purchase price allocation are adjusted retrospectively in the Consolidated Financial Statements.
Goodwill
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired in a business combination and is carried as an asset on the Consolidated Balance Sheets. The Company's goodwill is not amortized but is reviewed annually in the fourth quarter for impairment or more frequently if certain indicators arise. The Company's impairment testing is performed at the segment level. In 2011, the Company early adopted Accounting Standards Update ("ASU") 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 allows for the goodwill impairment analysis to start with an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the qualitative factors, management determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company performs the two-part quantitative impairment test under Topic 350. 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 goodwill 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 Company completed its annual assessment of goodwill for the years December 31, 2012, and 2011 in December of each respective year and concluded that the value of its goodwill was not impaired as of December 31, 2012 and 2011, respectively.
Other Intangible Assets
The Company has acquired significant other intangible assets through business acquisitions. The Company's other intangible assets consist of finite-lived intangibles, including customer related and contract based assets representing primarily client lists and non−compete arrangements and acquired software while the Company's indefinite-lived intangible assets consist of trademarks. Finite-
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FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
lived Intangible assets are amortized over periods ranging from 1 to 15 years. Trademarks are not amortized since these assets have been determined to have indefinite useful lives. The costs to periodically renew other intangible assets are expensed as incurred. Intangible assets are tested for impairment at least annually, or whenever events or circumstances indicate that their carrying amount may not be recoverable using an analysis of expected future cash flows.
Unpaid Claims
Unpaid claims include estimates for losses reported prior to the close of the accounting period and other estimates, including amounts for incurred but not reported claims. These liabilities are continuously reviewed and updated by management. Management believes that such liabilities are adequate to cover the estimated cost of the related claims. When management determines that changes in estimates are required, such changes are included in current operations.
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 consolidated financial statements. As adjustments to these estimates become necessary, such adjustments are reflected in the Consolidated Statements of Income.
Unearned Premiums
Premiums written are earned over the life of the respective policy using the Rule of 78's, pro rata, or other actuarial method as appropriate for the type of business. Unearned premiums represent the portion of premiums that will be earned in the future. A premium deficiency reserve is recorded if anticipated losses, loss adjustment expenses, deferred acquisition costs and policy maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. As of December 31, 2012, and 2011, no deficiency reserve was recorded.
Policyholder Account Balances
Policyholder account balances relate to investment-type individual annuity contracts in the accumulation phase. Policyholder account balances are carried at accumulated account values, which consist of deposits received, plus interest credited, less withdrawals and assessments. Minimum guaranteed interest credited to these contracts ranges from 3.0% to 4.0%.
Commissions
Commissions include the commissions paid to distributors selling credit insurance policies, motor club memberships, and warranty service contracts. Credit insurance commission rates, in many instances, are set by state regulators and are also impacted by market conditions. In certain instances, credit insurance 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 the Company's administrative fees, claims, reserves, and premium taxes. The Company analyzes the retrospective commission calculation on a monthly basis 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 receivable amount due from such producer for instances where the net result of the retrospective commission calculation is negative.
The settlement of net positive retrospective commission with the producer in a subsequent period (usually the following month), is made through a cash payment to the producer. If the net result is negative, 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 producer's 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. |
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.
Deferred Revenues
Deferred revenues represent the portion of income that will be earned in the future attributable to motor club memberships, mobile device protection plans, and other non-insurance service contracts that are earned over the respective contract periods using Rule of
16
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
78's, modified Rule of 78's, pro rata, or other methods as appropriate for the contract. A deficiency reserve would be recorded if anticipated contract benefits, deferred acquisition costs and contract service costs exceed the recorded deferred revenues and anticipated investment income. As of December 31, 2012, and 2011, no deficiency reserve was recorded.
Derivative Financial Instruments
Cash Flow Hedge
The Company uses interest rate swaps as part of its risk management strategy to manage interest rate risk and cash flow risk that may arise in connection with the variable interest rate provision of the Company's preferred trust securities. The Company accounts for its derivative financial instruments in accordance with ASC 815, Derivatives and Hedging, which requires all derivative instruments to be carried at fair value on the balance sheet.
Changes in fair value associated with the effective portion of a derivative instrument designated as a qualifying cash flow hedge are recognized initially in other comprehensive income (loss). When the cash flows for which the derivative is hedging materialize and are recorded in income or expense, the associated gain or (loss) from the hedging derivative previously recorded in AOCI is recognized in earnings. If a cash flow hedge is de-designated because it is no longer highly effective, or if the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative to that date will continue to be reported in AOCI unless the hedged forecasted transaction is no longer expected to occur, at which time the cumulative gain or loss is recorded into earnings.
The Company records the fair value of the derivative instrument in other assets or other liabilities. To the extent a derivative is an effective hedge of the cash flow risk of the hedged debt obligation, any change in the derivative's fair value is recorded in AOCI, net of income tax. To the extent the derivative is an ineffective hedge, that portion of the change in fair value is recorded in other operating expenses or interest expense as appropriate. The Company is not a party to leveraged derivatives and does not enter into derivative financial instruments for trading or speculative purposes.
Income Taxes
Under Internal Revenue Code Section 1501, the Company files a consolidated federal income tax return with its affiliates which are at least 80% owned by the group. 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. The components of other comprehensive income or loss included on the Consolidated Statements of Comprehensive Income and on the Consolidated Statements of Stockholders' Equity have been computed based upon the 35% federal tax rate.
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.
ASC subtopic 740-10, Income Taxes—Overall ("ASC 740-10") prescribes a comprehensive model for the financial statement recognition, measurement, classification, and disclosure of uncertain tax positions. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company accounts for penalties and interest related to uncertain tax positions as part of its provision for federal and state income taxes.
Stock-Based Compensation
Stock Options and Restricted Stock Awards
The Company accounts for stock-based compensation in accordance with FASB Topic ASC 718, Compensation—Stock Compensation ("ASC 718"), which addresses accounting for stock-based awards, including stock options and restricted stock. The Company has stock options outstanding under its 2005 Equity Incentive Plan (the "2005 Plan") and time- and performance-based stock options and restricted stock awards outstanding under The 2010 Omnibus Incentive Plan (the "2010 Plan"). Time-based stock options and restricted stock awards are grants that vest based on the passage of time; whereas, performance-based stock options and restricted stock awards are grants that vest based on the Company attaining certain financial metrics.
Under ASC 718, compensation expense is measured using fair value and is recorded over the requisite service or performance period of the awards, or to an employee’s eligible retirement date under the award agreement, if earlier. The Company measures stock-based compensation expense using the calculated value method. Under this method, the Company estimates the fair value of each
17
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
stock option on the grant date using the Black-Scholes valuation model. The Company uses historical data to estimate expected employee behavior related to stock award exercises and forfeitures. Since there is not sufficient historical market experience for shares of the Company's stock, the Company has chosen to estimate volatility, by using the average volatility of a selected peer group of 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. The fair value of restricted stock awards is based on the market price of Fortegra's common stock at the grant date. The Company typically recognizes stock-based compensation expense for time-based awards on a straight-line basis over the requisite service period and on a graded vesting attribution model for performance-based awards. Stock-based compensation expense for time- and performance-based stock options and restricted stock awards for employee grants is recognized in personnel costs, while expense for restricted stock awards to directors is included in other operating expenses on the Consolidated Statements of Income. The related income tax expense (benefit) on stock-based compensation is recognized in income tax expense on the Consolidated Statements of Income. The Company's current policy is to issue new shares upon the exercise of stock options.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding adjusted to include the effect of potentially dilutive common shares, which includes outstanding stock options and non-vested restricted stock awards, using the treasury stock method. Common shares that are considered anti-dilutive are excluded from the computation of diluted earnings per share.
Treasury Stock
All repurchased common shares are recorded as treasury stock and are accounted for under the cost method.
Variable Interest Entities
The Company's investments in less than majority-owned companies in which it has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method except when they qualify as Variable Interest Entities ("VIEs") and the Company is the primary beneficiary, in which case the investments are consolidated in accordance with ASC 810, "Consolidation." Investments that do not meet the above criteria are accounted for under the cost method.
Advertising and Promotion
Advertising and promotional costs are expensed as incurred. Advertising expense for the following periods is presented below:
Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Advertising expense | $ | 1,624 | $ | 583 | $ | 367 |
3. Restatement of the Consolidated Financial Statements
The Company has restated its previously issued Consolidated Balance Sheets, Consolidated Statements of Income and Consolidated Statements of Cash Flows as of and for the years ended December 31, 2011 and 2010, to correct for an error in the presentation of revenue and expense for the Motor Clubs division within the Payment Protection Segment, and errors in accounting as discussed in further detail below.
The effects of these restatements to the Consolidated Statements of Income, Consolidated Balance Sheets, and Consolidated Statements of Cash Flows as of and for the years ended December 31, 2011 and 2010 are presented in the financial statement schedules below, by line item. Also shown in the schedules below are the effects of the Company's retrospective adoption of ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, because these effects, which are not corrections of errors, are part of the reconciliation from previously reported information to restated amounts.
The Notes "Segment Results," "Quarterly Information - Restated (Unaudited)," and "Quarterly Segment Results - Restated (Unaudited)" disclose the material effects of these restatements by segment, by quarter, and by segment by quarter, respectively.
Correction of Prior Period Errors - Motor Clubs division
During 2010 the Company acquired Continental and United, which began the Company's Motor Clubs division. In 2010 and subsequent reporting periods, the Motor Clubs revenues were presented on a net basis in service and administrative fees on the Consolidated Statements of Income. This net presentation consisted of service and administration fees less member benefit claims expense and commission expense. During 2011, the acquisition of Auto Knight increased the revenues of the Company's Motor Clubs division.
18
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Due to the increased growth in and significance of this division to the Company and the Payment Protection segment, the Company reviewed its revenue presentation for service and administrative fees generated by the Motor Clubs division during the fourth quarter of 2012. The Company performed this analysis based on the guidance in ASC 605, Revenue Recognition, to determine the proper presentation of revenues for the Motor Clubs division. Based on its analysis, the Company determined that presentation of gross revenue and expense is most appropriate because the Company was and is the principal in transactions with motor club members, and was and is responsible for future claims and services to be provided to those members.
Thus, the service and administrative fees revenues generated by the Motor Clubs division have been restated to present them on a gross basis with the corresponding gross amounts of member benefit claims and commissions expenses restated in the Consolidated Statements of Income.
The effect of this correction had no impact on net income, basic or diluted earnings per share amounts, balance sheet values, or net cash provided by operating activities.
Concurrent with its review of Motor Clubs revenue presentation, the Company also reviewed its method of Motor Clubs revenue recognition and identified errors in revenue recognition for some of its product lines for the year ended December 31, 2011 and for the nine months ended September 30, 2012, and associated errors in purchase accounting related to deferred revenues and deferred acquisition costs on these products. Management evaluated the materiality of the errors from qualitative and quantitative perspectives and concluded that the errors were immaterial to the periods affected. The immaterial purchase accounting impacts, included in final purchase accounting amounts disclosed in Note "Business Combinations," were increases in deferred revenue liability of $0.7 million, deferred acquisition costs of $0.1 million, and goodwill of $0.4 million, and a decrease in deferred tax liabilities of $0.3 million. For the year ended December 31, 2011, this immaterial correction reduced retained earnings by $0.5 million. In this Form 10-K, the Consolidated Statement of Income, Consolidated Balance Sheet, and Consolidated Statement of Cash Flows as of and for the year ended December 31, 2011 have been restated to reflect the immaterial corrections.
For the nine months ended September 30, 2012, this immaterial correction reduced retained earnings by $0.2 million. The effects of these restatements to the first three quarters of 2012 are included in the Consolidated Statement of Income, Consolidated Balance Sheet, and Consolidated Statement of Cash Flows as of and for the year ended December 31, 2012.
Immaterial Correction of Prior Period Errors - Purchase Accounting Adjustments
As reported in the Company's Quarterly Report on Form 10-Q ("Form 10-Q") for September 30, 2012, during the third quarter 2012 the Company identified errors related to the purchase accounting adjustments for the 2011 acquisition of Auto Knight and the April 2009 acquisition of B&G. As a result, the Company's historical balances for goodwill, property and equipment and deferred taxes were incorrectly reported in prior period filings for the years ended December 31, 2011, 2010 and 2009, respectively. Management evaluated the materiality of the errors from qualitative and quantitative perspectives and concluded that the errors were immaterial to each of the prior periods noted above.
As a result, in this Form 10-K, the Consolidated Balance Sheet data as of December 31, 2011 has been revised to reflect the correction of the error associated with the Auto Knight acquisition, as previously disclosed in the Form 10-Q for the period ended September 30, 2012. This correction, included in final purchase accounting amounts disclosed in Note "Business Combinations" increased goodwill by $0.6 million and increased deferred income tax liabilities by $0.6 million. See the Note, "Goodwill" for more information on this correction. The effect of this correction had no impact on net income, basic or diluted earnings per share amounts, or stockholders' equity.
Further, the Consolidated Balance Sheet data as of December 31, 2009, 2010, and 2011 have been revised to reflect the immaterial correction of the error associated with the B&G acquisition occurring during the year ended December 31, 2009, as previously disclosed in the Company's Form 10-Q for the period ended September 30, 2012. This correction increased goodwill by $0.4 million, decreased deferred income tax liabilities by $0.3 million and decreased other assets by $0.7 million.
Immaterial Correction of Prior Period Error - Cash Flows
The Company identified an error in the Consolidated Statement of Cash Flows for the year ended December 31, 2011 caused primarily by the reporting of certain changes in deferred income taxes as operating rather than investing activities. Management evaluated the materiality of the error from qualitative and quantitative perspectives and concluded that the error was immaterial to the statement. The correction is reflected in the schedule below, and had no effect on other statements.
Retrospective adoption of ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
As more fully disclosed in Note "Recent Accounting Standards," the Company adopted ASU 2010-26, Accounting for the Costs Associated with Acquiring or Renewing Insurance Contracts, on a retrospective basis as permitted. This is not a correction of an error. However, in order to show all the effects of adjustments and restatements to the prior period financial statements in one set of schedules, the effects of this retrospective adoption are displayed in the schedules below.
19
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following tables present our restated Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010, respectively.
Consolidated Statement of Income | ||||||||||||
For the Year Ended | ||||||||||||
December 31, 2011 | ||||||||||||
As Previously Reported | Effect of the Restatement- Motor Clubs | Adoption of ASU 2010-26 | As Restated | |||||||||
Revenues: | ||||||||||||
Service and administrative fees | $ | 38,200 | $ | 56,264 | $ | — | $ | 94,464 | ||||
Brokerage commissions and fees | 34,396 | — | — | 34,396 | ||||||||
Ceding commission | 29,495 | — | — | 29,495 | ||||||||
Net investment income | 3,368 | — | — | 3,368 | ||||||||
Net realized investment gains | 4,193 | — | — | 4,193 | ||||||||
Net earned premium | 115,503 | — | — | 115,503 | ||||||||
Other income | 170 | — | — | 170 | ||||||||
Total revenues | 225,325 | 56,264 | — | 281,589 | ||||||||
Expenses: | ||||||||||||
Net losses and loss adjustment expenses | 37,949 | — | — | 37,949 | ||||||||
Member benefit claims | — | 4,409 | — | 4,409 | ||||||||
Commissions | 74,231 | 52,687 | — | 126,918 | ||||||||
Personnel costs | 44,547 | — | — | 44,547 | ||||||||
Other operating expenses | 30,362 | — | 778 | 31,140 | ||||||||
Depreciation and amortization | 3,077 | — | — | 3,077 | ||||||||
Amortization of intangibles | 4,952 | — | — | 4,952 | ||||||||
Interest expense | 7,641 | — | — | 7,641 | ||||||||
Loss on sale of subsidiary | 477 | — | — | 477 | ||||||||
Total expenses | 203,236 | 57,096 | 778 | 261,110 | ||||||||
Income before income taxes and non-controlling interests | 22,089 | (832 | ) | (778 | ) | 20,479 | ||||||
Income taxes | 7,745 | (333 | ) | (272 | ) | 7,140 | ||||||
Income before non-controlling interests | 14,344 | (499 | ) | (506 | ) | 13,339 | ||||||
Less: net (loss) attributable to non-controlling interests | (170 | ) | — | — | (170 | ) | ||||||
Net income | $ | 14,514 | $ | (499 | ) | $ | (506 | ) | $ | 13,509 | ||
Earnings per share: | ||||||||||||
Basic | $ | 0.71 | $ | (0.02 | ) | $ | (0.03 | ) | $ | 0.66 | ||
Diluted | $ | 0.68 | $ | (0.02 | ) | $ | (0.02 | ) | $ | 0.64 | ||
Weighted average common shares outstanding: | ||||||||||||
Basic | 20,352,027 | 20,352,027 | ||||||||||
Diluted | 21,265,801 | 21,265,801 |
20
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Consolidated Statement of Income | ||||||||||||
For the Year Ended | ||||||||||||
December 31, 2010 | ||||||||||||
As Previously Reported | Effect of the Restatement- Motor Clubs | Adoption of ASU 2010-26 | As Restated | |||||||||
Revenues: | ||||||||||||
Service and administrative fees | $ | 34,145 | $ | 22,109 | $ | — | $ | 56,254 | ||||
Brokerage commissions and fees | 24,620 | — | — | 24,620 | ||||||||
Ceding commission | 28,767 | — | — | 28,767 | ||||||||
Net investment income | 4,073 | — | — | 4,073 | ||||||||
Net realized investment gains | 650 | — | — | 650 | ||||||||
Net earned premium | 111,805 | — | — | 111,805 | ||||||||
Other income | 230 | — | — | 230 | ||||||||
Total revenues | 204,290 | 22,109 | — | 226,399 | ||||||||
Expenses: | ||||||||||||
Net losses and loss adjustment expenses | 36,035 | — | — | 36,035 | ||||||||
Member benefit claims | — | 466 | — | 466 | ||||||||
Commissions | 71,003 | 21,643 | — | 92,646 | ||||||||
Personnel costs | 36,361 | — | — | 36,361 | ||||||||
Other operating expenses | 22,873 | — | 1,553 | 24,426 | ||||||||
Depreciation and amortization | 1,396 | — | — | 1,396 | ||||||||
Amortization of intangibles | 3,232 | — | — | 3,232 | ||||||||
Interest expense | 8,464 | — | — | 8,464 | ||||||||
Total expenses | 179,364 | 22,109 | 1,553 | 203,026 | ||||||||
Income before income taxes and non-controlling interests | 24,926 | — | (1,553 | ) | 23,373 | |||||||
Income taxes | 8,703 | — | (544 | ) | 8,159 | |||||||
Income before non-controlling interests | 16,223 | — | (1,009 | ) | 15,214 | |||||||
Less: net income attributable to non-controlling interests | 20 | — | — | 20 | ||||||||
Net income | $ | 16,203 | $ | — | $ | (1,009 | ) | $ | 15,194 | |||
Earnings per share: | ||||||||||||
Basic | $ | 1.02 | $ | — | $ | (0.07 | ) | $ | 0.95 | |||
Diluted | $ | 0.94 | $ | — | $ | (0.06 | ) | $ | 0.88 | |||
Weighted average common shares outstanding: | ||||||||||||
Basic | 15,929,181 | 15,929,181 | ||||||||||
Diluted | 17,220,029 | 17,220,029 |
21
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Consolidated Balance Sheet | ||||||||||||
For the Year Ended | ||||||||||||
December 31, 2011 | ||||||||||||
As Previously Reported (1) | Effect of the Restatement | Adoption of ASU 2010-26 | As Restated | |||||||||
Assets: | ||||||||||||
Investments: | ||||||||||||
Fixed maturity securities available-for-sale | $ | 93,509 | $ | — | $ | — | $ | 93,509 | ||||
Equity securities available-for-sale | 1,219 | — | — | 1,219 | ||||||||
Short-term investments | 1,070 | — | — | 1,070 | ||||||||
Total investments | 95,798 | — | — | 95,798 | ||||||||
Cash and cash equivalents | 31,339 | — | — | 31,339 | ||||||||
Restricted cash | 14,180 | — | — | 14,180 | ||||||||
Accrued investment income | 929 | — | — | 929 | ||||||||
Notes receivable, net | 3,603 | — | — | 3,603 | ||||||||
Accounts and premiums receivable, net | 19,690 | — | — | 19,690 | ||||||||
Other receivables | 9,465 | — | — | 9,465 | ||||||||
Reinsurance receivables | 194,740 | — | — | 194,740 | ||||||||
Deferred acquisition costs | 62,755 | 93 | (7,220 | ) | 55,628 | |||||||
Property and equipment, net | 15,314 | — | — | 15,314 | ||||||||
Goodwill | 104,888 | — | — | 104,888 | ||||||||
Other intangible assets, net | 54,410 | — | — | 54,410 | ||||||||
Other assets | 5,294 | 75 | — | 5,369 | ||||||||
Total assets | $ | 612,405 | $ | 168 | $ | (7,220 | ) | $ | 605,353 | |||
Liabilities: | ||||||||||||
Unpaid claims | $ | 32,583 | $ | — | $ | — | 32,583 | |||||
Unearned premiums | 227,929 | — | — | 227,929 | ||||||||
Policyholder account balances | 28,040 | — | — | 28,040 | ||||||||
Accrued expenses, accounts payable and other liabilities | 33,982 | — | — | 33,982 | ||||||||
Income taxes payable | 1,344 | — | — | 1,344 | ||||||||
Deferred revenue | 21,495 | 925 | — | 22,420 | ||||||||
Note payable | 73,000 | — | — | 73,000 | ||||||||
Preferred trust securities | 35,000 | — | — | 35,000 | ||||||||
Deferred income taxes, net | 26,754 | (258 | ) | (2,527 | ) | 23,969 | ||||||
Total liabilities | 480,127 | 667 | (2,527 | ) | 478,267 | |||||||
Stockholders' Equity: | ||||||||||||
Preferred stock | — | — | — | — | ||||||||
Common stock | 206 | — | — | 206 | ||||||||
Treasury stock, at cost | (2,728 | ) | — | — | (2,728 | ) | ||||||
Additional paid-in capital | 96,199 | — | — | 96,199 | ||||||||
Accumulated other comprehensive loss, net of tax | (1,754 | ) | — | — | (1,754 | ) | ||||||
Retained earnings | 39,823 | (499 | ) | (4,672 | ) | 34,652 | ||||||
Stockholders' equity before non-controlling interests | 131,746 | (499 | ) | (4,672 | ) | 126,575 | ||||||
Non-controlling interests | 532 | — | (21 | ) | 511 | |||||||
Total stockholders' equity | 132,278 | (499 | ) | (4,693 | ) | 127,086 | ||||||
Total liabilities and stockholders' equity | $ | 612,405 | $ | 168 | $ | (7,220 | ) | $ | 605,353 |
(1) - Includes the business acquisition valuation measurement period adjustments presented in the Notes, "Business Combinations," "Goodwill," and "Other Intangible Assets."
22
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Consolidated Balance Sheet | |||||||||
For the Year Ended | |||||||||
December 31, 2010 | |||||||||
As Previously Reported | Adoption of ASU 2010-26 | As Restated | |||||||
Assets: | |||||||||
Investments: | |||||||||
Fixed maturity securities available-for-sale | $ | 85,786 | $ | — | $ | 85,786 | |||
Equity securities available-for-sale | 1,935 | — | 1,935 | ||||||
Short-term investments | 1,170 | — | 1,170 | ||||||
Total investments | 88,891 | — | 88,891 | ||||||
Cash and cash equivalents | 43,389 | — | 43,389 | ||||||
Restricted cash | 15,722 | — | 15,722 | ||||||
Accrued investment income | 880 | — | 880 | ||||||
Notes receivable, net | 1,485 | — | 1,485 | ||||||
Accounts and premiums receivable, net | 17,023 | — | 17,023 | ||||||
Other receivables | 7,632 | — | 7,632 | ||||||
Reinsurance receivables | 169,382 | — | 169,382 | ||||||
Deferred acquisition costs | 65,142 | (6,442 | ) | 58,700 | |||||
Property and equipment, net | 11,996 | — | 11,996 | ||||||
Goodwill | 74,430 | — | 74,430 | ||||||
Other intangible assets, net | 39,997 | — | 39,997 | ||||||
Income taxes receivable | 818 | — | 818 | ||||||
Other assets | 4,857 | — | 4,857 | ||||||
Total assets | $ | 541,644 | $ | (6,442 | ) | $ | 535,202 | ||
Liabilities: | |||||||||
Unpaid claims | $ | 32,693 | $ | — | 32,693 | ||||
Unearned premiums | 210,430 | — | 210,430 | ||||||
Accrued expenses, accounts payable and other liabilities | 41,579 | — | 41,579 | ||||||
Income taxes payable | 25,611 | — | 25,611 | ||||||
Deferred revenue | 36,713 | — | 36,713 | ||||||
Note payable | 35,000 | — | 35,000 | ||||||
Preferred trust securities | 11,040 | — | 11,040 | ||||||
Deferred income taxes, net | 24,691 | (2,255 | ) | 22,436 | |||||
Total liabilities | 417,757 | (2,255 | ) | 415,502 | |||||
Stockholders' Equity: | |||||||||
Preferred stock | — | — | — | ||||||
Common stock | 203 | — | 203 | ||||||
Treasury stock, at cost | (176 | ) | — | (176 | ) | ||||
Additional paid-in capital | 95,556 | — | 95,556 | ||||||
Accumulated other comprehensive loss, net of tax | 2,293 | — | 2,293 | ||||||
Retained earnings | 25,308 | (4,166 | ) | 21,142 | |||||
Stockholders' equity before non-controlling interests | 123,184 | (4,166 | ) | 119,018 | |||||
Non-controlling interests | 703 | (21 | ) | 682 | |||||
Total stockholders' equity | 123,887 | (4,187 | ) | 119,700 | |||||
Total liabilities and stockholders' equity | $ | 541,644 | $ | (6,442 | ) | $ | 535,202 |
23
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Consolidated Statement of Cash Flows | |||||||||||||||
For the Year Ended | |||||||||||||||
December 31, 2011 | |||||||||||||||
Operating Activities | As Previously Reported | Immaterial Correction of Prior Period Error | Effect of the Restatement- Motor Clubs | Adoption of ASU 2010-26 | As Restated | ||||||||||
Net income | $ | 14,514 | $ | — | $ | (499 | ) | $ | (506 | ) | $ | 13,509 | |||
Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||||||||||
Change in deferred acquisition costs | 3,223 | — | (93 | ) | 778 | 3,908 | |||||||||
Depreciation and amortization | 8,029 | — | — | — | 8,029 | ||||||||||
Deferred income tax expense | 3,397 | (1,071 | ) | (333 | ) | (272 | ) | 1,721 | |||||||
Net realized investment (gains) losses | (4,193 | ) | — | — | — | (4,193 | ) | ||||||||
Loss on sale of subsidiary | 477 | — | — | — | 477 | ||||||||||
Stock-based compensation expense | 763 | — | — | — | 763 | ||||||||||
Amortization of premiums and accretion of discounts on investments | 609 | — | — | — | 609 | ||||||||||
Non-controlling interests | (170 | ) | — | — | — | (170 | ) | ||||||||
Change in allowance for doubtful accounts | (31 | ) | — | — | — | (31 | ) | ||||||||
Changes in operating assets and liabilities, net of the effects of acquisitions and dispositions: | |||||||||||||||
Accrued investment income | (16 | ) | — | — | — | (16 | ) | ||||||||
Accounts and premiums receivable, net | (898 | ) | — | — | — | (898 | ) | ||||||||
Other receivables | (1,430 | ) | (339 | ) | — | — | (1,769 | ) | |||||||
Reinsurance receivables | (5,181 | ) | — | — | — | (5,181 | ) | ||||||||
Income taxes receivable | 818 | — | — | — | 818 | ||||||||||
Other assets | (389 | ) | — | — | — | (389 | ) | ||||||||
Unpaid claims | (315 | ) | — | — | — | (315 | ) | ||||||||
Unearned premiums | 14,373 | — | — | — | 14,373 | ||||||||||
Policyholder account balances | (45 | ) | — | — | — | (45 | ) | ||||||||
Accrued expenses, accounts payable and other liabilities | (14,909 | ) | — | — | — | (14,909 | ) | ||||||||
Income taxes payable | 1,344 | — | — | — | 1,344 | ||||||||||
Deferred revenue | (7,394 | ) | — | 925 | — | (6,469 | ) | ||||||||
Net cash flows provided by operating activities | 12,576 | (1,410 | ) | — | — | 11,166 | |||||||||
Investing activities | |||||||||||||||
Proceeds from maturities, calls and prepayments of available-for-sale investments | 9,691 | — | — | — | 9,691 | ||||||||||
Proceeds from sales of available-for-sale investments | 62,300 | — | — | — | 62,300 | ||||||||||
Net change in short-term investments | 100 | — | — | — | 100 | ||||||||||
Purchases of available-for-sale investments | (63,557 | ) | 1,410 | — | — | (62,147 | ) | ||||||||
Purchases of property and equipment | (6,280 | ) | — | — | — | (6,280 | ) | ||||||||
Net paid for acquisitions of subsidiaries, net of cash received | (49,873 | ) | — | — | — | (49,873 | ) | ||||||||
Sale of subsidiary, net of cash paid | (153 | ) | — | — | — | (153 | ) | ||||||||
Net (issuance) proceeds from notes receivable | (975 | ) | — | — | — | (975 | ) | ||||||||
Change in restricted cash, net of restricted cash received from acquisitions | 1,542 | — | — | — | 1,542 | ||||||||||
Net cash flows used in investing activities | (47,205 | ) | 1,410 | — | — | (45,795 | ) | ||||||||
Financing activities | |||||||||||||||
Payments on notes payable | (74,263 | ) | — | — | — | (74,263 | ) | ||||||||
Proceeds from notes payable | 110,550 | — | — | — | 110,550 | ||||||||||
Payments for initial public offering costs | (826 | ) | — | — | — | (826 | ) | ||||||||
Payments on redeemable preferred stock | (11,040 | ) | — | — | — | (11,040 | ) | ||||||||
Net proceeds from exercise of stock options | 607 | — | — | — | 607 | ||||||||||
Excess tax benefits from stock-based compensation | 45 | — | — | — | 45 | ||||||||||
Purchase of treasury stock | (2,552 | ) | — | — | — | (2,552 | ) | ||||||||
Net proceeds received from stock issued in the Employee Stock Purchase Plan | 58 | — | — | — | 58 | ||||||||||
Net cash flows provided by financing activities | 22,579 | — | — | — | 22,579 | ||||||||||
Net (decrease) increase in cash and cash equivalents | (12,050 | ) | — | — | — | (12,050 | ) | ||||||||
Cash and cash equivalents, beginning of period | 43,389 | — | — | — | 43,389 | ||||||||||
Cash and cash equivalents, end of period | $ | 31,339 | $ | — | $ | — | $ | — | $ | 31,339 |
24
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Consolidated Statement of Cash Flows | |||||||||
For the Year Ended | |||||||||
December 31, 2010 | |||||||||
Operating Activities | As Previously Reported | Adoption of ASU 2010-26 | As Restated | ||||||
Net income | $ | 16,203 | $ | (1,009 | ) | $ | 15,194 | ||
Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||||
Change in deferred acquisition costs | (5,754 | ) | 1,553 | (4,201 | ) | ||||
Depreciation and amortization | 4,628 | — | 4,628 | ||||||
Deferred income tax expense | 4,881 | (544 | ) | 4,337 | |||||
Net realized investment (gains) losses | (650 | ) | — | (650 | ) | ||||
Stock-based compensation expense | 176 | — | 176 | ||||||
Amortization of premiums and accretion of discounts on investments | 348 | — | 348 | ||||||
Non-controlling interests | (772 | ) | — | (772 | ) | ||||
Change in allowance for doubtful accounts | (30 | ) | — | (30 | ) | ||||
Changes in operating assets and liabilities, net of the effects of acquisitions and dispositions: | |||||||||
Accrued investment income | 30 | — | 30 | ||||||
Accounts and premiums receivable, net | 3,808 | — | 3,808 | ||||||
Other receivables | 1,884 | — | 1,884 | ||||||
Reinsurance receivables | 4,416 | — | 4,416 | ||||||
Income taxes receivable | (818 | ) | — | (818 | ) | ||||
Other assets | (1,600 | ) | — | (1,600 | ) | ||||
Unpaid claims | (3,459 | ) | — | (3,459 | ) | ||||
Unearned premiums | (5,222 | ) | — | (5,222 | ) | ||||
Policyholder account balances | — | — | — | ||||||
Accrued expenses, accounts payable and other liabilities | (7,379 | ) | — | (7,379 | ) | ||||
Income taxes payable | (769 | ) | — | (769 | ) | ||||
Deferred revenue | 3,181 | — | 3,181 | ||||||
Net cash flows provided by operating activities | 13,102 | — | 13,102 | ||||||
Investing activities | |||||||||
Proceeds from maturities, calls and prepayments of available-for-sale investments | 12,114 | — | 12,114 | ||||||
Proceeds from sales of available-for-sale investments | 8,769 | — | 8,769 | ||||||
Net change in short-term investments | 50 | — | 50 | ||||||
Purchases of available-for-sale investments | (24,047 | ) | — | (24,047 | ) | ||||
Purchases of property and equipment | (9,191 | ) | — | (9,191 | ) | ||||
Net paid for acquisitions of subsidiaries, net of cash received | (20,548 | ) | — | (20,548 | ) | ||||
Net (issuance) proceeds from notes receivable | 684 | — | 684 | ||||||
Change in restricted cash, net of restricted cash received from acquisitions | 2,368 | — | 2,368 | ||||||
Net cash flows used in investing activities | (29,801 | ) | — | (29,801 | ) | ||||
Financing activities | |||||||||
Payments on notes payable | (20,000 | ) | — | (20,000 | ) | ||||
Proceeds from notes payable | 25,226 | — | 25,226 | ||||||
Capitalized closing costs for notes payable | (1,379 | ) | — | (1,379 | ) | ||||
Net proceeds from the issuance of common stock | 40,703 | — | 40,703 | ||||||
Payments on redeemable preferred stock | (500 | ) | — | (500 | ) | ||||
Stockholder funds disbursed at purchase | (14,105 | ) | — | (14,105 | ) | ||||
Net proceeds from exercise of stock options | 117 | — | 117 | ||||||
Excess tax benefits from stock-based compensation | 86 | — | 86 | ||||||
Net cash flows provided by financing activities | 30,148 | — | 30,148 | ||||||
Net (decrease) increase in cash and cash equivalents | 13,449 | — | 13,449 | ||||||
Cash and cash equivalents, beginning of period | 29,940 | — | 29,940 | ||||||
Cash and cash equivalents, end of period | $ | 43,389 | $ | — | $ | 43,389 |
4. Recent Accounting Standards
Recently Adopted Accounting Pronouncements
In June 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income (Topic 820), which changes the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated. This guidance became effective for the Company on January 1, 2012 and only required a change in the format of the presentation of comprehensive income. The adoption of this guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.
25
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS"), which provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. The guidance changes certain fair value measurement principles and expands the disclosure requirements particularly for Level 3 fair value measurements. The guidance became effective for the Company beginning January 1, 2012 and was applied prospectively. The adoption of this guidance, which primarily relates to disclosure, did not impact the Company’s consolidated financial position, results of operations or cash flows.
In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, which updates the accounting for deferred acquisition costs. This guidance modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal insurance contracts. The amendments in this guidance specify that the costs are limited to incremental direct costs that result directly from successful contract transactions and would not have been incurred by the insurance entity had the contract transactions not occurred. These costs must be directly related to underwriting, policy issuance and processing, medical and inspection reports and sales force contract selling. The amendments also specify that advertising costs are only included as deferred acquisition costs if the direct-response advertising criteria are met. ASU 2010-26 is effective for interim and annual reporting periods beginning after December 15, 2011. The Company retrospectively adopted the new standard on January 1, 2012. As of January 1, 2010, the beginning of the earliest period presented, the cumulative effect of the adjustment recorded to adopt this guidance resulted in decreases of $4.9 million to deferred acquisition costs, $1.7 million to deferred income taxes and $3.2 million to retained earnings. See the Note, "Restatement" for the effect of the retrospective adoption on the Company's Consolidated Financial Statement line items for the years ending December 31, 2011 and 2010, respectively.
Recently Issued Accounting Pronouncements
On February 5, 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is the culmination of the board’s redeliberation on reporting reclassification adjustments from AOCI. The new requirements will take effect for public companies in interim and annual reporting periods beginning after December 15, 2012 (the first quarter of 2013 for public, calendar-year companies). The Company is evaluating the impact of the ASU. The Company does not expect the adoption of this pronouncement to have a significant impact on the Company's consolidated financial position, results of operations or cash flows.
In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The ASU permits entities to perform an optional qualitative assessment for determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company is evaluating the impact of the ASU. The Company does not expect the adoption of this pronouncement to have a significant impact on the Company's consolidated financial position, results of operations or cash flows.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures About Offsetting Assets and Liabilities. This standard requires the disclosure of both gross and net information about instruments and transactions eligible for offset in the statement of financial position, as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. The new requirements are effective for the Company beginning on January 1, 2013. As the provisions of ASU No. 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, the Company does not expect a significant impact on its consolidated financial position, results of operations or cash flows as a result of adoption of these new requirements.
26
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
5. Earnings Per Share
Earnings per share is calculated as follows: | For the Years Ended December 31, | ||||||||||
2012 | 2011 | 2010 | |||||||||
As Restated | As Restated | ||||||||||
Numerator: (for both basic and diluted earnings per share) | |||||||||||
Net income | $ | 15,165 | $ | 13,509 | $ | 15,194 | |||||
Denominator: | |||||||||||
Total average basic common shares outstanding | 19,655,492 | 20,352,027 | 15,929,181 | ||||||||
Effect of dilutive stock options and restricted stock awards | 944,870 | 913,774 | 1,290,848 | ||||||||
Total average diluted common shares outstanding | 20,600,362 | 21,265,801 | 17,220,029 | ||||||||
Earnings per share-basic | $ | 0.77 | $ | 0.66 | 0.95 | ||||||
Earnings per share-diluted | $ | 0.74 | $ | 0.64 | 0.88 | ||||||
Weighted average anti-dilutive common shares (1) | 480,795 | 301,010 | — |
(1) The weighted average anti-dilutive common shares presented in the 2011 Form 10-K for the year ended December 31, 2011 only included out-of-the money anti-dilutive stock options and has been revised to include all anti-dilutive stock options and restricted share awards calculated under the treasury method. The revision to the presentation of weighted average anti-dilutive common shares had no impact on the average basic and diluted common shares outstanding or the basic and diluted earnings per share calculations for the year ended December 31, 2011.
6. Variable Interest Entities
In July 2011, the Company sold its 100% interest in Creative Investigations Recovery Group, LLC ("CIRG"). The consideration included a note receivable, included on the Consolidated Balance Sheets, with a first priority lien security interest in the assets of CIRG and other property of the buyers. The Company performed a detailed analysis of the CIRG sale transaction and determined that CIRG is considered a VIE, as defined in ASC 810, because the Company has an interest due to the note financing. The Company further determined that it is not the primary beneficiary because the Company does not have the power to direct the activities of the VIE and has no right to receive the residual returns of CIRG. Therefore, CIRG is not consolidated in the Company's results of operations. The Company's maximum exposure to loss in the VIE is limited to the outstanding balance of the note receivable, which is presented in the table below:
At December 31, | |||||||
2012 | 2011 | ||||||
The Company's maximum exposure to loss in the VIE | $ | 1,139 | $ | 1,142 |
7. Business Acquisitions and Dispositions
Acquisitions in 2012
On December 31, 2012, the Company acquired a 62.4% ownership interest of Digital Leash, LLC, d/b/a ProtectCELL and an option to purchase the remaining 37.6% ownership interest in ProtectCELL after 2014. ProtectCELL provides membership plans that afford protection for mobile wireless devices and other benefits including data management and identity theft protection. ProtectCELL is one of the leaders in mobile device protection plans and will spearhead Fortegra's efforts to expand its warranty and service contract business in the mobile and wireless device space. ProtectCELL's results will be included in the Company's Payment Protection segment.
On December 31, 2012, the Company acquired 100% of the outstanding stock ownership of 4Warranty Corporation, a leading warranty and extended service contract administrator with extensive expertise in furniture, electronics, appliance, lawn and garden, and fitness equipment. 4Warranty complements the Company's rapidly expanding warranty business. 4Warranty's results will be included in the Company's Payment Protection segment.
On April 24, 2012, the Company acquired a 100% ownership interest in MHA & Associates LLC ("MHA"), for $0.3 million, obtaining the renewal rights of the business and hiring the prior owner to maintain and increase the block of business.
The Consolidated Balance Sheets at December 31, 2012, include the accounts of both ProtectCELL and 4Warranty as of December 31, 2012. The financial results for the 2012 acquisitions of ProtectCELL and 4Warranty have not been included in the Company's Consolidated Statements of Income for the year ended December 31, 2012, because both acquisitions closed after business on December 31, 2012.
27
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The Company did not issue shares of its common stock in connection with any of the acquisitions completed during the years ended December 31, 2012, 2011 and 2010, respectively.
The following unaudited pro forma summary presents the Company's consolidated financial information as if ProtectCELL and 4Warranty had been acquired on January 1 of each year. Due to the insignificant impact of the MHA acquisition, its pro forma results have been excluded from the table below. These amounts have been calculated after applying the Company's accounting policies and adjusting the results of the acquired company to reflect the additional interest expense associated with the funding necessary to complete the acquisition and any amortization of intangibles that would have been charged to operations assuming the intangible assets would have existed on January 1, 2012 and 2011, excluding the transaction costs and the consequential tax effect.
Years Ended December 31, | |||||||
2012 | 2011 | ||||||
Revenue | $ | 359,950 | $ | 321,135 | |||
Net income | $ | 11,615 | $ | 9,549 |
The unaudited pro forma results in the above table were prepared for comparative purposes only and do not purport to be indicative of the results of operations which may have actually resulted had the acquisitions of ProtectCELL and 4Warranty occurred at January 1, 2012 and 2011, respectively, nor is it indicative of any future operating results of the Company.
During 2012, the Company received the final valuation studies for identifiable intangible assets to determine the final valuation for the 2011 acquisitions of eReinsure and PBG. Accordingly, the Consolidated Balance Sheet at December 31, 2011 has been retrospectively adjusted to include the effect of the measurement period adjustments as required under ASC 805. Please see the Notes, "Goodwill," and "Other Intangible Assets," for more information on the retrospective measurement period adjustments made in 2012.
The following table presents the preliminary determination of the fair value of the amounts for the identifiable assets acquired, liabilities assumed, non-controlling interests and goodwill recorded for the 2012 acquisitions of ProtectCELL and 4Warranty and the final amounts recorded for the 2011 acquisitions based on their fair values as of the respective acquisition date and the effects of the measurement period adjustments recorded in 2012, as discussed above:
2011 Acquisitions | 2012 Acquisitions | ||||||||||||||||||||||
Auto Knight | eReinsure | PBG | Magna Insurance | 4Warranty | ProtectCELL | ||||||||||||||||||
Assets: | |||||||||||||||||||||||
Cash | $ | — | $ | 3,694 | $ | 38 | $ | 400 | $ | 703 | $ | 350 | |||||||||||
Restricted cash | — | — | — | — | 72 | 7,438 | |||||||||||||||||
Investments | 1,403 | 1,212 | — | 2,432 | — | — | |||||||||||||||||
Short-term investments | — | — | — | — | — | 252 | |||||||||||||||||
Notes receivable | — | — | — | — | — | 6,341 | |||||||||||||||||
Other receivables | 90 | 1,826 | — | 83 | 199 | 2,312 | |||||||||||||||||
Deferred acquisition costs | 408 | — | — | — | — | 19,845 | |||||||||||||||||
Property and equipment, net | — | 142 | 65 | — | 61 | 674 | |||||||||||||||||
Other intangible assets, net | 1,807 | 13,908 | 3,650 | — | 1,900 | 27,815 | |||||||||||||||||
Other assets | — | 54 | 23 | — | — | 1,470 | |||||||||||||||||
Net deferred tax asset | — | — | 127 | — | — | — | |||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Unpaid claims | — | — | — | — | — | (176 | ) | ||||||||||||||||
Accrued expenses and accounts payable | (137 | ) | (2,825 | ) | (304 | ) | (455 | ) | (180 | ) | (2,644 | ) | |||||||||||
Commissions payable | (116 | ) | — | (60 | ) | — | (41 | ) | — | ||||||||||||||
Deferred revenue | (2,443 | ) | (835 | ) | — | — | (1,260 | ) | (45,409 | ) | |||||||||||||
Income taxes payable | — | — | — | — | (296 | ) | — | ||||||||||||||||
Net deferred tax liability | (477 | ) | (1,757 | ) | — | (36 | ) | (266 | ) | — | |||||||||||||
Net assets acquired | 535 | 15,419 | 3,539 | 2,424 | 892 | 18,268 | |||||||||||||||||
Non-controlling interest | — | — | — | — | — | (10,000 | ) | ||||||||||||||||
Purchase consideration (1) (2) | 4,750 | 38,931 | 7,607 | 2,424 | 3,616 | 20,000 | |||||||||||||||||
Goodwill | $ | 4,215 | $ | 23,512 | $ | 4,068 | $ | — | $ | 2,724 | $ | 11,732 |
(1) - Reflects a purchase price reduction of $0.3 million for the final eReinsure working capital adjustments.
(2) - The purchase consideration for the 4Warranty acquisition includes $0.3 million of contingent consideration and $0.5 million of working capital and hold back reserves, which are expected to be paid out based on the agreed terms of the Stock Purchase Agreement.
28
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The Company has determined that none of the goodwill acquired in 2012 is expected to be tax deductible. The following table presents goodwill attributable to acquisitions that is expected to be tax deductible by year of acquisition:
Year of the Acquisition | |||||||||||
2012 | 2011 | 2010 | |||||||||
Total (1) | $ | — | $ | 4,069 | $ | 10,008 |
(1) The amount of goodwill attributable to acquisitions that is expected to be tax deductible for acquisitions completed in 2011 has been revised from the amount presented in the 2011 Annual Report on Form 10-K resulting from adjustments to goodwill for final valuations obtained in 2012 for the 2011 acquisitions.
Dispositions
In July 2011, the Company sold its wholly owned subsidiary, CIRG, for a sales price of $1.2 million, comprised of cash and a $1.1 million secured note receivable. For the year ended December 31, 2011, the Company recorded a $0.5 million loss on the sale of CIRG. This disposition resulted in a non-consolidated VIE. For more information see the Note, "Variable Interest Entity."
8. Goodwill
In 2012, the Company recorded goodwill in conjunction with the ProtectCELL and 4Warranty acquisitions. During 2012, the Company determined the final valuations for the 2011 acquisitions of eReinsure, included in the Brokerage Segment and PBG, included in the BPO segment.
The following table shows the retrospective adjustments made to the balance of goodwill at December 31, 2011 to reflect the effect of these measurement period adjustments made in accordance with accounting requirements under ASC 805 and the adjustments made to goodwill for the immaterial error corrections under ASC 250, that impacted balances prior to January1, 2011, that are discussed in the Note, "Restatement of the Consolidated Financial Statements," of Notes to the Consolidated Financial Statements.
Goodwill balances by segment are as follows: | Payment Protection | BPO | Brokerage (1) | Total | |||||||||||
Balance at January 1, 2011 (1) | $ | 33,413 | $ | 10,239 | $ | 30,778 | $ | 74,430 | |||||||
Segment reclassifications | — | (1,337 | ) | 1,337 | — | ||||||||||
Goodwill disposed of during 2011 | — | — | (1,337 | ) | (1,337 | ) | |||||||||
Goodwill acquired during 2011 | 3,219 | 6,730 | 26,138 | 36,087 | |||||||||||
Goodwill adjustment under ASC 250 for the Auto Knight acquisition for the year ending December 31, 2011 | 996 | — | — | 996 | |||||||||||
Final valuation adjustments as required under ASC 805 for eReinsure | — | — | (2,626 | ) | (2,626 | ) | |||||||||
Final valuation adjustments as required under ASC 805 for PBG | — | (2,662 | ) | — | (2,662 | ) | |||||||||
Adjusted balance at December 31, 2011 | 37,628 | 12,970 | 54,290 | 104,888 | |||||||||||
Goodwill acquired - purchased book of business | — | — | 168 | 168 | |||||||||||
Goodwill acquired - ProtectCELL acquisition | 11,732 | — | — | 11,732 | |||||||||||
Goodwill acquired - 4Warranty acquisition | 2,724 | — | — | 2,724 | |||||||||||
Balance at December 31, 2012 | $ | 52,084 | $ | 12,970 | $ | 54,458 | $ | 119,512 |
(1) The January 1, 2011 balance includes an increasing adjustment of $0.4 million to goodwill for the immaterial correction of an error adjustment attributable to B&G acquisition for the year ending December 31, 2009, as discussed in the Note, "Restatement of the Consolidated Financial Statements" of Notes to the Consolidated Financial Statements in the section titled "Immaterial correction of Prior Period Errors - Purchase Accounting Adjustments."
9. Other Intangible Assets
The following table shows finite-lived other intangible assets and their respective amortization periods:
December 31, 2012 | December 31, 2011 | ||||||||||||||||||||||||||
Amortization Period (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||
Finite-lived other intangible assets: | |||||||||||||||||||||||||||
Customer and agent relationships | 5 | to | 15 | $ | 57,780 | $ | (12,340 | ) | $ | 45,440 | $ | 34,552 | $ | (8,724 | ) | $ | 25,828 | ||||||||||
Software | 5 | to | 10 | 10,118 | (3,385 | ) | 6,733 | 8,773 | (2,345 | ) | 6,428 | ||||||||||||||||
Present value of future profits | 0.3 | to | 0.75 | 548 | (548 | ) | — | 548 | (548 | ) | — | ||||||||||||||||
Non-compete agreements | 1.5 | to | 6 | 5,008 | (2,716 | ) | 2,292 | 2,958 | (2,419 | ) | 539 | ||||||||||||||||
Total finite-lived other intangible assets | $ | 73,454 | $ | (18,989 | ) | $ | 54,465 | $ | 46,831 | $ | (14,036 | ) | $ | 32,795 |
29
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table shows the carrying amount of indefinite-lived other intangible assets: | At December 31, | ||||||
2012 | 2011 | ||||||
Tradenames | $ | 24,875 | $ | 21,615 |
The finite-lived and indefinite-lived other intangible assets acquired in 2012 relate to the acquisition of ProtectCELL and 4Warranty and for the purchase of a book of business. In 2012, the Company determined the final valuations for the 2011 acquisitions of eReinsure and PBG and made retrospective adjustments to other intangible assets. The following table includes the retrospective adjustments made to the balance of other intangible assets at December 31, 2011 to reflect the effect of these measurement period adjustments made in accordance with the accounting requirements under ASC 805 and the current period activity.
Changes in other intangible assets are as follows: | |||
Balance at January 1, 2011 | $ | 39,997 | |
Intangible assets acquired in 2011 | 11,977 | ||
Less: Amortization expense | 4,952 | ||
Balance at December 31, 2011 | 47,022 | ||
Final valuation adjustments as required under ASC 805 for eReinsure | 4,508 | ||
Final valuation adjustments as required under ASC 805 for PBG | 2,880 | ||
Adjusted balance at December 31, 2011 | 54,410 | ||
Intangible assets acquired in 2012 - Purchased book of business | 168 | ||
Intangible assets acquired in 2012 - ProtectCELL acquisition | 27,815 | ||
Intangible assets acquired in 2012 - 4Warranty acquisition | 1,900 | ||
Less: Amortization expense | 4,953 | ||
Balance at December 31, 2012 | $ | 79,340 |
Estimated amortization of finite-lived other intangible assets for the next five years and thereafter ending December 31 is presented below:
2013 | $ | 10,022 | |
2014 | 10,010 | ||
2015 | 10,003 | ||
2016 | 9,378 | ||
2017 | 8,031 | ||
Thereafter | 7,021 | ||
Total | $ | 54,465 |
10. Investments
The following table summarizes the Company's available-for-sale fixed maturity and equity securities:
At December 31, 2012 | |||||||||||||||
Description of Security | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Obligations of the U.S. Treasury and U.S. Government agencies | $ | 22,424 | $ | 761 | $ | (7 | ) | $ | 23,178 | ||||||
Municipal securities | 16,636 | 413 | (8 | ) | 17,041 | ||||||||||
Corporate securities | 67,627 | 2,461 | (80 | ) | 70,008 | ||||||||||
Mortgage-backed securities | 285 | 4 | — | 289 | |||||||||||
Asset-backed securities | 123 | 2 | — | 125 | |||||||||||
Total fixed maturity securities | $ | 107,095 | $ | 3,641 | $ | (95 | ) | $ | 110,641 | ||||||
Common stock - publicly traded | $ | 39 | $ | 3 | $ | — | $ | 42 | |||||||
Preferred stock - publicly traded | 4,975 | 133 | (1 | ) | 5,107 | ||||||||||
Common stock - non-publicly traded | 59 | 4 | (5 | ) | 58 | ||||||||||
Preferred stock - non-publicly traded | 1,009 | 4 | — | 1,013 | |||||||||||
Total equity securities | $ | 6,082 | $ | 144 | $ | (6 | ) | $ | 6,220 |
30
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
At December 31, 2011 | |||||||||||||||
Description of Security | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
Obligations of the U.S. Treasury and U.S. Government agencies | $ | 25,751 | $ | 611 | $ | (2 | ) | $ | 26,360 | ||||||
Municipal securities | 17,609 | 388 | (5 | ) | 17,992 | ||||||||||
Corporate securities | 47,304 | 594 | (426 | ) | 47,472 | ||||||||||
Mortgage-backed securities | 1,272 | 26 | — | 1,298 | |||||||||||
Asset-backed securities | 375 | 12 | — | 387 | |||||||||||
Total fixed maturity securities | $ | 92,311 | $ | 1,631 | $ | (433 | ) | $ | 93,509 | ||||||
Common stock - publicly traded | $ | 40 | $ | — | $ | (1 | ) | $ | 39 | ||||||
Preferred stock - publicly traded | 50 | 2 | — | 52 | |||||||||||
Common stock - non-publicly traded | 104 | 26 | (16 | ) | 114 | ||||||||||
Preferred stock - non-publicly traded | 1,009 | 5 | — | 1,014 | |||||||||||
Total equity securities | $ | 1,203 | $ | 33 | $ | (17 | ) | $ | 1,219 |
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. The following table details the Company's restricted investments:
At December 31, | |||||||
2012 | 2011 | ||||||
Fair value of restricted investments | $ | 17,942 | $ | 18,319 | |||
Fair value of restricted investments for special deposits required by state insurance departments | $ | 10,988 | $ | 11,618 |
The amortized cost and fair value of fixed maturity securities 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.
At | |||||||||||||||
December 31, 2012 | December 31, 2011 | ||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
Due in one year or less | $ | 5,557 | $ | 5,608 | $ | 3,890 | $ | 3,923 | |||||||
Due after one year through five years | 58,378 | 60,323 | 51,210 | 51,839 | |||||||||||
Due after five years through ten years | 24,983 | 25,900 | 23,623 | 23,973 | |||||||||||
Due after ten years | 17,769 | 18,396 | 11,941 | 12,089 | |||||||||||
Mortgage-backed securities | 285 | 289 | 1,272 | 1,298 | |||||||||||
Asset-backed securities | 123 | 125 | 375 | 387 | |||||||||||
Total fixed maturity securities | $ | 107,095 | $ | 110,641 | $ | 92,311 | $ | 93,509 |
31
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table provides information on unrealized losses on investment securities that have been in an unrealized loss position for less than twelve months, and twelve months or greater:
December 31, 2012 | ||||||||||||||||||||||||||
Less than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||||
Description of Security | Fair Value | Unrealized Losses | # of Securities | Fair Value | Unrealized Losses | # of Securities | Fair Value | Unrealized Losses | # of Securities | |||||||||||||||||
Obligations of the U.S. Treasury and U.S. Government agencies | $ | 857 | $ | (7 | ) | 11 | $ | — | $ | — | — | $ | 857 | $ | (7 | ) | 11 | |||||||||
Municipal securities | 734 | (8 | ) | 1 | — | — | — | 734 | (8 | ) | 1 | |||||||||||||||
Corporate securities | 12,625 | (63 | ) | 16 | 183 | (17 | ) | 1 | 12,808 | (80 | ) | 17 | ||||||||||||||
Mortgage-backed securities | — | — | — | — | — | — | — | — | — | |||||||||||||||||
Asset-backed securities | — | — | — | — | — | — | — | — | — | |||||||||||||||||
Total fixed maturity securities | $ | 14,216 | $ | (78 | ) | 28 | $ | 183 | $ | (17 | ) | 1 | $ | 14,399 | $ | (95 | ) | 29 | ||||||||
Common stock - publicly traded | $ | — | $ | — | — | $ | — | $ | — | — | $ | — | $ | — | — | |||||||||||
Preferred stock - publicly traded | 198 | (1 | ) | 1 | — | — | — | 198 | (1 | ) | 1 | |||||||||||||||
Common stock - non-publicly traded | — | — | — | 39 | (5 | ) | 2 | 39 | (5 | ) | 2 | |||||||||||||||
Preferred stock - non-publicly traded | — | — | — | — | — | — | — | — | — | |||||||||||||||||
Total equity securities | $ | 198 | $ | (1 | ) | 1 | $ | 39 | $ | (5 | ) | 2 | $ | 237 | $ | (6 | ) | 3 |
At December 31, 2011 | ||||||||||||||||||||||||||
Less than Twelve Months | Twelve Months or Greater | Total | ||||||||||||||||||||||||
Description of Security | Fair Value | Unrealized Losses | # of Securities | Fair Value | Unrealized Losses | # of Securities | Fair Value | Unrealized Losses | # of Securities | |||||||||||||||||
Obligations of the U.S. Treasury and U.S. Government agencies | $ | 1,902 | $ | (2 | ) | 7 | $ | — | $ | — | — | $ | 1,902 | $ | (2 | ) | 7 | |||||||||
Municipal securities | 486 | (1 | ) | 1 | 478 | (4 | ) | 1 | 964 | (5 | ) | 2 | ||||||||||||||
Corporate securities | 16,861 | (426 | ) | 26 | — | — | — | 16,861 | (426 | ) | 26 | |||||||||||||||
Mortgage-backed securities | — | — | — | — | — | — | — | — | — | |||||||||||||||||
Asset-backed securities | — | — | — | — | — | — | — | — | — | |||||||||||||||||
Total fixed maturity securities | $ | 19,249 | $ | (429 | ) | 34 | $ | 478 | $ | (4 | ) | 1 | $ | 19,727 | $ | (433 | ) | 35 | ||||||||
Common stock - publicly traded | $ | 38 | $ | (1 | ) | 2 | $ | — | $ | — | — | $ | 38 | $ | (1 | ) | 2 | |||||||||
Preferred stock - publicly traded | — | — | — | — | — | — | — | — | — | |||||||||||||||||
Common stock - non-publicly traded | 45 | (16 | ) | 3 | — | — | — | 45 | (16 | ) | 3 | |||||||||||||||
Preferred stock - non-publicly traded | — | — | — | — | — | — | — | — | — | |||||||||||||||||
Total equity securities | $ | 83 | $ | (17 | ) | 5 | $ | — | $ | — | — | $ | 83 | $ | (17 | ) | 5 |
The Company does not intend to sell the investments that are in an unrealized loss position at December 31, 2012 and it is more likely than not that the Company will be able to hold these securities until full recovery of their amortized cost basis for fixed maturity securities or cost for equity securities. At December 31, 2012, based on management's review, the Company deemed that 1 individual equity security was other than temporarily impaired and recorded an impairment charge of $16.0 thousand for the year ended December 31, 2012. For the year ended December 31, 2011 the Company deemed that 10 equity securities were other than temporarily impaired and recorded an impairment charge of $0.2 million.
The following table summarizes the gross proceeds from the sale of available-for-sale investment securities:
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Gross proceeds from sales | $ | 8,364 | $ | 62,300 | $ | 8,769 |
32
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table summarizes the gross realized gains and gross realized losses for both fixed maturity and equity securities and realized losses for other-than-temporary impairments for available-for-sale investment securities:
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Gross realized gains | $ | 33 | $ | 4,456 | $ | 831 | |||||
Gross realized losses | (14 | ) | (91 | ) | (116 | ) | |||||
Total net gains from investment sales | 19 | 4,365 | 715 | ||||||||
Impairment write-downs (other-than-temporary impairments) | (16 | ) | (172 | ) | (65 | ) | |||||
Net realized investment gains | $ | 3 | $ | 4,193 | $ | 650 |
The following schedule details the components of net investment income: | For the Years Ended December 31, | ||||||||||
2012 | 2011 | 2010 | |||||||||
Fixed income securities | $ | 2,670 | $ | 3,188 | $ | 3,666 | |||||
Cash on hand and on deposit | 193 | 333 | 738 | ||||||||
Common and preferred stock dividends | 275 | 59 | 60 | ||||||||
Notes receivable | 267 | 155 | 157 | ||||||||
Other income | 138 | 141 | (46 | ) | |||||||
Investment expenses | (475 | ) | (508 | ) | (502 | ) | |||||
Net investment income | $ | 3,068 | $ | 3,368 | $ | 4,073 |
11. Reinsurance Receivables
The effects of reinsurance on premiums written and earned and on losses and loss adjustment expenses ("LAE") incurred are presented in the tables below:
Premiums | For the Years Ended December 31, | |||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | |||||||||||||||
Direct and assumed | $ | 367,791 | $ | 359,820 | $ | 338,869 | $ | 321,412 | $ | 302,574 | $ | 307,916 | ||||||||
Ceded | (236,121 | ) | (232,195 | ) | (214,485 | ) | (205,909 | ) | (191,141 | ) | (196,111 | ) | ||||||||
Net | $ | 131,670 | $ | 127,625 | $ | 124,384 | $ | 115,503 | $ | 111,433 | $ | 111,805 |
Losses and LAE incurred | For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | ||||||||||
Direct and assumed | $ | 86,409 | $ | 81,843 | $ | 79,403 | ||||||
Ceded | (46,190 | ) | (43,894 | ) | (43,368 | ) | ||||||
Net losses and LAE incurred | $ | 40,219 | $ | 37,949 | $ | 36,035 |
The following table reflects the components of the reinsurance receivables: | At December 31, | ||||||
2012 | 2011 | ||||||
Prepaid reinsurance premiums (1): | |||||||
Life | $ | 53,117 | $ | 59,545 | |||
Accident and health | 34,266 | 30,759 | |||||
Property | 85,805 | 80,758 | |||||
Total | 173,188 | 171,062 | |||||
Ceded claim reserves: | |||||||
Life | 1,786 | 1,794 | |||||
Accident and health | 9,263 | 9,896 | |||||
Property | 8,663 | 7,743 | |||||
Total ceded claim reserves recoverable | 19,712 | 19,433 | |||||
Other reinsurance settlements recoverable | 11,088 | 4,245 | |||||
Reinsurance receivables | $ | 203,988 | $ | 194,740 | |||
(1) Including policyholder account balances ceded. |
33
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table shows the amount included in reinsurance receivable that is recoverable from three unrelated insurers:
At December 31, | |||||||
2012 | 2011 | ||||||
Total recoverable from three unrelated reinsurers | $ | 126,633 | $ | 124,160 |
At December 31, 2012, the three unrelated reinsurers are: London Life Reinsurance Company (A. M. Best Rating-A); London Life International Reinsurance Corporation (A. M. Best Rating-NR-3) and Spartan Property Insurance Company (A. M. Best Rating - Non-rated). Because Spartan Property Insurance Company does not maintain an A.M. Best rating, the related receivables are collateralized by assets held in trust accounts. At December 31, 2011, 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). Because London Life International Reinsurance Corporation does not maintain an A.M. Best rating, the related receivables are collateralized by assets held in trust accounts and letters of credit. At December 31, 2012, the Company does not believe there is a risk of loss as a result of the concentration of credit risk in the reinsurance program.
12. Property and Equipment
The components of property and equipment are as follows: | At December 31, | ||||||
2012 | 2011 | ||||||
Furniture, fixtures and equipment | $ | 3,038 | $ | 2,868 | |||
Computer equipment | 4,126 | 2,356 | |||||
Equipment and software under capital lease | 229 | — | |||||
Software (1) | 18,632 | 14,416 | |||||
Leasehold improvements | 568 | 357 | |||||
Property and equipment, gross | 26,593 | 19,997 | |||||
Less: accumulated depreciation and amortization | 8,647 | 4,683 | |||||
Property and equipment, net | $ | 17,946 | $ | 15,314 | |||
(1) Internally developed software not yet placed in service, included in software | $ | 942 | $ | 5,302 |
The following reflects depreciation on property and equipment and amortization expense related to capitalized software costs:
Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Depreciation expense on property and equipment | $ | 1,756 | $ | 1,605 | $ | 924 | |||||
Amortization expense on capitalized software | 2,177 | 1,472 | 472 | ||||||||
Total depreciation and amortization | $ | 3,933 | $ | 3,077 | $ | 1,396 |
13. Leases
Operating Leases
The Company leases certain office space and equipment under operating leases expiring on various dates from 2013 through 2022. The Company assumed operating leases for office space from related parties in conjunction with the ProtectCELL and 4Warranty acquisitions. The terms of the related party leases are substantially the same as those offered for comparable transactions with non-related parties. The Company did not make payments on the related party lease during 2012. Please see the Note, "Related Party Transactions," for more information. The following table shows the Company's future minimum lease payments under operating leases with initial or remaining non-cancelable lease terms in excess of one year at:
December 31, 2012 | |||
2013 | $ | 2,574 | |
2014 | 2,886 | ||
2015 | 2,732 | ||
2016 | 2,485 | ||
2017 | 2,415 | ||
Thereafter | 9,453 | ||
Total payments | $ | 22,545 |
34
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The Company recognized rent expense for the: | Years Ended December 31, | ||||||||||
2012 | 2011 | 2010 | |||||||||
Total rent expense | $ | 3,050 | $ | 3,275 | $ | 2,997 |
Capital Lease
The Company also leases equipment and software under a single capital lease expiring in 2014. The capital lease was assumed by the Company in conjunction with the 2012 acquisition of ProtectCELL. The following table shows the Company's future minimum lease payments for its capital lease at December 31, 2012:
December 31, 2012 | |||
2013 | $ | 134 | |
2014 | 133 | ||
2015 | — | ||
2016 | — | ||
2017 | — | ||
Thereafter | — | ||
Total minimum payments | $ | 267 | |
Amounts representing interest | (26 | ) | |
Obligations under capital lease | 241 |
14. Note Payable
The Company's Notes Payable consisted of the following at: | At December 31, | ||||||
2012 | 2011 | ||||||
Wells Fargo Bank, N.A.- credit facility, maturing August 2017 | $ | 89,438 | $ | — | |||
Maximum balance allowed on Wells Fargo Bank, N.A credit facility | $ | 125,000 | $ | — | |||
SunTrust Bank, N.A. - revolving credit facility, maturing June 2013 | $ | — | $ | 73,000 | |||
Maximum balance allowed on SunTrust Bank, N.A revolving credit facility | $ | — | $ | 85,000 | |||
Interest rate on the respective note payable at the end of the respective periods: | 2.76 | % | 4.59 | % |
Aggregate maturities for the Company's note payable at December 31, 2012 are as follows:
2013 | $ | 1,250 | |
2014 | 5,000 | ||
2015 | 5,000 | ||
2016 | 5,000 | ||
2017 | 73,188 | ||
Thereafter | — | ||
Total | $ | 89,438 |
$125.0 million Secured Credit Agreement - Wells Fargo Bank, N.A.
At December 31, 2012, the Company had a $125.0 million secured credit agreement (the "Credit Agreement"), entered into on August 2, 2012, with a syndicate of lenders, among them Wells Fargo Bank, N.A., who also serves as administrative agent ("Wells Fargo" or the "Administrative Agent"). The Credit Agreement has a five year term and provides for a $50.0 million term loan facility (the "Term Loan Facility"), as well as a $75.0 million revolving credit facility (the "Revolving Facility" and collectively with the Term Loan Facility, the "Facilities"). Subject to earlier termination, the Credit Agreement terminates on August 2, 2017. The Credit Agreement includes a provision pursuant to which, from time to time, the Company may request that the lenders in their discretion increase the maximum amount of commitments under the Facilities by an amount not to exceed $50.0 million.
At the Company's election, borrowings under the Revolving Facility will bear interest either at the base rate plus an applicable interest margin or the adjusted LIBO rate plus an applicable interest margin; provided, however, that all swingline loans will be base rate loans. The base rate is a fluctuating interest rate equal to the highest of: (i) Wells Fargo's publicly announced prime lending rate; (ii) the federal funds rate plus 0.50%; and (iii) the adjusted LIBO rate, determined on a daily basis for an interest period of one month, plus 1.0%.
35
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The adjusted LIBO rate is the rate per annum obtained by dividing (i) the London interbank offered rate ("LIBOR") for such interest period by (ii) a percentage equal to 1.00 minus the Eurodollar Reserve Percentage (as defined in the Credit Agreement). The interest margin over the adjusted LIBO rate, initially set at 2.75%, may increase (to a maximum amount of 3.0%) or decrease (to a minimum amount of 2.0%) based on changes in our leverage ratio. The interest margin over the base rate, initially set at 1.75%, may increase (to a maximum amount of 2.0%) or decrease (to a minimum amount of 1.0%) based on changes in our leverage ratio.
In addition to interest payable on the principal amount of indebtedness outstanding from time to time under the Credit Agreement, the Company is required to pay a commitment fee, initially equal to 0.40% per annum of the unused amount of the Revolving Facility. The percentage rate of such fee may increase (to a maximum amount of 0.45%) or decrease (to a minimum amount of 0.25%) based on changes in the Borrowers' leverage ratio. The amount of outstanding swingline loans is not considered usage of the Revolving Facility for the purpose of calculating the commitment fee. The Company is also required to pay letter of credit participation fees on the undrawn amount of all outstanding letters of credit. The Company paid fees of approximately $1.7 million to Wells Fargo in connection with the execution of the Credit Agreement, which have been capitalized and are being amortized over the life of the Credit Agreement.
The Company, at its option, may prepay any borrowing, in whole or in part, at any time and from time to time without premium or penalty. However, after the end of our fiscal year (commencing with the fiscal year ending December 31, 2015), the Company is required to make mandatory principal prepayments of loans under the Facilities in an amount determined under the Credit Agreement based upon a percentage of the Company's Excess Cash Flow (as defined in the Credit Agreement) minus certain off set amounts relating to permitted acquisitions.
The Credit Agreement contains certain customary representations, warranties and covenants applicable to us for the benefit of the Administrative Agent and the lenders. The Company may not assign, sell, transfer or dispose of any collateral or effect certain changes to our capital structure and the capital structure of our subsidiaries without the Administrative Agent's prior consent. The Company obligations under the Facilities may be accelerated or the commitments terminated upon the occurrence of an event of default under the Credit Agreement, 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.
The Credit Agreement also contains the financial covenants which the Company must maintain. See the section below, "Financial Covenants" for a presentation of the Company's more significant covenants associated with the Credit Agreement.
$85.0 million Revolving Credit Facility - SunTrust Bank, N.A.
At December 31, 2011, the Company had an $85.0 million revolving credit facility with SunTrust Bank, N.A.,(the "Facility"). The Facility had an original maturity of June 2013. The Facility bore 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 Company's leverage ratio. The Company could select at its discretion to convert the interest rate for all or a portion of the outstanding balance for a period of up to six months to a fixed EURO Dollar Funding rate which is equal to the adjusted LIBOR rate for the elected interest period in effect at the time of election, plus a margin tied to the Company's leverage ratio.
Termination of the $85.0 million Facility
On August 2, 2012, the Company terminated the Facility and entered into the Credit Agreement. In connection with the termination of the Facility, the Company recorded a charge of $0.7 million to interest expense for the year ending December 31, 2012, for previously capitalized transaction costs associated with the Facility.
Financial Covenants
At December 31, 2012 and 2011, respectively, the Company had to comply with various financial covenants set forth in the Credit Agreement and the Facility, respectively. The following describes the Credit Agreement's more significant financial covenants in effect at December 31, 2012 and the calculations used to arrive at each ratio:
Total Leverage Ratio - the ratio of (i) Consolidated Total Debt as of such date to (ii) Consolidated Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA")for the Measurement Period ending on or immediately prior to such date.
Fixed Charge Coverage Ratio - the ratio of (a) Consolidated Adjusted EBITDA less the actual amount paid by the Borrowers and their Subsidiaries in cash on account of Capital Expenditures less cash taxes paid by the Borrowers and their Subsidiaries to (b) Consolidated Fixed Charges, in each case for the Measurement Period ending on or immediately prior to such date.
36
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Reinsurance Ratio - the ratio (expressed as a percentage) of (a) the aggregate amounts recoverable by the Borrowers and its Subsidiaries from reinsurers divided by (b) the sum of (i) policy and claim liabilities plus (ii) unearned premiums, in each case of the Borrowers and their Subsidiaries determined in accordance with GAAP.
RBC Ratio - the ratio (expressed as a percentage) of NAIC RBC (as defined in the NAIC standards) for any Regulated Insurance Company on an individual basis, calculated at the end of any Fiscal Year, to the "authorized control level" (as defined in the NAIC standards).
The following is a summary of the Credit Agreement's more significant financial covenants calculated at December 31, 2012:
Actual At | |||
Covenant | Covenant Requirement | December 31, 2012 | |
Total leverage ratio | not more than 3.50 | 3.10 | |
Fixed charge coverage ratio | not less than 2.00 | 2.33 | |
Reinsurance ratio | not less than 50% | 69.0% | |
RBC Ratio's: | |||
RBC Ratio - Bankers Life of Louisiana | not less than 250% | 469.0% | |
RBC Ratio - Southern Financial Life Insurance Company | not less than 250% | 2,155.0% | |
RBC Ratio - Insurance Company of the South | not less than 250% | 378.0% | |
RBC Ratio - Lyndon Southern Insurance Company | not less than 250% | 255.0% | |
RBC Ratio - Life of the South Insurance Company | not less than 250% | 386.0% |
The following describes the Facility's more significant financial covenants in effect at December 31, 2011 and the calculations used to arrive at each ratio:
Fixed charge coverage ratio - is the ratio of Consolidated Adjusted EBITDA less the actual amount paid by the Company and its Subsidiaries in cash on account of Capital Expenditures less cash taxes to the Consolidated Fixed Charges, in each case measured for the four consecutive Fiscal Quarters ending on or immediately prior to such date.
Total leverage ratio - is the ratio of, as of any date, Consolidated Total Debt as of such date to the Consolidated Adjusted EBITDA for the four consecutive Fiscal Quarters ending on or immediately prior to such date.
Senior leverage ratio - is the ratio of, as of any date, Consolidated Senior Debt as of such date to the Consolidated Adjusted EBITDA for the four consecutive Fiscal Quarters ending on or immediately prior to such date.
Reinsurance ratio - is the ratio (expressed as a percentage) of, as of any date of determination, of the aggregate amounts recoverable by the Company and its Restricted Subsidiaries from reinsurers divided by the sum of (i) policy and claim liabilities plus (ii) unearned premiums, in each case of the Company and its Restricted Subsidiaries determined in accordance with GAAP.
The following is a summary of the Facility's more significant financial covenants in effect at December 31, 2011:
Actual At | |||
Covenant | Covenant Requirement | December 31, 2011 | |
Fixed charge coverage ratio | not less than 1.25 | 4.50 | |
Total leverage ratio | not more than 3.50 | 2.45 | |
Senior leverage ratio | not more than 2.50 | 2.45 | |
Reinsurance ratio | not less than 60% | 75.0% |
15. Derivative Financial Instruments - Interest Rate Swap
In April 2011, the Company entered into a forward interest rate swap (the "Swap") with Wells Fargo Bank, N.A, pursuant to which the Company swapped the floating rate portion of its outstanding preferred trust securities to a fixed rate. The Swap commenced in June 2012 and expires in June 2017 and is designated as a cash flow hedge.
The following table summarizes the fair value (including accrued interest) and related outstanding notional amounts of derivative instruments and indicates where within the Consolidated Balance Sheets each is reported:
37
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Balance Sheet Location | At December 31, | ||||||||
2012 | 2011 | ||||||||
Derivatives designated as cash flow hedging instruments: | |||||||||
Interest rate swap - notional value | $ | 35,000 | $ | 35,000 | |||||
Fair value of the Swap | Other Liabilities | $ | (4,338 | ) | $ | (3,601 | ) | ||
Unrealized loss, net of tax, on the fair value of the Swap | AOCI | $ | (2,820 | ) | $ | (2,340 | ) | ||
Variable rate of the interest rate swap (1) | 0.31 | % | — | % | |||||
Fixed rate of the interest rate swap (1) | 3.47 | % | — | % |
(1) - The swap took effect in June 2012.
The following table summarizes the pretax impact of the interest rate swap designated as a cash flow hedge on the Consolidated Financial Statements for the following periods:
Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
(Loss) recognized in AOCI on the derivative-effective portion | $ | (611 | ) | $ | (3,601 | ) | $ | — | |||
(Loss) reclassified from AOCI into income-effective portion | $ | 126 | $ | — | $ | — | |||||
Gain (loss) recognized in income on the derivative-ineffective portion | $ | — | $ | — | $ | — |
The table below shows the estimated amount to be reclassified to earnings from AOCI during the next 12 months. These net losses reclassified into earnings are expected to primarily increase net interest expense related to the respective hedged item.
At | |||
December 31, 2012 | |||
Estimated loss to be reclassified to earnings from AOCI during the next 12 months | $ | 1,117 |
16. Stock-Based Compensation
At December 31, 2012, the Company has outstanding time-based stock options under its 2005 Plan and outstanding time- and performance-based stock options and restricted stock awards under its 2010 Plan. The 2005 Plan permits awards of (i) Incentive Stock Options, (ii) Non-qualified Stock Options, (iii) Stock Appreciation Rights, (iv) Restricted Stock and (v) Restricted Stock Units. The 2010 Plan permits awards of (i) Incentive Stock Options, (ii) Non-qualified Stock Options, (iii) Stock Appreciation Rights, (iv) Restricted Stock, (v) Other Stock-Based Awards and (vi) Performance-Based Compensation Awards. The following table details the 2005 Plan and the 2010 Plan at December 31, 2012:
2005 Plan | 2010 Plan | ||||
Date the plan was established | October 18, 2005 | December 13, 2010 | |||
Share permitted to be issued under the plan | 1,312,500 | 4,000,000 | |||
Maximum contractual term of grants under the plan (in years) | 10.0 | 10.0 | |||
Time-based stock options outstanding under the plan | 1,545,462 | 470,769 | |||
Performance-based stock options outstanding under the plan | — | 185,000 | |||
Time-based restricted stock awards under the plan | — | 103,000 | |||
Performance-based restricted stock awards outstanding under the plan | — | 80,861 |
38
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Stock Options
A summary of the Company's time- and performance-based stock option activity is presented below:
Time-Based | Performance-Based | ||||||||||||||||||||||||||
Options Outstanding | Weighted Average Exercise Price | Options Exercisable | Weighted Average Exercise Price | Options Outstanding(1) | Weighted Average Exercise Price | Options Exercisable | Weighted Average Exercise Price | ||||||||||||||||||||
Balance, January 1, 2011 | 1,955,792 | $ | 3.29 | 1,780,663 | $ | 3.00 | — | $ | — | — | $ | — | |||||||||||||||
Granted | 280,000 | 7.84 | — | — | — | — | — | — | |||||||||||||||||||
Vested | — | — | 148,705 | 5.78 | — | — | — | — | |||||||||||||||||||
Exercised | (322,061 | ) | 1.88 | (322,061 | ) | 1.88 | — | — | — | — | |||||||||||||||||
Canceled/forfeited | (20,000 | ) | 7.84 | — | — | — | — | — | — | ||||||||||||||||||
Balance, December 31, 2011 | 1,893,731 | $ | 4.15 | 1,607,307 | $ | 3.41 | — | $ | — | — | $ | — | |||||||||||||||
Granted | 125,000 | 7.97 | — | — | 185,000 | 8.00 | — | — | |||||||||||||||||||
Vested | — | — | 85,233 | 8.50 | — | — | — | — | |||||||||||||||||||
Exercised | (2,500 | ) | 7.84 | (2,500 | ) | 7.84 | — | — | — | — | |||||||||||||||||
Canceled/forfeited | — | — | — | — | — | — | — | — | |||||||||||||||||||
Balance, December 31, 2012 | 2,016,231 | $ | 4.38 | 1,690,040 | $ | 3.66 | 185,000 | $ | 8.00 | — | $ | — | |||||||||||||||
Weighted average remaining contractual term at December 31, 2012 (in years) | 5.0 | 4.2 | 9.5 | 0 |
(1) The performance-based stock options granted during the year ended December 31, 2012 will begin to vest equally over three years upon the Company's compensation committee determining that the Company has attained an Adjusted EBITDA of $46.0 million.
The following presents the Company's outstanding and exercisable time- and performance-based stock options by exercise price at December 31, 2012:
Options Outstanding | Options Exercisable | ||||||||||||||
Exercise Price | Option Shares Outstanding | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Option Shares Outstanding | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | |||||||||
$3.03 | 787,500 | 2.88 | $ | 3.03 | 787,500 | 2.88 | $ | 3.03 | |||||||
3.25 | 757,963 | 4.82 | 3.25 | 757,963 | 4.82 | 3.25 | |||||||||
7.84 | 257,500 | 8.50 | 7.84 | 80,214 | 8.50 | 7.84 | |||||||||
7.93 | 15,000 | 9.75 | 7.93 | — | — | — | |||||||||
7.97 | 110,000 | 9.67 | 7.97 | — | — | — | |||||||||
8.00 | 185,000 | 9.50 | 8.00 | — | — | — | |||||||||
11.00 | 88,268 | 7.96 | 11.00 | 64,363 | 7.96 | 11.00 | |||||||||
Totals | 2,201,231 | 5.35 | $ | 4.69 | 1,690,040 | 4.21 | $ | 3.66 |
Information on time- and performance-based stock options, vested and expected to vest, is as follows: | At | |||
December 31, 2012 | ||||
Number of shares vested and expected to vest | 2,188,170 | |||
Weighted average remaining contractual life (in years) | 5.3 | |||
Weighted average exercise price per option (in dollars) | $ | 4.66 | ||
Intrinsic value | $ | 9,427 |
39
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Additional information on time- and performance-based options granted, vested and exercised is presented below:
Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Weighted-average grant date fair value of stock options granted (in dollars) | $ | 2.80 | $ | 2.92 | $ | 3.18 | |||||
Total stock options granted (in shares) | 310,000 | 280,000 | 88,268 | ||||||||
Total fair value of stock options vested during the year | $ | 268 | $ | 268 | $ | 167 | |||||
Total intrinsic value of stock options exercised (1) | $ | — | $ | 2,920 | $ | 369 | |||||
Cash received from stock option exercises | $ | 20 | $ | 607 | $ | 117 | |||||
Tax benefits realized from exercised stock options | $ | — | $ | 45 | $ | 86 | |||||
Cash used to settle equity instruments granted under stock-based compensation awards | $ | — | $ | — | $ | — | |||||
New shares issued upon the exercise of stock options | 2,500 | 322,061 | 44,185 | ||||||||
Outstanding stock options issued outside of existing plans (in shares) | 272,338 | 272,338 | 296,724 |
(1) Calculated as the difference between the market value at the exercise date and the exercise price of the shares.
The weighted average assumptions used to estimate the fair values of all stock options granted is as follows:
Years Ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
Expected term (years) | 6.2 | 6.1 | 5.0 | |||||
Expected volatility | 34.34 | % | 33.95 | % | 32.71 | % | ||
Expected dividends | — | % | — | % | — | % | ||
Risk-free rate | 0.91 | % | 2.22 | % | 2.06 | % |
Restricted Stock Awards
A summary of the Company's time- and performance-based restricted stock award activity is presented below:
Time-Based | Performance-Based | ||||||||||||
Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | ||||||||||
Shares outstanding at January 1, 2011 | 60,000 | $ | 11.00 | 100,000 | $ | 11.00 | |||||||
Grants | 7,000 | 7.64 | — | — | |||||||||
Vests | (18,500 | ) | 10.36 | — | — | ||||||||
Forfeitures | (15,500 | ) | 10.90 | (19,139 | ) | 11.00 | |||||||
Shares outstanding at December 31, 2011 | 33,000 | 10.69 | 80,861 | 11.00 | |||||||||
Grants | 88,000 | 7.48 | — | — | |||||||||
Vests | (18,000 | ) | 10.43 | — | — | ||||||||
Forfeitures | — | — | — | — | |||||||||
Shares outstanding at December 31, 2012 | 103,000 | $ | 8.00 | 80,861 | $ | 11.00 |
Stock-based Compensation Expense
Total time- and performance-based stock-based compensation expense and the related income tax (benefit), as recognized on the Consolidated Statements of Income, is as follows:
Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Personnel costs | $ | 661 | $ | 593 | $ | 167 | |||||
Other operating expenses | 293 | 154 | 9 | ||||||||
Income tax benefit | (365 | ) | (286 | ) | (67 | ) | |||||
Net stock-based compensation expense | $ | 589 | $ | 461 | $ | 109 |
Additional information on total non-vested stock-based compensation is as follows: | At | ||||||
December 31, 2012 | |||||||
Stock Options | Restricted Stock Awards | ||||||
Unrecognized compensation cost related to non-vested awards | $ | 1,180 | $ | 1,039 | |||
Weighted-average recognition period (in years) | 2.7 | 4.7 |
40
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan ("ESPP"),which allows the Company to issue up to 1,000,000 shares of common stock to all eligible employees, including the Company's named executive officers, under the same offering and eligibility terms. The ESPP qualifies under Section 423 of the Internal Revenue Code and allows eligible employees to contribute, at their discretion, up to 10% of their payroll, up to $25,000 per year, to purchase up to a maximum of 3,500 shares of the Company's common stock per offering period. The purchase price of Fortegra's common stock is equal to 85% of the lesser of the fair market value of the closing stock price of Fortegra's common stock on either the first day of the offering period or the last day of the offering period. Each offering period has a duration of six months and begins on January 1st and July 1st of each year.
Information related to the Company's ESPP is as follows: | Years Ended December 31, | ||||||||||
2012 | 2011 | 2010 (1) | |||||||||
Common stock issued under the ESPP (in shares) | 53,511 | 10,167 | — | ||||||||
Weighted-average purchase price per share by participant in the ESPP | $ | 6.18 | $ | 5.68 | $ | — | |||||
Total cash proceeds received from the issuance of common shares under the ESPP | $ | 330 | $ | 100 | $ | — | |||||
ESPP compensation costs recognized | $ | 90 | $ | 15 | $ | — |
(1) The Company's ESPP began open enrollment in July 2011.
17. Share Repurchase Plan
Fortegra has an active share repurchase plan which allows the Company to purchase up to $10.0 million in total of the Company's common stock to be purchased from time to time through open market or private transactions. The plan was approved by the Board of Directors in November 2011 and provides for shares to be repurchased for general corporate purposes, which may include serving as a resource for funding potential acquisitions and employee benefit plans. The timing, price and quantity of purchases are at the discretion of Fortegra. The plan may be discontinued or suspended at any time and has no expiration date. None of the shares repurchased during the years ended December 31, 2012 and 2011, respectively, have been retired.
The following table shows the shares repurchased during the following periods:
Years Ended December 31, | |||||||
2012 | 2011 | ||||||
Shares repurchased during the period | 508,080 | 471,554 | |||||
Total cost of shares repurchased during the period | $ | 3,923 | $ | 2,552 | |||
Average price paid per share for shares purchased during the period | $ | 7.72 | $ | 5.41 |
From January 1, 2013 through March 29, 2013, the Company did not purchase any of its common stock under the share repurchase plan.
18. 401(k) Profit Sharing Plan
The Company has a 401(k) plan (the "401(k) Plan") available to employees meeting certain eligibility requirements. The 401(k)Plan allows employees to contribute, at their discretion, a percentage of their pre-tax annual compensation and allows for employees to select from various investment options based on their individual investment goals and risk tolerances. Under the 401(k) Plan, the Company will match 100% of each dollar of the employee contribution up to the maximum of 5% of the employee's annual compensation. The contributions of the 401(k) Plan are invested at the election of the employee in one or more investment options by a third party plan administrator. In July 2009, the Company suspended the matching contribution. The matching contribution was reinstated in January 2010 and subsequently suspended in August 2010.
The Company's matching contributions to the 401(k) Plan are as follows: | Years Ended December 31, | ||||||||||
2012 | 2011 | 2010 | |||||||||
401(k) matching contribution expense | $ | — | $ | — | $ | 568 |
19. 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 beneficiaries over a period of ten years commencing with the first year following retirement or death. As of December 31, 2012, there were no further payments required under the plan.
41
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
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 included in cash and cash equivalents and the corresponding deferred compensation obligation is included in the line item, "Accrued expenses, accounts payable and other liabilities," on the Consolidated Balance Sheets. Pursuant to U.S. GAAP, the portion of the rabbi trusts invested in shares of the Company has been reflected in the treasury stock balance on the Consolidated Balance Sheets at December 31, 2012 and 2011.
20. Income Taxes
The provision for income taxes consisted of the following: | At December 31, | ||||||||||
2012 | 2011 | 2010 | |||||||||
As Restated | As Restated | ||||||||||
Current | $ | 4,043 | $ | 5,419 | $ | 3,822 | |||||
Deferred | 4,252 | 1,721 | 4,337 | ||||||||
Income taxes | $ | 8,295 | $ | 7,140 | $ | 8,159 |
The reconciliation of the income tax expense at the federal statutory income tax rate of 35% is as follows for the:
Years Ended December 31, | ||||||||||||||||||||
2012 | 2011 - As Restated | 2010 - As Restated | ||||||||||||||||||
Amount | Percent of Pre-tax Income | Amount | Percent of Pre-tax Income | Amount | Percent of Pre-tax Income | |||||||||||||||
Income taxes at federal income tax rate | $ | 8,236 | 35.00 | % | $ | 7,168 | 35.00 | % | $ | 8,181 | 35.00 | % | ||||||||
Effect of: | ||||||||||||||||||||
Small life deduction | (444 | ) | (1.89 | ) | (375 | ) | (1.83 | ) | (465 | ) | (1.99 | ) | ||||||||
Non-deductible expenses | 51 | 0.22 | 267 | 1.30 | 179 | 0.77 | ||||||||||||||
Non-deductible preferred dividends | — | — | 105 | 0.51 | 301 | 1.29 | ||||||||||||||
Tax exempt interest | (123 | ) | (0.52 | ) | (120 | ) | (0.59 | ) | (117 | ) | (0.50 | ) | ||||||||
State taxes | 535 | 2.27 | 339 | 1.66 | 597 | 2.55 | ||||||||||||||
Goodwill amortization | — | — | — | — | (243 | ) | (1.04 | ) | ||||||||||||
Prior year tax true up | 98 | 0.42 | (506 | ) | (2.47 | ) | (647 | ) | (2.77 | ) | ||||||||||
Other, net | (58 | ) | (0.25 | ) | 262 | 1.28 | 373 | 1.60 | ||||||||||||
Income tax expense | $ | 8,295 | 35.25 | % | $ | 7,140 | 34.86 | % | $ | 8,159 | 34.91 | % |
The components of the Company's deferred taxes are as follows: | At December 31, | ||||||
2012 | 2011 | ||||||
Gross deferred tax assets | As Restated | ||||||
Unearned premiums | $ | 4,852 | $ | 4,825 | |||
Deferred revenue | 8,002 | 8,140 | |||||
Net operating loss carryforward | 516 | 1,413 | |||||
Unrealized loss on interest rate swap | 1,636 | 1,260 | |||||
Research credit | 671 | 676 | |||||
Unpaid claims | 146 | 634 | |||||
Deferred compensation | 483 | 248 | |||||
Bad debt allowance | 238 | 118 | |||||
Other deferred assets | 108 | 71 | |||||
Total gross deferred tax assets | 16,652 | 17,385 | |||||
Gross deferred tax liabilities | |||||||
Deferred acquisition costs | 20,250 | 19,235 | |||||
Other intangible assets | 14,218 | 14,170 | |||||
Advanced commissions | 4,204 | 2,759 | |||||
Depreciation on property and equipment | 5,246 | 4,642 | |||||
Unrealized gains on investments | 1,290 | 424 | |||||
Other basis differences in investments | 65 | 77 | |||||
Other deferred tax liabilities | 37 | 47 | |||||
Total gross deferred tax liabilities | 45,310 | 41,354 | |||||
Deferred income taxes, net | $ | 28,658 | $ | 23,969 |
42
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
At December 31, 2012, the Company had a net operating loss carry forward of $1.4 million, which is subject to certain limitations under IRC Section 382 and will begin to expire in 2019. The Company expects full utilization of the net operating loss carryforward by the end of 2013.
In addition, the Company has research and experimentation (research) tax credit carry forwards for federal and state income tax purposes in the amount of $0.5 million and $0.2 million, respectively. The federal research credit is also subject to certain limitations under IRC Section 382. The research credit carry forwards will begin to expire in 2019. As part of the valuation determinations of the subsidiary in which the research credit was generated, the Company recorded a $0.2 million liability against the research credit carryforward deferred tax asset.
The Company has reviewed its uncertain tax positions and management has concluded that there are no additional amounts required to be recorded in accordance with ASC 740-10.
As of December 31, 2012, the Company was under examination by the Internal Revenue Service ("IRS") for the 2009 and 2010 tax years. In February 2013, the IRS completed its field audit for those tax years and presented preliminary findings. The Company has agreed to those findings and paid $57.0 thousand, an amount considered immaterial to the consolidated group as of December 31, 2012. In March 2013, the Company received notice from the IRS that the audit report has been fully approved. The assessment will be expensed in the first quarter of 2013.
21. Fair Value of Financial Instruments
The carrying and fair values of financial instruments are as follows: | At | ||||||||||||||
December 31, 2012 | December 31, 2011 | ||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Financial assets: | As Restated | As Restated | |||||||||||||
Cash and cash equivalents | $ | 15,209 | $ | 15,209 | $ | 31,339 | $ | 31,339 | |||||||
Fixed maturity securities: | |||||||||||||||
Obligations of the U.S. Treasury and U.S. Government agencies | 23,178 | 23,178 | 26,360 | 26,360 | |||||||||||
Municipal securities | 17,041 | 17,041 | 17,992 | 17,992 | |||||||||||
Corporate securities | 70,008 | 70,008 | 47,472 | 47,472 | |||||||||||
Mortgage-backed securities | 289 | 289 | 1,298 | 1,298 | |||||||||||
Asset-backed securities | 125 | 125 | 387 | 387 | |||||||||||
Equity securities: | |||||||||||||||
Common stock - publicly traded | 42 | 42 | 39 | 39 | |||||||||||
Preferred stock - publicly traded | 5,107 | 5,107 | 52 | 52 | |||||||||||
Common stock - non-publicly traded | 58 | 58 | 114 | 114 | |||||||||||
Preferred stock - non-publicly traded | 1,013 | 1,013 | 1,014 | 1,014 | |||||||||||
Notes receivable | 11,290 | 11,290 | 3,603 | 3,603 | |||||||||||
Accounts and premiums receivable, net | 27,026 | 27,026 | 19,690 | 19,690 | |||||||||||
Other receivables | 13,511 | 13,511 | 9,465 | 9,465 | |||||||||||
Short-term investments | 1,222 | 1,222 | 1,070 | 1,070 | |||||||||||
Total financial assets | $ | 185,119 | $ | 185,119 | $ | 159,895 | $ | 159,895 | |||||||
Financial liabilities: | |||||||||||||||
Notes payable | $ | 89,438 | $ | 89,438 | $ | 73,000 | $ | 73,000 | |||||||
Preferred trust securities | 35,000 | 35,000 | 35,000 | 35,000 | |||||||||||
Interest rate swap | 4,338 | 4,338 | 3,601 | 3,601 | |||||||||||
Total financial liabilities | $ | 128,776 | $ | 128,776 | $ | 111,601 | $ | 111,601 |
43
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The Company's financial assets and liabilities accounted for at fair value by level within the fair value hierarchy are as follows:
At December 31, 2012 | Fair Value Measurements Using: | |||||||||||
Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||
Financial Assets: | ||||||||||||
Fixed maturity securities: | ||||||||||||
Obligations of the U.S. Treasury and U.S. Government agencies | $ | 23,178 | $ | — | $ | 23,178 | $ | — | ||||
Municipal securities | 17,041 | — | 17,041 | — | ||||||||
Corporate securities | 70,008 | — | 69,956 | 52 | ||||||||
Mortgage-backed securities | 289 | — | 289 | — | ||||||||
Asset-backed securities | 125 | — | 125 | — | ||||||||
Equity securities: | ||||||||||||
Common stock - publicly traded | 42 | — | 42 | — | ||||||||
Preferred stock - publicly traded | 5,107 | 5,107 | — | — | ||||||||
Common stock - non-publicly traded | 58 | — | — | 58 | ||||||||
Preferred stock - non-publicly traded | 1,013 | — | — | 1,013 | ||||||||
Short-term investments | 1,222 | 1,222 | — | — | ||||||||
Total assets | $ | 118,083 | $ | 6,329 | $ | 110,631 | $ | 1,123 | ||||
Financial Liabilities: | ||||||||||||
Interest rate swap | $ | 4,338 | $ | — | $ | 4,338 | $ | — |
At December 31, 2011 | Fair Value Measurements Using: | |||||||||||
Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||
Financial Assets: | ||||||||||||
Fixed maturity securities: | ||||||||||||
Obligations of the U.S. Treasury and U.S. Government agencies | $ | 26,360 | $ | — | $ | 26,360 | $ | — | ||||
Municipal securities | 17,992 | — | 17,992 | — | ||||||||
Corporate securities | 47,472 | — | 47,396 | 76 | ||||||||
Mortgage-backed securities | 1,298 | — | 1,298 | — | ||||||||
Asset-backed securities | 387 | — | 387 | — | ||||||||
Equity securities: | ||||||||||||
Common stock - publicly traded | 39 | 39 | — | — | ||||||||
Preferred stock - publicly traded | 52 | 52 | — | — | ||||||||
Common stock - non-publicly traded | 114 | — | — | 114 | ||||||||
Preferred stock - non-publicly traded | 1,014 | — | — | 1,014 | ||||||||
Short-term investments | 1,070 | 1,070 | — | — | ||||||||
Total Assets | $ | 95,798 | $ | 1,161 | $ | 93,433 | $ | 1,204 | ||||
Financial Liabilities: | ||||||||||||
Interest rate swap | $ | 3,601 | $ | — | $ | 3,601 | $ | — |
There were no transfers between Level 1 and Level 2 for the year ended December 31, 2012. For the year ended December 31, 2012, a single equity security was transferred from Level 3 to Level 2. This transfer occurred due to the availability of Level 2 pricing for the equity security, which was unavailable in prior periods. The Company's use of Level 3 unobservable inputs included 7 individual securities that accounted for 1.0% of total investments at December 31, 2012. The Company utilized an independent third party pricing service to value 5 of the Level 3 securities. The value of 2 equity securities in Level 3, which are non-publicly traded preferred stocks, were calculated by the Company. One of the equity securities, with a value of $1.0 million was valued by taking into account the strength of the issuer's parent company guaranteeing the dividend of the issuer. The second Level 3 equity security, with a value of $13.0 thousand was valued by estimating the total value of the Class-A shares outstanding by the issuer and a review of the company's audited financial statements. At December 31, 2011, the Company had 12 individual securities valued under Level 3 that accounted for 1.3% of total investments.
44
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The following table summarizes the changes in Level 3 assets measured at fair value: | For the Years Ended December 31, | ||||||
2012 | 2011 | ||||||
Beginning balance, January 1, | $ | 1,204 | $ | 1,425 | |||
Total investment gains or losses (realized/unrealized): | |||||||
Included in net income | — | 319 | |||||
Included in other comprehensive (loss) | (31 | ) | (120 | ) | |||
Sales | (47 | ) | (522 | ) | |||
Transfers (out of) into Level 3 | (3 | ) | 102 | ||||
Ending balance, December 31, | $ | 1,123 | $ | 1,204 |
22. Statutory Reporting and Insurance Subsidiaries Dividend Restrictions
The Company's 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 state of domicile. All dividends from subsidiaries were eliminated in the Consolidated Financial Statements. The following table sets forth the dividends paid to the Company by its insurance company subsidiaries for the following periods:
For the Years Ended December 31, | |||||||
2012 | 2011 | ||||||
Ordinary dividends | $ | 2,783 | $ | 6,956 | |||
Extraordinary dividends | — | 830 | |||||
Total dividends | $ | 2,783 | $ | 7,786 |
The following table details the combined statutory capital and surplus of the Company's insurance subsidiaries, the required minimum statutory capital and surplus, as required by the laws of the states in which they are domiciled and the combined amount available for ordinary dividends of the Company's insurance subsidiaries for the following periods:
At December 31, | |||||||
2012 | 2011 | ||||||
Combined statutory capital and surplus of the Company's insurance subsidiaries | $ | 53,885 | $ | 50,230 | |||
Required minimum statutory capital and surplus | $ | 15,300 | $ | 15,300 | |||
Amount available for ordinary dividends of the Company's insurance subsidiaries | $ | 4,500 | $ | 2,344 |
Under the NAIC's Risk-Based Capital Act of 1995, a company's RBC is calculated by applying certain risk factors to various asset, claim and reserve items. If a company's adjusted surplus falls below calculated RBC thresholds, regulatory intervention or oversight is required. The insurance subsidiaries' RBC levels, as calculated in accordance with the NAIC's RBC instructions, exceeded all RBC thresholds as of December 31, 2012 and 2011, respectively.
23. Commitments and Contingencies
Commitments
The Company, from time to time, may in the ordinary normal business enter into certain contractual obligations or commitments.
As part of the 2012 acquisition of ProtectCELL, the Company has a conditional commitment to provide up to $10.2 million of additional capital ("Additional Fortegra Capital Contributions") to ProtectCELL if the board of directors of ProtectCELL (the "PC Board") determines that ProtectCELL requires additional funds to support expansion and growth, or other appropriate business needs.
The Company is obligated to evaluate any such funding request received from the PC Board in good faith to determine whether in the Company's reasonable business judgment the requested capital should be contributed. Fortegra is not required to honor the funding request from the PC Board if it in good faith deems the request to be imprudent or unjustified.
The benefits of such additional funding would inure to the Company and to the non-controlling ownership interest of ProtectCell, in proportion to their respective ownership interests. However, in return for each $1,000 of Additional Fortegra Capital Contributions, the Fortegra Members shall receive one Series A Preferred Unit. Any unreturned Series A Preferred contribution is deducted from ProtectCELL's valuation in determining the option price.
45
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Contingencies
The Company is a 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 condition, results of operations or cash flows of the Company.
In the Payment Protection segment, the Company is currently a defendant in lawsuits that relate to marketing and/or pricing issues that involve claims for punitive, exemplary or extra-contractual damages in amounts substantially in excess of the covered claim. Such litigation includes Lawson v. Life of the South Insurance Co., which was filed on March 13, 2006, in the Superior Court of Muscogee County, Georgia, and later moved to the United States District Court for the Middle District of Georgia, Columbus Division. The allegations involve the Company's alleged duty to refund unearned premiums on credit insurance policies, even when the Company has not been informed of the payoff of the underlying finance contract. The action seeks an injunction requiring remedial action, as well as a variety of damages, including punitive damages and attorney fees and costs. The action was brought as a class action, however the Company's May 11, 2012 Motion to Strike or Dismiss Plaintiffs' Class Action Allegations, or in the Alternative, to Deny Class Certification was granted on September 28, 2012. Plaintiff's appeal of such ruling was denied on December 7, 2012. The merits discovery phase continues in the individual, underlying case.
Also in the Payment Protection segment, the Company is currently a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed on February 2, 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified on June 25, 2010. At issue is the duration or term of coverage under certain policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud. The action seeks compensatory and punitive damages, attorney fees and interest. The parties are currently involved in the merits discovery phase and discovery disputes have arisen. Plaintiffs filed a Motion for Sanctions on April 5, 2012 in connection with the Company's efforts to locate and gather certificates and other documents from the Company's agents. While the court did not award sanctions, it did order the Company to subpoena certain records from its agents. The Company filed an appeal of this order, which was denied on August 31, 2012. The Company is currently appealing the denial in the Kentucky Supreme Court. To date, no trial date has been set.
In the Motor Clubs business in the Payment Protection segment, the Company is currently a Defendant in Dill and Thurman v. Continental Car Club, Inc. and Fortegra Financial Corp., which was filed on August 18, 2011 in the Tennessee Chancery Court, Rhea County. The Plaintiffs assert claims for breach of their employment and non-competition agreements, among other claims, and seek injunctive relief and damages in connection with the Company's purchase of Continental Car Club, Inc. from Plaintiffs in May 2010. The trial court ruled in November 2012 that Plaintiffs resigned for good reason from the Company, the result of which is that the Company can enforce the non-competition and non-solicitation provisions contained in the Plaintiffs' employment agreements for a period of up to two years, but that the Company is required to pay Plaintiffs base salary and accrued benefits during such period. As of December 31, 2012, the value of such salary and benefits is $0.4 million; the value would increase over time through the two-year period to an estimated maximum of approximately $0.8 million. The Company has filed for an appeal of this ruling and will vigorously defend its position. The Company believes that it is not probable that the judgment will be upheld through the appeal process, and that reasonably possible outcomes range from $0 to the amount of the judgment. Accordingly, the Company has not recorded a charge with respect to this loss contingency as of December 31, 2012.
The Company considers such litigation customary in its lines of business. In management's opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position, results of operations or cash flows of the Company. 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. Loss contingencies may be taken as developments warrant, although such amounts are not reasonably estimable at this time.
24. Segment Results
The Company conducts business through three business segments: (i) Payment Protection; (ii) BPO; and (iii) Brokerage. The revenue for each segment is presented to reflect the operating characteristics of the segment. The Company allocates certain revenues and expenses to the segments. These items consist primarily of corporate-related income, transaction related costs, executive stock compensation and other overhead expenses. Segment assets are not presented to the Company's chief operating decision maker for operational decision-making and therefore are not disclosed in the accompanying table.
The Company measures the profitability of its business segments with the allocation of Corporate revenues and expenses and without taking into account amortization, depreciation, interest expense and income taxes. The Company refers to this financial performance measure as segment EBITDA (earnings before interest, taxes, depreciation and amortization). The Company's financial measure of segment EBITDA meets the definition of a Non-GAAP financial measure and is not a recognized term under U.S. GAAP, nor is it an alternative to the U.S. GAAP financial measures presented in this Form 10-K. The Non-GAAP financial measure in this Form 10-K should be used in addition to, but not as a substitute for, the U.S. GAAP financial measures presented elsewhere in this Form 10-K.
46
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
The Company believes that this Non-GAAP financial measure provides useful information to management, analysts and investors regarding financial and business trends relating to the Company's results of operations and financial condition. The variability of the Company's segment EBITDA is significantly affected by segment net revenues because a large portion of the Company's operating expenses are fixed. The Company's industry peers may also provide similar supplemental Non-GAAP financial measures, although they may not use the same or comparable terminology and may not make identical adjustments.
The following table presents the Company's business segment results:
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
As Restated | As Restated | ||||||||||
Segment Net Revenue | |||||||||||
Payment Protection | |||||||||||
Service and administrative fees | $ | 70,365 | $ | 76,244 | $ | 34,568 | |||||
Ceding commission | 34,825 | 29,495 | 28,767 | ||||||||
Net investment income | 3,068 | 3,368 | 4,073 | ||||||||
Net realized investment gains (losses) | 3 | 4,193 | 650 | ||||||||
Other income | 269 | 170 | 230 | ||||||||
Net earned premium | 127,625 | 115,503 | 111,805 | ||||||||
Net losses and loss adjustment expenses | (40,219 | ) | (37,949 | ) | (36,035 | ) | |||||
Member benefit claims | (4,642 | ) | (4,409 | ) | (466 | ) | |||||
Commissions | (128,741 | ) | (126,918 | ) | (92,646 | ) | |||||
Total Payment Protection Net Revenue | 62,553 | 59,697 | 50,946 | ||||||||
BPO | 18,424 | 15,584 | 17,069 | ||||||||
Brokerage | |||||||||||
Brokerage commissions and fees | 35,306 | 34,396 | 24,620 | ||||||||
Service and administrative fees | 1,761 | 2,636 | 4,617 | ||||||||
Total Brokerage | 37,067 | 37,032 | 29,237 | ||||||||
Total segment net revenue | 118,044 | 112,313 | 97,252 | ||||||||
Operating Expenses | |||||||||||
Payment Protection | 36,420 | 33,514 | 25,126 | ||||||||
BPO | 14,227 | 11,598 | 10,002 | ||||||||
Brokerage (1) | 28,355 | 29,289 | 23,529 | ||||||||
Corporate | — | 1,763 | 2,130 | ||||||||
Total operating expenses | 79,002 | 76,164 | 60,787 | ||||||||
EBITDA | |||||||||||
Payment Protection | 26,133 | 26,183 | 25,820 | ||||||||
BPO | 4,197 | 3,986 | 7,067 | ||||||||
Brokerage (1) | 8,712 | 7,743 | 5,708 | ||||||||
Corporate | — | (1,763 | ) | (2,130 | ) | ||||||
Total EBITDA | 39,042 | 36,149 | 36,465 | ||||||||
Depreciation and Amortization | |||||||||||
Payment Protection | 3,590 | 4,205 | 2,352 | ||||||||
BPO | 2,290 | 1,124 | 598 | ||||||||
Brokerage | 3,006 | 2,700 | 1,678 | ||||||||
Total depreciation and amortization | 8,886 | 8,029 | 4,628 | ||||||||
Interest Expense | |||||||||||
Payment Protection | 4,146 | 4,649 | 7,197 | ||||||||
BPO | 1,035 | 419 | 433 | ||||||||
Brokerage | 1,443 | 2,573 | 834 | ||||||||
Total interest expense | 6,624 | 7,641 | 8,464 | ||||||||
Income before income taxes and non-controlling interests |
47
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
As Restated | As Restated | ||||||||||
Payment Protection | 18,397 | 17,329 | 16,271 | ||||||||
BPO | 872 | 2,443 | 6,036 | ||||||||
Brokerage (1) | 4,263 | 2,470 | 3,196 | ||||||||
Corporate | — | (1,763 | ) | (2,130 | ) | ||||||
Total income before income taxes and non-controlling interests | 23,532 | 20,479 | 23,373 | ||||||||
Income taxes | 8,295 | 7,140 | 8,159 | ||||||||
Less: net income (loss) attributable to non-controlling interests | 72 | (170 | ) | 20 | |||||||
Net income | $ | 15,165 | $ | 13,509 | $ | 15,194 |
(1) - Includes loss on sale of subsidiary of $477 for the year ended December 31, 2011.
The following table reconciles segment information to the Company's Consolidated Statements of Income and provides a summary of other key financial information for each segment:
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Years Ended December 31, | ||||||||||
2012 | 2011 | 2010 | |||||||||
As Restated | As Restated | ||||||||||
Segment Net Revenue | |||||||||||
Payment Protection | $ | 62,553 | $ | 59,697 | $ | 50,946 | |||||
BPO | 18,424 | 15,584 | 17,069 | ||||||||
Brokerage | 37,067 | 37,032 | 29,237 | ||||||||
Segment net revenues | 118,044 | 112,313 | 97,252 | ||||||||
Net losses and loss adjustment expenses | 40,219 | 37,949 | 36,035 | ||||||||
Member benefit claims | 4,642 | 4,409 | 466 | ||||||||
Commissions | 128,741 | 126,918 | 92,646 | ||||||||
Total segment revenue | 291,646 | 281,589 | 226,399 | ||||||||
Operating Expenses | |||||||||||
Payment Protection | 36,420 | 33,514 | 25,126 | ||||||||
BPO | 14,227 | 11,598 | 10,002 | ||||||||
Brokerage (1) | 28,355 | 29,289 | 23,529 | ||||||||
Corporate | — | 1,763 | 2,130 | ||||||||
Total operating expenses | 79,002 | 76,164 | 60,787 | ||||||||
Net losses and loss adjustment expenses | 40,219 | 37,949 | 36,035 | ||||||||
Member benefit claims | 4,642 | 4,409 | 466 | ||||||||
Commissions | 128,741 | 126,918 | 92,646 | ||||||||
Total operating expenses before depreciation, amortization and interest expense | 252,604 | 245,440 | 189,934 | ||||||||
EBITDA | |||||||||||
Payment Protection | 26,133 | 26,183 | 25,820 | ||||||||
BPO | 4,197 | 3,986 | 7,067 | ||||||||
Brokerage (1) | 8,712 | 7,743 | 5,708 | ||||||||
Corporate | — | (1,763 | ) | (2,130 | ) | ||||||
Total EBITDA | 39,042 | 36,149 | 36,465 | ||||||||
Depreciation and amortization | |||||||||||
Payment Protection | 3,590 | 4,205 | 2,352 | ||||||||
BPO | 2,290 | 1,124 | 598 |
48
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Years Ended December 31, | ||||||||||
2012 | 2011 | 2010 | |||||||||
As Restated | As Restated | ||||||||||
Brokerage | 3,006 | 2,700 | 1,678 | ||||||||
Total depreciation and amortization | 8,886 | 8,029 | 4,628 | ||||||||
Interest Expense | |||||||||||
Payment Protection | 4,146 | 4,649 | 7,197 | ||||||||
BPO | 1,035 | 419 | 433 | ||||||||
Brokerage | 1,443 | 2,573 | 834 | ||||||||
Total interest expense | 6,624 | 7,641 | 8,464 | ||||||||
Income (loss) before income taxes and non-controlling interests | |||||||||||
Payment Protection | 18,397 | 17,329 | 16,271 | ||||||||
BPO | 872 | 2,443 | 6,036 | ||||||||
Brokerage (1) | 4,263 | 2,470 | 3,196 | ||||||||
Corporate | — | (1,763 | ) | (2,130 | ) | ||||||
Total income before income taxes and non-controlling interests | 23,532 | 20,479 | 23,373 | ||||||||
Income taxes | 8,295 | 7,140 | 8,159 | ||||||||
Less: net income (loss) attributable to non-controlling interests | 72 | (170 | ) | 20 | |||||||
Net income | $ | 15,165 | $ | 13,509 | 15,194 |
(1) - Includes loss on sale of subsidiary of $477 for the year ended December 31, 2011.
25. Related Party Transactions
In conjunction with the December 31, 2012 acquisition of ProtectCELL, the Company assumed an office space lease between ProtectCELL and 39500 High Pointe, LLC, ("High Pointe"). The ownership of High Pointe includes three members who were the founding members and are currently employees of ProtectCELL. The Company did not make any lease payments to High Pointe for the year ended December 31, 2012.
In addition, ProtectCELL holds a $6.1 million note receivable carrying an interest rate of 8.00% from High Pointe, which is fully secured by a mortgage on the office building owned by High Pointe. For the year ending December 31, 2012, the Company did not receive payments from High Pointe on the note receivable.
An executive officer of ProtectCELL owns multiple wireless retail locations, which sell ProtectCELL protection plans to wireless retail customers. For the year ending December 31, 2012, the Company did not record income related to this related party arrangement.
In conjunction with the December 31, 2012 acquisition of 4Warranty, the Company assumed an office space lease between 4Warranty and Source International Incorporated ("Source"), effective January 1, 2013. The ownership of Source is comprised of two individuals who have consulting relationships with the Company. The Company did not make any lease payments to Source for the year ended December 31, 2012.
In January 2012, the Company recorded a receivable due from an officer of the Company relating to the 2010 acquisition of South Bay Acceptance Corporation, which has a balance of $0.1 million at December 21, 2012 and 2011, respectively.
In December 2011, the Company entered into an information technology support services agreement (the "IT Agreement") with a company for which a member serving on the Company's Board of Directors also serves on the board of the company receiving the information support services. The IT Agreement has no set term and calls for a total of $0.3 million plus reimbursement of expenses to be received by the Company over the duration of the agreement.
In December 2011, the Company entered into a marketing and referral agreement (the "Marketing Agreement") with a company in which a member serving on the Company's Board of Directors also serves on the board of the company providing the marketing services (the "Marketer"). The Marketing Agreement has a five year term and requires the Company to pay the Marketer a per account fee per month based on the number of enrolled customers the Marketer obtains for the Company.
49
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
In connection with the Summit Partners acquisition of the Company on June 20, 2007, $20.0 million of subordinated debentures were issued to affiliates of Summit Partners, a related party, and reported in the notes payable line of the Consolidated Balance Sheets. The subordinated debentures had an original maturity of June 20, 2012, which was subsequently amended to mature in June 2013, and bore interest at 14% per annum on the principal amount of such subordinated debentures, payable quarterly. In December 2010, the Company paid off the entire $20.0 million of outstanding subordinated debentures for $20.6 million, which included accrued but unpaid interest to the redemption date.
The following table details the amounts recorded on the Company's Consolidated Balance Sheets and Consolidated Statements of Income resulting from related party transactions:
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Income recorded by the Company from related parties | $ | 218 | $ | — | $ | — | |||||
Related party interest expense | $ | — | $ | — | $ | 2,769 | |||||
At | |||||||||||
December 31, 2012 | December 31, 2011 | ||||||||||
Accounts receivable from related parties | $ | — | $ | 125 | |||||||
Notes receivable from related parties | $ | 6,269 | $ | — |
26. Subsequent Events
Subsequent events have been measured through the date on which the Consolidated Financial Statements were filed. Management has determined that the following events merit disclosure as subsequent events:
Stock-Based Compensation Awards
On January 1, 2013, the Company granted 228,981 performance-based stock options and 76,326 performance-based restricted stock awards under the Company's Long-Term Incentive Plan ("LTIP").
The performance-based awards will vest, if at all, should the Company achieves three-year performance goals on or before December 31, 2015 for (i) net revenue (Compound Annual Growth Rate), (ii) earnings growth (Net Income) and (iii) profitable growth (Return on Average Equity). The performance metrics are equally weighted such that achievement of any one target results in vesting of one-third of the total equity award. If any of the target(s) are not attained by December 31, 2015, the award(s) associated with the unattained targets will be canceled.
In February 2013, the Company granted a total of 75,000 time-based restricted stock awards, equally distributed, to five of its Directors. The restricted stock vests equally on each of the three anniversaries of the grant date.
American Taxpayer Relief Act of 2012
On January 2, 2013, U.S. tax law was enacted which extends, through 2013, several expired or expiring temporary business tax provisions. The Company is still quantifying the impact of this law change; however, it is not expected to have a material impact on the Company's Consolidated Financial Statements.
Consolidation of Operations Plan
As disclosed on January 18, 2013 in the Company's Current Report on Form 8-K, effective January 14, 2013, the Company committed to a plan to consolidate the Company's fulfillment, claims administration and information technology functions for all its insurance related products (the "Plan"). Prior to the Plan, such functions resided in the Company's individual business units. The decision is part of the Company's efforts to streamline its operations, focus its resources and provide first in class service to its customers. When fully implemented, approximately 40 employee and contract positions will be eliminated.
Acquisition of Response Indemnity Company of California
On February 1, 2013, the Company acquired 100% of the outstanding stock of Response Indemnity Company of California ("RICC"), from subsidiaries of the Kemper Corporation ("Kemper") for $4.8 million. RICC is a property/casualty insurance company domiciled and licensed in California. RICC has, at the time of purchase, approximately $4.2 million in capital and surplus and no policies in
50
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
force. All remaining claim liabilities for previously issued policies are fully reinsured by Kemper's subsidiary, Trinity Universal Insurance Company.
Related Party Note Receivable Payoff
On March 15, 2013, the Company's subsidiary ProtectCELL, received $6.1 million representing the full payoff of the outstanding balance of the note receivable from High Pointe.
27. Summarized Quarterly Information (Unaudited)
The quarters ending March 31, 2012, June 30, 2012 and September 30, 2012 and the quarters ending March 31, 2011, June 30, 2011, September 30, 2011 and December 31, 2011 presented in the tables below have been restated as discussed in the Note, "Restatement," of the Consolidated Financial Statements and have been adjusted to reflect the retrospective adoption of ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. See the Note, "Quarterly Information - Restated (Unaudited)," of the Notes to Consolidated Financial Statements for additional information on the line items impacted for the for the above noted periods.
2012 | |||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
As Restated | As Restated | As Restated | |||||||||||||
Revenues | $ | 71,139 | $ | 70,313 | $ | 76,376 | $ | 70,747 | |||||||
Net investment income | 743 | 732 | 744 | 849 | |||||||||||
Net realized (losses) gains on the sale of investments | (3 | ) | 13 | (16 | ) | 9 | |||||||||
Total revenues | 71,879 | 71,058 | 77,104 | 71,605 | |||||||||||
Total expenses | 66,560 | 64,991 | 70,654 | 65,909 | |||||||||||
Income before income taxes and non-controlling interest | 5,319 | 6,067 | 6,450 | 5,696 | |||||||||||
Income taxes | 1,887 | 2,108 | 2,397 | 1,903 | |||||||||||
Income before non-controlling interest | 3,432 | 3,959 | 4,053 | 3,793 | |||||||||||
Less: net income attributable to non-controlling interest | 18 | 15 | 29 | 10 | |||||||||||
Net income | $ | 3,414 | $ | 3,944 | $ | 4,024 | $ | 3,783 | |||||||
Earnings per share: | |||||||||||||||
Basic | $ | 0.17 | $ | 0.20 | $ | 0.21 | $ | 0.19 | |||||||
Diluted | $ | 0.16 | $ | 0.19 | $ | 0.20 | $ | 0.18 | |||||||
Weighted average common shares outstanding | |||||||||||||||
Basic | 19,904,819 | 19,705,276 | 19,531,694 | 19,507,733 | |||||||||||
Diluted | 20,739,196 | 20,632,233 | 20,463,238 | 20,507,329 |
2011 | |||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
As Restated | As Restated | As Restated | As Restated | ||||||||||||
Revenues | $ | 65,736 | $ | 64,146 | $ | 71,285 | $ | 72,861 | |||||||
Net investment income | 941 | 894 | 801 | 732 | |||||||||||
Net realized gains on the sale of investments | 95 | 1,132 | 1,196 | 1,770 | |||||||||||
Total revenues | 66,772 | 66,172 | 73,282 | 75,363 | |||||||||||
Total expenses | 62,018 | 64,130 | 67,075 | 67,887 | |||||||||||
Income before income taxes and non-controlling interest | 4,754 | 2,042 | 6,207 | 7,476 | |||||||||||
Income taxes | 1,609 | 750 | 2,209 | 2,572 | |||||||||||
Income before non-controlling interest | 3,145 | 1,292 | 3,998 | 4,904 | |||||||||||
Less: net (loss) income attributable to non-controlling interest | (174 | ) | 2 | 1 | 1 | ||||||||||
Net income | $ | 3,319 | $ | 1,290 | $ | 3,997 | $ | 4,903 | |||||||
Earnings per share: | |||||||||||||||
Basic | $ | 0.16 | $ | 0.06 | $ | 0.20 | $ | 0.24 | |||||||
Diluted | $ | 0.15 | $ | 0.06 | $ | 0.19 | $ | 0.24 | |||||||
Weighted average common shares outstanding | |||||||||||||||
Basic | 20,464,592 | 20,510,254 | 20,404,441 | 20,343,038 | |||||||||||
Diluted | 21,668,333 | 21,592,418 | 21,214,365 | 20,955,690 |
51
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
28. Quarterly Information - Restated (Unaudited)
The following tables present the Company's restated quarterly information for the quarters ending March 31, 2012, June 30, 2012 and September 30, 2012 and for the quarters ending March 31, June 30, September 30, and December 31, 2011 and 2010, respectively.
Adjustments in the 2012 and 2011 periods to service and administrative fees, member benefit claims, and commissions represent the effects of restatements for the errors in Motor Clubs revenue presentation and revenue recognition as discussed in Note "Restatement" of the Notes to Consolidated Financial Statements, unless otherwise noted.
Adjustments in the 2010 periods to service and administrative fees, member benefit claims, and commissions represent the effects of restatements for the errors in Motor Clubs revenue presentation, as discussed in Note "Restatement".
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
March 31, 2012 | June 30, 2012 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Revenues: | |||||||||||||||||||
Service and administrative fees | $ | 9,340 | $ | 13,171 | $ | 22,511 | $ | 9,394 | $ | 12,392 | $ | 21,786 | |||||||
Brokerage commissions and fees | 9,520 | — | 9,520 | 9,364 | — | 9,364 | |||||||||||||
Ceding commission | 7,064 | — | 7,064 | 7,210 | — | 7,210 | |||||||||||||
Net investment income | 743 | — | 743 | 732 | — | 732 | |||||||||||||
Net realized investment (losses) gains | (3 | ) | — | (3 | ) | 13 | — | 13 | |||||||||||
Net earned premium | 31,972 | — | 31,972 | 31,905 | — | 31,905 | |||||||||||||
Other income | 72 | — | 72 | 48 | — | 48 | |||||||||||||
Total revenues | 58,708 | 13,171 | 71,879 | 58,666 | 12,392 | 71,058 | |||||||||||||
Expenses: | |||||||||||||||||||
Net losses and loss adjustment expenses | 11,266 | — | 11,266 | 9,576 | — | 9,576 | |||||||||||||
Member benefit claims | — | 1,303 | 1,303 | — | 1,098 | 1,098 | |||||||||||||
Commissions | 20,039 | 11,949 | 31,988 | 19,892 | 11,390 | 31,282 | |||||||||||||
Personnel costs | 11,392 | — | 11,392 | 12,367 | — | 12,367 | |||||||||||||
Other operating expenses | 6,739 | — | 6,739 | 6,937 | — | 6,937 | |||||||||||||
Depreciation and amortization | 738 | — | 738 | 975 | — | 975 | |||||||||||||
Amortization of intangibles | 1,482 | — | 1,482 | 1,166 | — | 1,166 | |||||||||||||
Interest expense | 1,652 | — | 1,652 | 1,590 | — | 1,590 | |||||||||||||
Total expenses | 53,308 | 13,252 | 66,560 | 52,503 | 12,488 | 64,991 | |||||||||||||
Income before income taxes and non-controlling interests | 5,400 | (81 | ) | 5,319 | 6,163 | (96 | ) | 6,067 | |||||||||||
Income taxes | 1,919 | (32 | ) | 1,887 | 2,146 | (38 | ) | 2,108 | |||||||||||
Income before non-controlling interests | 3,481 | (49 | ) | 3,432 | 4,017 | (58 | ) | 3,959 | |||||||||||
Less: net income attributable to non-controlling interests | 18 | — | 18 | 15 | — | 15 | |||||||||||||
Net income | $ | 3,463 | $ | (49 | ) | $ | 3,414 | $ | 4,002 | $ | (58 | ) | $ | 3,944 | |||||
Earnings per share: | |||||||||||||||||||
Basic | $ | 0.17 | $ | — | $ | 0.17 | $ | 0.20 | $ | — | $ | 0.20 | |||||||
Diluted | $ | 0.17 | $ | (0.01 | ) | $ | 0.16 | $ | 0.19 | $ | — | $ | 0.19 | ||||||
Weighted average common shares outstanding: | |||||||||||||||||||
Basic | 19,904,819 | 19,904,819 | 19,705,276 | 19,705,276 | |||||||||||||||
Diluted | 20,739,196 | 20,739,196 | 20,632,233 | 20,632,233 |
52
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | |||||||||
September 30, 2012 | |||||||||
As Previously Reported | Adjustment | As Restated | |||||||
Revenues: | |||||||||
Service and administrative fees | $ | 10,056 | $ | 12,842 | $ | 22,898 | |||
Brokerage commissions and fees | 8,411 | — | 8,411 | ||||||
Ceding commission | 11,122 | — | 11,122 | ||||||
Net investment income | 744 | — | 744 | ||||||
Net realized investment (losses) | (16 | ) | — | (16 | ) | ||||
Net earned premium | 33,893 | — | 33,893 | ||||||
Other income | 52 | — | 52 | ||||||
Total revenues | 64,262 | 12,842 | 77,104 | ||||||
Expenses: | |||||||||
Net losses and loss adjustment expenses | 11,430 | — | 11,430 | ||||||
Member benefit claims | — | 1,157 | 1,157 | ||||||
Commissions | 21,548 | 11,829 | 33,377 | ||||||
Personnel costs | 12,708 | — | 12,708 | ||||||
Other operating expenses | 7,959 | — | 7,959 | ||||||
Depreciation and amortization | 871 | — | 871 | ||||||
Amortization of intangibles | 1,127 | — | 1,127 | ||||||
Interest expense | 2,025 | — | 2,025 | ||||||
Total expenses | 57,668 | 12,986 | 70,654 | ||||||
Income before income taxes and non-controlling interests | 6,594 | (144 | ) | 6,450 | |||||
Income taxes | 2,455 | (58 | ) | 2,397 | |||||
Income before non-controlling interests | 4,139 | (86 | ) | 4,053 | |||||
Less: net income attributable to non-controlling interests | 29 | — | 29 | ||||||
Net income | $ | 4,110 | $ | (86 | ) | $ | 4,024 | ||
Earnings per share: | |||||||||
Basic | $ | 0.21 | $ | — | $ | 0.21 | |||
Diluted | $ | 0.20 | $ | — | $ | 0.20 | |||
Weighted average common shares outstanding: | |||||||||
Basic | 19,531,694 | 19,531,694 | |||||||
Diluted | 20,463,238 | 20,463,238 |
53
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
March 31, 2011 | June 30, 2011 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Revenues: | |||||||||||||||||||
Service and administrative fees | $ | 9,116 | $ | 12,076 | $ | 21,192 | $ | 8,800 | $ | 12,321 | $ | 21,121 | |||||||
Brokerage commissions and fees | 7,867 | — | 7,867 | 9,208 | — | 9,208 | |||||||||||||
Ceding commission | 8,158 | — | 8,158 | 6,243 | — | 6,243 | |||||||||||||
Net investment income | 941 | — | 941 | 894 | — | 894 | |||||||||||||
Net realized investment gains | 95 | — | 95 | 1,132 | — | 1,132 | |||||||||||||
Net earned premium | 28,437 | — | 28,437 | 27,536 | — | 27,536 | |||||||||||||
Other income | 82 | — | 82 | 38 | — | 38 | |||||||||||||
Total revenues | 54,696 | 12,076 | 66,772 | 53,851 | 12,321 | 66,172 | |||||||||||||
Expenses: | |||||||||||||||||||
Net losses and loss adjustment expenses | 9,373 | — | 9,373 | 9,251 | — | 9,251 | |||||||||||||
Member benefit claims | — | 867 | 867 | — | 1,309 | 1,309 | |||||||||||||
Commissions | 18,517 | 11,389 | 29,906 | 17,323 | 11,404 | 28,727 | |||||||||||||
Personnel costs | 10,992 | — | 10,992 | 11,428 | — | 11,428 | |||||||||||||
Other operating expenses | 7,214 | — | 7,214 | 9,298 | — | 9,298 | |||||||||||||
Depreciation and amortization | 583 | — | 583 | 814 | — | 814 | |||||||||||||
Amortization of intangibles | 1,052 | — | 1,052 | 1,378 | — | 1,378 | |||||||||||||
Interest expense | 2,031 | — | 2,031 | 1,925 | — | 1,925 | |||||||||||||
Total expenses | 49,762 | 12,256 | 62,018 | 51,417 | 12,713 | 64,130 | |||||||||||||
Income before income taxes and non-controlling interests | 4,934 | (180 | ) | 4,754 | 2,434 | (392 | ) | 2,042 | |||||||||||
Income taxes | 1,681 | (72 | ) | 1,609 | 907 | (157 | ) | 750 | |||||||||||
Income before non-controlling interests | 3,253 | (108 | ) | 3,145 | 1,527 | (235 | ) | 1,292 | |||||||||||
Less: net (loss) income attributable to non-controlling interests | (174 | ) | — | (174 | ) | 2 | — | 2 | |||||||||||
Net income | $ | 3,427 | $ | (108 | ) | $ | 3,319 | $ | 1,525 | $ | (235 | ) | $ | 1,290 | |||||
Earnings per share: | |||||||||||||||||||
Basic | $ | 0.17 | $ | (0.01 | ) | $ | 0.16 | $ | 0.07 | $ | (0.01 | ) | $ | 0.06 | |||||
Diluted | $ | 0.16 | $ | (0.01 | ) | $ | 0.15 | $ | 0.07 | $ | (0.01 | ) | $ | 0.06 | |||||
Weighted average common shares outstanding: | |||||||||||||||||||
Basic | 20,464,592 | 20,464,592 | 20,510,254 | 20,510,254 | |||||||||||||||
Diluted | 21,668,333 | 21,668,333 | 21,592,418 | 21,592,418 |
54
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
September 30, 2011 | December 31, 2011 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Revenues: | |||||||||||||||||||
Service and administrative fees | $ | 10,125 | $ | 16,831 | $ | 26,956 | $ | 10,159 | $ | 15,036 | $ | 25,195 | |||||||
Brokerage commissions and fees | 8,611 | — | 8,611 | 8,710 | — | 8,710 | |||||||||||||
Ceding commission | 7,027 | — | 7,027 | 8,067 | — | 8,067 | |||||||||||||
Net investment income | 801 | — | 801 | 732 | — | 732 | |||||||||||||
Net realized investment gains | 1,196 | — | 1,196 | 1,770 | — | 1,770 | |||||||||||||
Net earned premium | 28,673 | — | 28,673 | 30,857 | — | 30,857 | |||||||||||||
Other income | 18 | — | 18 | 32 | — | 32 | |||||||||||||
Total revenues | 56,451 | 16,831 | 73,282 | 60,327 | 15,036 | 75,363 | |||||||||||||
Expenses: | |||||||||||||||||||
Net losses and loss adjustment expenses | 9,714 | — | 9,714 | 9,611 | — | 9,611 | |||||||||||||
Member benefit claims | — | 945 | 945 | — | 1,288 | 1,288 | |||||||||||||
Commissions | 17,926 | 16,011 | 33,937 | 20,465 | 13,883 | 34,348 | |||||||||||||
Personnel costs | 10,945 | — | 10,945 | 11,182 | — | 11,182 | |||||||||||||
Other operating expenses | 7,267 | — | 7,267 | 7,361 | — | 7,361 | |||||||||||||
Depreciation and amortization | 886 | — | 886 | 794 | — | 794 | |||||||||||||
Amortization of intangibles | 998 | — | 998 | 1,524 | — | 1,524 | |||||||||||||
Interest expense | 1,906 | — | 1,906 | 1,779 | — | 1,779 | |||||||||||||
Loss on sale of subsidiary | 477 | — | 477 | — | — | — | |||||||||||||
Total expenses | 50,119 | 16,956 | 67,075 | 52,716 | 15,171 | 67,887 | |||||||||||||
Income before income taxes and non-controlling interests | 6,332 | (125 | ) | 6,207 | 7,611 | (135 | ) | 7,476 | |||||||||||
Income taxes | 2,259 | (50 | ) | 2,209 | 2,626 | (54 | ) | 2,572 | |||||||||||
Income before non-controlling interests | 4,073 | (75 | ) | 3,998 | 4,985 | (81 | ) | 4,904 | |||||||||||
Less: net income attributable to non-controlling interests | 1 | — | 1 | 1 | — | 1 | |||||||||||||
Net income | $ | 4,072 | $ | (75 | ) | $ | 3,997 | $ | 4,984 | $ | (81 | ) | $ | 4,903 | |||||
Earnings per share: | |||||||||||||||||||
Basic | $ | 0.20 | $ | — | $ | 0.20 | $ | 0.24 | $ | — | $ | 0.24 | |||||||
Diluted | $ | 0.19 | $ | — | $ | 0.19 | $ | 0.24 | $ | — | $ | 0.24 | |||||||
Weighted average common shares outstanding: | |||||||||||||||||||
Basic | 20,404,441 | 20,404,441 | 20,343,038 | 20,343,038 | |||||||||||||||
Diluted | 21,214,365 | 21,214,365 | 20,955,690 | 20,955,690 |
55
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
March 31, 2010 | June 30, 2010 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Revenues: | |||||||||||||||||||
Service and administrative fees | $ | 7,975 | $ | — | $ | 7,975 | $ | 8,843 | $ | 3,082 | $ | 11,925 | |||||||
Brokerage commissions and fees | 6,730 | — | 6,730 | 6,404 | — | 6,404 | |||||||||||||
Ceding commission | 6,624 | — | 6,624 | 6,389 | — | 6,389 | |||||||||||||
Net investment income | 948 | — | 948 | 986 | — | 986 | |||||||||||||
Net realized investment gains | 2 | — | 2 | 47 | — | 47 | |||||||||||||
Net earned premium | 28,493 | — | 28,493 | 26,669 | — | 26,669 | |||||||||||||
Other income | 81 | — | 81 | 45 | — | 45 | |||||||||||||
Total revenues | 50,853 | — | 50,853 | 49,383 | 3,082 | 52,465 | |||||||||||||
Expenses: | |||||||||||||||||||
Net losses and loss adjustment expenses | 8,777 | — | 8,777 | 7,316 | — | 7,316 | |||||||||||||
Member benefit claims | — | — | — | — | (23 | ) | (23 | ) | |||||||||||
Commissions | 19,349 | — | 19,349 | 17,850 | 3,105 | 20,955 | |||||||||||||
Personnel costs | 9,081 | — | 9,081 | 9,332 | — | 9,332 | |||||||||||||
Other operating expenses | 5,136 | 656 | 5,792 | 5,891 | 167 | 6,058 | |||||||||||||
Depreciation and amortization | 275 | — | 275 | 284 | — | 284 | |||||||||||||
Amortization of intangibles | 779 | — | 779 | 779 | — | 779 | |||||||||||||
Interest expense | 1,891 | — | 1,891 | 1,985 | — | 1,985 | |||||||||||||
Total expenses | 45,288 | 656 | 45,944 | 43,437 | 3,249 | 46,686 | |||||||||||||
Income before income taxes and non-controlling interests | 5,565 | (656 | ) | 4,909 | 5,946 | (167 | ) | 5,779 | |||||||||||
Income taxes | 2,076 | (230 | ) | 1,846 | 2,220 | (58 | ) | 2,162 | |||||||||||
Income before non-controlling interests | 3,489 | (426 | ) | 3,063 | 3,726 | (109 | ) | 3,617 | |||||||||||
Less: net income (loss) attributable to non-controlling interests | 15 | — | 15 | (46 | ) | — | (46 | ) | |||||||||||
Net income | $ | 3,474 | $ | (426 | ) | $ | 3,048 | $ | 3,772 | $ | (109 | ) | $ | 3,663 | |||||
Earnings per share: | |||||||||||||||||||
Basic | $ | 0.22 | $ | (0.03 | ) | $ | 0.19 | $ | 0.24 | $ | (0.01 | ) | $ | 0.23 | |||||
Diluted | $ | 0.21 | $ | (0.03 | ) | $ | 0.18 | $ | 0.22 | $ | (0.01 | ) | $ | 0.21 | |||||
Weighted average common shares outstanding: | |||||||||||||||||||
Basic | 15,742,336 | 15,742,336 | 15,742,336 | 15,742,336 | |||||||||||||||
Diluted | 16,941,372 | 16,941,372 | 17,040,432 | 17,040,432 |
56
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||
September 30, 2010 | December 31, 2010 | |||||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | Adoption of ASU 2010-26 | As Restated | ||||||||||||||||
Revenues: | ||||||||||||||||||||||
Service and administrative fees | $ | 9,229 | $ | 8,738 | $ | 17,967 | $ | 8,098 | $ | 10,289 | $ | — | $ | 18,387 | ||||||||
Brokerage commissions and fees | 6,034 | — | 6,034 | 5,452 | — | — | 5,452 | |||||||||||||||
Ceding commission | 9,455 | — | 9,455 | 6,299 | — | — | 6,299 | |||||||||||||||
Net investment income | 865 | — | 865 | 1,274 | — | — | 1,274 | |||||||||||||||
Net realized investment gains | 107 | — | 107 | 494 | — | — | 494 | |||||||||||||||
Net earned premium | 28,255 | — | 28,255 | 28,388 | — | — | 28,388 | |||||||||||||||
Other income | (6 | ) | — | (6 | ) | 110 | — | — | 110 | |||||||||||||
Total revenues | 53,939 | 8,738 | 62,677 | 50,115 | 10,289 | — | 60,404 | |||||||||||||||
Expenses: | ||||||||||||||||||||||
Net losses and loss adjustment expenses | 10,993 | — | 10,993 | 8,949 | — | — | 8,949 | |||||||||||||||
Member benefit claims | — | 211 | 211 | — | 278 | — | 278 | |||||||||||||||
Commissions | 16,432 | 8,527 | 24,959 | 17,372 | 10,011 | — | 27,383 | |||||||||||||||
Personnel costs | 9,526 | — | 9,526 | 8,422 | — | — | 8,422 | |||||||||||||||
Other operating expenses | 6,500 | 125 | 6,625 | 5,346 | — | 605 | 5,951 | |||||||||||||||
Depreciation and amortization | 431 | — | 431 | 406 | — | — | 406 | |||||||||||||||
Amortization of intangibles | 788 | — | 788 | 886 | — | — | 886 | |||||||||||||||
Interest expense | 2,246 | — | 2,246 | 2,342 | — | — | 2,342 | |||||||||||||||
Total expenses | 46,916 | 8,863 | 55,779 | 43,723 | 10,289 | 605 | 54,617 | |||||||||||||||
Income before income taxes and non-controlling interests | 7,023 | (125 | ) | 6,898 | 6,392 | — | (605 | ) | 5,787 | |||||||||||||
Income taxes | 2,576 | (44 | ) | 2,532 | 1,831 | — | (212 | ) | 1,619 | |||||||||||||
Income before non-controlling interests | 4,447 | (81 | ) | 4,366 | 4,561 | — | (393 | ) | 4,168 | |||||||||||||
Less: net income attributable to non-controlling interests | — | — | — | 51 | — | — | 51 | |||||||||||||||
Net income | $ | 4,447 | $ | (81 | ) | $ | 4,366 | $ | 4,510 | $ | — | $ | (393 | ) | $ | 4,117 | ||||||
Earnings per share: | ||||||||||||||||||||||
Basic | $ | 0.28 | $ | — | $ | 0.28 | $ | 0.27 | $ | — | $ | (0.02 | ) | $ | 0.25 | |||||||
Diluted | $ | 0.26 | $ | — | $ | 0.26 | $ | 0.25 | $ | — | $ | (0.02 | ) | $ | 0.23 | |||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||
Basic | 15,742,336 | 15,742,336 | 16,483,626 | 16,483,626 | 16,483,626 | 16,483,626 | ||||||||||||||||
Diluted | 17,057,157 | 17,057,157 | 17,703,334 | 17,703,334 | 17,703,334 | 17,703,334 |
57
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
29. Quarterly Segment Results - Restated (Unaudited)
The following tables present the Company's restated quarterly Segment Results for the quarters ending March 31, 2012, June 30, 2012 and September 30, 2012 and for the quarters ending March 31, June 30, September 30, and December 31, 2011 and 2010, respectively.
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
March 31, 2012 | June 30, 2012 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Segment Net Revenue | |||||||||||||||||||
Payment Protection | |||||||||||||||||||
Service and administrative fees | $ | 4,632 | $ | 13,171 | $ | 17,803 | $ | 4,567 | $ | 12,392 | $ | 16,959 | |||||||
Ceding commission | 7,064 | — | 7,064 | 7,210 | — | 7,210 | |||||||||||||
Net investment income | 743 | — | 743 | 732 | — | 732 | |||||||||||||
Net realized investment (losses) gains | (3 | ) | — | (3 | ) | 13 | — | 13 | |||||||||||
Other income | 72 | — | 72 | 48 | — | 48 | |||||||||||||
Net earned premium | 31,972 | — | 31,972 | 31,905 | — | 31,905 | |||||||||||||
Net losses and loss adjustment expenses | (11,266 | ) | — | (11,266 | ) | (9,576 | ) | — | (9,576 | ) | |||||||||
Member benefit claims | — | (1,303 | ) | (1,303 | ) | — | (1,098 | ) | (1,098 | ) | |||||||||
Commissions | (20,039 | ) | (11,949 | ) | (31,988 | ) | (19,892 | ) | (11,390 | ) | (31,282 | ) | |||||||
Total Payment Protection Net Revenue | 13,175 | (81 | ) | 13,094 | 15,007 | (96 | ) | 14,911 | |||||||||||
BPO | 4,205 | — | 4,205 | 4,409 | — | 4,409 | |||||||||||||
Brokerage | |||||||||||||||||||
Brokerage commissions and fees | 9,520 | — | 9,520 | 9,364 | — | 9,364 | |||||||||||||
Service and administrative fees | 503 | — | 503 | 418 | — | 418 | |||||||||||||
Total Brokerage | 10,023 | — | 10,023 | 9,782 | — | 9,782 | |||||||||||||
Total segment net revenue | 27,403 | (81 | ) | 27,322 | 29,198 | (96 | ) | 29,102 | |||||||||||
Operating Expenses | |||||||||||||||||||
Payment Protection | 7,913 | — | 7,913 | 8,729 | — | 8,729 | |||||||||||||
BPO | 3,133 | — | 3,133 | 3,351 | — | 3,351 | |||||||||||||
Brokerage | 7,085 | — | 7,085 | 7,224 | — | 7,224 | |||||||||||||
Total operating expenses | 18,131 | — | 18,131 | 19,304 | — | 19,304 | |||||||||||||
EBITDA | |||||||||||||||||||
Payment Protection | 5,262 | (81 | ) | 5,181 | 6,278 | (96 | ) | 6,182 | |||||||||||
BPO | 1,072 | — | 1,072 | 1,058 | — | 1,058 | |||||||||||||
Brokerage | 2,938 | — | 2,938 | 2,558 | — | 2,558 | |||||||||||||
Total EBITDA | 9,272 | (81 | ) | 9,191 | 9,894 | (96 | ) | 9,798 | |||||||||||
Depreciation and Amortization | |||||||||||||||||||
Payment Protection | 849 | — | 849 | 865 | — | 865 | |||||||||||||
BPO | 503 | — | 503 | 498 | — | 498 | |||||||||||||
Brokerage | 868 | — | 868 | 778 | — | 778 | |||||||||||||
Total depreciation and amortization | 2,220 | — | 2,220 | 2,141 | — | 2,141 | |||||||||||||
Interest Expense | |||||||||||||||||||
Payment Protection | 1,012 | — | 1,012 | 971 | — | 971 | |||||||||||||
BPO | 267 | — | 267 | 259 | — | 259 | |||||||||||||
Brokerage | 373 | — | 373 | 360 | — | 360 | |||||||||||||
Total interest expense | 1,652 | — | 1,652 | 1,590 | — | 1,590 | |||||||||||||
Income before income taxes and non-controlling interests | |||||||||||||||||||
Payment Protection | 3,401 | (81 | ) | 3,320 | 4,442 | (96 | ) | 4,346 | |||||||||||
BPO | 302 | — | 302 | 301 | — | 301 | |||||||||||||
Brokerage | 1,697 | — | 1,697 | 1,420 | — | 1,420 |
58
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
March 31, 2012 | June 30, 2012 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Total income before income taxes and non-controlling interests | 5,400 | (81 | ) | 5,319 | 6,163 | (96 | ) | 6,067 | |||||||||||
Income taxes | 1,919 | (32 | ) | 1,887 | 2,146 | (38 | ) | 2,108 | |||||||||||
Less: net income attributable to non-controlling interests | 18 | — | 18 | 15 | — | 15 | |||||||||||||
Net income | $ | 3,463 | $ | (49 | ) | $ | 3,414 | $ | 4,002 | $ | (58 | ) | $ | 3,944 |
For the Three Months Ended | |||||||||
September 30, 2012 | |||||||||
As Previously Reported | Adjustment | As Restated | |||||||
Segment Net Revenue | |||||||||
Payment Protection | |||||||||
Service and administrative fees | $ | 4,677 | $ | 12,842 | $ | 17,519 | |||
Ceding commission | 11,122 | — | 11,122 | ||||||
Net investment income | 744 | — | 744 | ||||||
Net realized investment (losses) | (16 | ) | — | (16 | ) | ||||
Other income | 52 | — | 52 | ||||||
Net earned premium | 33,893 | — | 33,893 | ||||||
Net losses and loss adjustment expenses | (11,430 | ) | — | (11,430 | ) | ||||
Member benefit claims | — | (1,157 | ) | (1,157 | ) | ||||
Commissions | (21,548 | ) | (11,829 | ) | (33,377 | ) | |||
Total Payment Protection Net Revenue | 17,494 | (144 | ) | 17,350 | |||||
BPO | 4,951 | — | 4,951 | ||||||
Brokerage | |||||||||
Brokerage commissions and fees | 8,411 | — | 8,411 | ||||||
Service and administrative fees | 428 | — | 428 | ||||||
Total Brokerage | 8,839 | — | 8,839 | ||||||
Total segment net revenue | 31,284 | (144 | ) | 31,140 | |||||
Operating Expenses | |||||||||
Payment Protection | 9,563 | — | 9,563 | ||||||
BPO | 3,836 | — | 3,836 | ||||||
Brokerage | 7,268 | — | 7,268 | ||||||
Total operating expenses | 20,667 | — | 20,667 | ||||||
EBITDA | |||||||||
Payment Protection | 7,931 | (144 | ) | 7,787 | |||||
BPO | 1,115 | — | 1,115 | ||||||
Brokerage | 1,571 | — | 1,571 | ||||||
Total EBITDA | 10,617 | (144 | ) | 10,473 | |||||
Depreciation and Amortization | |||||||||
Payment Protection | 863 | — | 863 | ||||||
BPO | 494 | — | 494 | ||||||
Brokerage | 641 | — | 641 | ||||||
Total depreciation and amortization | 1,998 | — | 1,998 | ||||||
Interest Expense | |||||||||
Payment Protection | 1,359 | — | 1,359 | ||||||
BPO | 294 | — | 294 | ||||||
Brokerage | 372 | — | 372 |
59
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | |||||||||
September 30, 2012 | |||||||||
As Previously Reported | Adjustment | As Restated | |||||||
Total interest expense | 2,025 | — | 2,025 | ||||||
Income before income taxes and non-controlling interests | |||||||||
Payment Protection | 5,709 | (144 | ) | 5,565 | |||||
BPO | 327 | — | 327 | ||||||
Brokerage | 558 | — | 558 | ||||||
Total income before income taxes and non-controlling interests | 6,594 | (144 | ) | 6,450 | |||||
Income taxes | 2,455 | (58 | ) | 2,397 | |||||
Less: net income attributable to non-controlling interests | 29 | — | 29 | ||||||
Net income | $ | 4,110 | $ | (86 | ) | $ | 4,024 |
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
March 31, 2011 | June 30, 2011 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Segment Net Revenue | |||||||||||||||||||
Payment Protection | |||||||||||||||||||
Service and administrative fees | $ | 4,528 | $ | 12,076 | $ | 16,604 | $ | 4,481 | $ | 12,321 | $ | 16,802 | |||||||
Ceding commission | 8,158 | — | 8,158 | 6,243 | — | 6,243 | |||||||||||||
Net investment income | 941 | — | 941 | 894 | — | 894 | |||||||||||||
Net realized investment gains | 95 | — | 95 | 1,132 | — | 1,132 | |||||||||||||
Other income | 82 | — | 82 | 38 | — | 38 | |||||||||||||
Net earned premium | 28,437 | — | 28,437 | 27,536 | — | 27,536 | |||||||||||||
Net losses and loss adjustment expenses | (9,373 | ) | — | (9,373 | ) | (9,251 | ) | — | (9,251 | ) | |||||||||
Member benefit claims | — | (867 | ) | (867 | ) | — | (1,309 | ) | (1,309 | ) | |||||||||
Commissions | (18,517 | ) | (11,389 | ) | (29,906 | ) | (17,323 | ) | (11,404 | ) | (28,727 | ) | |||||||
Total Payment Protection Net Revenue | 14,351 | (180 | ) | 14,171 | 13,750 | (392 | ) | 13,358 | |||||||||||
BPO | 3,564 | — | 3,564 | 3,691 | — | 3,691 | |||||||||||||
Brokerage | |||||||||||||||||||
Brokerage commissions and fees | 7,867 | — | 7,867 | 9,208 | — | 9,208 | |||||||||||||
Service and administrative fees | 1,024 | — | 1,024 | 628 | — | 628 | |||||||||||||
Total Brokerage | 8,891 | — | 8,891 | 9,836 | — | 9,836 | |||||||||||||
Total segment net revenue | 26,806 | (180 | ) | 26,626 | 27,277 | (392 | ) | 26,885 | |||||||||||
Operating Expenses | |||||||||||||||||||
Payment Protection | 8,768 | — | 8,768 | 8,644 | — | 8,644 | |||||||||||||
BPO | 2,619 | — | 2,619 | 2,828 | — | 2,828 | |||||||||||||
Brokerage | 6,819 | — | 6,819 | 7,527 | — | 7,527 | |||||||||||||
Corporate | — | — | — | 1,727 | — | 1,727 | |||||||||||||
Total operating expenses | 18,206 | — | 18,206 | 20,726 | — | 20,726 | |||||||||||||
EBITDA | |||||||||||||||||||
Payment Protection | 5,583 | (180 | ) | 5,403 | 5,106 | (392 | ) | 4,714 | |||||||||||
BPO | 945 | — | 945 | 863 | — | 863 | |||||||||||||
Brokerage | 2,072 | — | 2,072 | 2,309 | — | 2,309 | |||||||||||||
Corporate | — | — | — | (1,727 | ) | — | (1,727 | ) | |||||||||||
Total EBITDA | 8,600 | (180 | ) | 8,420 | 6,551 | (392 | ) | 6,159 | |||||||||||
Depreciation and Amortization |
60
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
March 31, 2011 | June 30, 2011 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Payment Protection | 953 | — | 953 | 1,324 | — | 1,324 | |||||||||||||
BPO | 240 | — | 240 | 277 | — | 277 | |||||||||||||
Brokerage | 442 | — | 442 | 591 | — | 591 | |||||||||||||
Total depreciation and amortization | 1,635 | — | 1,635 | 2,192 | — | 2,192 | |||||||||||||
Interest Expense | |||||||||||||||||||
Payment Protection | 1,526 | — | 1,526 | 1,043 | — | 1,043 | |||||||||||||
BPO | 63 | — | 63 | 99 | — | 99 | |||||||||||||
Brokerage | 442 | — | 442 | 783 | — | 783 | |||||||||||||
Total interest expense | 2,031 | — | 2,031 | 1,925 | — | 1,925 | |||||||||||||
Income before income taxes and non-controlling interests | |||||||||||||||||||
Payment Protection | 3,104 | (180 | ) | 2,924 | 2,739 | (392 | ) | 2,347 | |||||||||||
BPO | 642 | — | 642 | 487 | — | 487 | |||||||||||||
Brokerage | 1,188 | — | 1,188 | 935 | — | 935 | |||||||||||||
Corporate | — | — | — | (1,727 | ) | — | (1,727 | ) | |||||||||||
Total income before income taxes and non-controlling interests | 4,934 | (180 | ) | 4,754 | 2,434 | (392 | ) | 2,042 | |||||||||||
Income taxes | 1,681 | (72 | ) | 1,609 | 907 | (157 | ) | 750 | |||||||||||
Less: net (loss) income attributable to non-controlling interests | (174 | ) | — | (174 | ) | 2 | — | 2 | |||||||||||
Net income | $ | 3,427 | $ | (108 | ) | $ | 3,319 | $ | 1,525 | $ | (235 | ) | $ | 1,290 |
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
September 30, 2011 | December 31, 2011 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Segment Net Revenue | |||||||||||||||||||
Payment Protection | |||||||||||||||||||
Service and administrative fees | $ | 5,695 | $ | 16,831 | $ | 22,526 | $ | 5,276 | $ | 15,036 | $ | 20,312 | |||||||
Ceding commission | 7,027 | — | 7,027 | 8,067 | — | 8,067 | |||||||||||||
Net investment income | 801 | — | 801 | 732 | — | 732 | |||||||||||||
Net realized investment gains (losses) | 1,196 | — | 1,196 | 1,770 | — | 1,770 | |||||||||||||
Other income | 18 | — | 18 | 32 | — | 32 | |||||||||||||
Net earned premium | 28,673 | — | 28,673 | 30,857 | — | 30,857 | |||||||||||||
Net losses and loss adjustment expenses | (9,714 | ) | — | (9,714 | ) | (9,611 | ) | — | (9,611 | ) | |||||||||
Member benefit claims | — | (945 | ) | (945 | ) | — | (1,288 | ) | (1,288 | ) | |||||||||
Commissions | (17,926 | ) | (16,011 | ) | (33,937 | ) | (20,465 | ) | (13,883 | ) | (34,348 | ) | |||||||
Total Payment Protection Net Revenue | 15,770 | (125 | ) | 15,645 | 16,658 | (135 | ) | 16,523 | |||||||||||
BPO | 3,833 | — | 3,833 | 4,496 | — | 4,496 | |||||||||||||
Brokerage | |||||||||||||||||||
Brokerage commissions and fees | 8,611 | — | 8,611 | 8,710 | — | 8,710 | |||||||||||||
Service and administrative fees | 597 | — | 597 | 387 | — | 387 | |||||||||||||
Total Brokerage | 9,208 | — | 9,208 | 9,097 | — | 9,097 | |||||||||||||
Total segment net revenue | 28,811 | (125 | ) | 28,686 | 30,251 | (135 | ) | 30,116 | |||||||||||
Operating Expenses | |||||||||||||||||||
Payment Protection | 8,445 | — | 8,445 | 7,657 | — | 7,657 | |||||||||||||
BPO | 2,717 | — | 2,717 | 3,434 | — | 3,434 | |||||||||||||
Brokerage (1) | 7,491 | — | 7,491 | 7,452 | — | 7,452 |
61
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
September 30, 2011 | December 31, 2011 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Corporate | 36 | — | 36 | — | — | — | |||||||||||||
Total operating expenses | 18,689 | — | 18,689 | 18,543 | — | 18,543 | |||||||||||||
EBITDA | |||||||||||||||||||
Payment Protection | 7,325 | (125 | ) | 7,200 | 9,001 | (135 | ) | 8,866 | |||||||||||
BPO | 1,116 | — | 1,116 | 1,062 | — | 1,062 | |||||||||||||
Brokerage (1) | 1,717 | — | 1,717 | 1,645 | — | 1,645 | |||||||||||||
Corporate | (36 | ) | — | (36 | ) | — | — | — | |||||||||||
Total EBITDA | 10,122 | (125 | ) | 9,997 | 11,708 | (135 | ) | 11,573 | |||||||||||
Depreciation and Amortization | |||||||||||||||||||
Payment Protection | 927 | — | 927 | 1,001 | — | 1,001 | |||||||||||||
BPO | 307 | — | 307 | 300 | — | 300 | |||||||||||||
Brokerage | 650 | — | 650 | 1,017 | — | 1,017 | |||||||||||||
Total depreciation and amortization | 1,884 | — | 1,884 | 2,318 | — | 2,318 | |||||||||||||
Interest Expense | |||||||||||||||||||
Payment Protection | 1,053 | — | 1,053 | 1,027 | — | 1,027 | |||||||||||||
BPO | 96 | — | 96 | 161 | — | 161 | |||||||||||||
Brokerage | 757 | — | 757 | 591 | — | 591 | |||||||||||||
Total interest expense | 1,906 | — | 1,906 | 1,779 | — | 1,779 | |||||||||||||
Income before income taxes and non-controlling interests | |||||||||||||||||||
Payment Protection | 5,345 | (125 | ) | 5,220 | 6,973 | (135 | ) | 6,838 | |||||||||||
BPO | 713 | — | 713 | 601 | — | 601 | |||||||||||||
Brokerage (1) | 310 | — | 310 | 37 | — | 37 | |||||||||||||
Corporate | (36 | ) | — | (36 | ) | — | — | — | |||||||||||
Total income before income taxes and non-controlling interests | 6,332 | (125 | ) | 6,207 | 7,611 | (135 | ) | 7,476 | |||||||||||
Income taxes | 2,259 | (50 | ) | 2,209 | 2,626 | (54 | ) | 2,572 | |||||||||||
Less: net income attributable to non-controlling interests | 1 | — | 1 | 1 | — | 1 | |||||||||||||
Net income | $ | 4,072 | $ | (75 | ) | $ | 3,997 | $ | 4,984 | $ | (81 | ) | $ | 4,903 | |||||
(1) - Includes loss on sale of subsidiary of $477 for the three months ended September 30, 2011. |
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
March 31, 2010 | June 30, 2010 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Segment Net Revenue | |||||||||||||||||||
Payment Protection | |||||||||||||||||||
Service and administrative fees | $ | 1,881 | $ | — | $ | 1,881 | $ | 3,240 | $ | 3,082 | $ | 6,322 | |||||||
Ceding commission | 6,624 | — | 6,624 | 6,389 | — | 6,389 | |||||||||||||
Net investment income | 948 | — | 948 | 986 | — | 986 | |||||||||||||
Net realized investment gains | 2 | — | 2 | 47 | — | 47 | |||||||||||||
Other income | 81 | — | 81 | 45 | — | 45 | |||||||||||||
Net earned premium | 28,493 | — | 28,493 | 26,669 | — | 26,669 | |||||||||||||
Net losses and loss adjustment expenses | (8,777 | ) | — | (8,777 | ) | (7,316 | ) | — | (7,316 | ) | |||||||||
Member benefit claims | — | — | — | — | 23 | 23 |
62
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
March 31, 2010 | June 30, 2010 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Commissions | (19,349 | ) | — | (19,349 | ) | (17,850 | ) | (3,105 | ) | (20,955 | ) | ||||||||
Total Payment Protection Net Revenue | 9,903 | — | 9,903 | 12,210 | — | 12,210 | |||||||||||||
BPO | 4,563 | — | 4,563 | 4,327 | — | 4,327 | |||||||||||||
Brokerage | |||||||||||||||||||
Brokerage commissions and fees | 6,730 | — | 6,730 | 6,404 | — | 6,404 | |||||||||||||
Service and administrative fees | 1,531 | — | 1,531 | 1,276 | — | 1,276 | |||||||||||||
Total Brokerage | 8,261 | — | 8,261 | 7,680 | — | 7,680 | |||||||||||||
Total segment net revenue | 22,727 | — | 22,727 | 24,217 | — | 24,217 | |||||||||||||
Operating Expenses | |||||||||||||||||||
Payment Protection | 5,094 | 656 | 5,750 | 6,191 | 167 | 6,358 | |||||||||||||
BPO | 2,774 | — | 2,774 | 2,635 | — | 2,635 | |||||||||||||
Brokerage (1) | 6,119 | — | 6,119 | 5,785 | — | 5,785 | |||||||||||||
Corporate | 230 | — | 230 | 612 | — | 612 | |||||||||||||
Total operating expenses | 14,217 | 656 | 14,873 | 15,223 | 167 | 15,390 | |||||||||||||
EBITDA | |||||||||||||||||||
Payment Protection | 4,809 | (656 | ) | 4,153 | 6,019 | (167 | ) | 5,852 | |||||||||||
BPO | 1,789 | — | 1,789 | 1,692 | — | 1,692 | |||||||||||||
Brokerage | 2,142 | — | 2,142 | 1,895 | — | 1,895 | |||||||||||||
Corporate | (230 | ) | — | (230 | ) | (612 | ) | — | (612 | ) | |||||||||
Total EBITDA | 8,510 | (656 | ) | 7,854 | 8,994 | (167 | ) | 8,827 | |||||||||||
Depreciation and Amortization | |||||||||||||||||||
Payment Protection | 470 | — | 470 | 585 | — | 585 | |||||||||||||
BPO | 174 | — | 174 | 80 | — | 80 | |||||||||||||
Brokerage | 410 | — | 410 | 398 | — | 398 | |||||||||||||
Total depreciation and amortization | 1,054 | — | 1,054 | 1,063 | — | 1,063 | |||||||||||||
Interest Expense | |||||||||||||||||||
Payment Protection | 1,661 | — | 1,661 | 1,704 | — | 1,704 | |||||||||||||
BPO | 106 | — | 106 | 92 | — | 92 | |||||||||||||
Brokerage | 124 | — | 124 | 189 | — | 189 | |||||||||||||
Total interest expense | 1,891 | — | 1,891 | 1,985 | — | 1,985 | |||||||||||||
Income before income taxes and non-controlling interests | |||||||||||||||||||
Payment Protection | 2,678 | (656 | ) | 2,022 | 3,730 | (167 | ) | 3,563 | |||||||||||
BPO | 1,509 | — | 1,509 | 1,520 | — | 1,520 | |||||||||||||
Brokerage | 1,608 | — | 1,608 | 1,308 | — | 1,308 | |||||||||||||
Corporate | (230 | ) | — | (230 | ) | (612 | ) | — | (612 | ) | |||||||||
Total income before income taxes and non-controlling interests | 5,565 | (656 | ) | 4,909 | 5,946 | (167 | ) | 5,779 | |||||||||||
Income taxes | 2,076 | (230 | ) | 1,846 | 2,220 | (58 | ) | 2,162 | |||||||||||
Less: net income (loss) attributable to non-controlling interests | 15 | — | 15 | (46 | ) | — | (46 | ) | |||||||||||
Net income | $ | 3,474 | $ | (426 | ) | $ | 3,048 | $ | 3,772 | $ | (109 | ) | $ | 3,663 |
63
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
September 30, 2010 | December 31, 2010 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Segment Net Revenue | |||||||||||||||||||
Payment Protection | |||||||||||||||||||
Service and administrative fees | $ | 3,390 | $ | 8,738 | $ | 12,128 | $ | 3,948 | $ | 10,289 | $ | 14,237 | |||||||
Ceding commission | 9,455 | — | 9,455 | 6,299 | — | 6,299 | |||||||||||||
Net investment income | 865 | — | 865 | 1,274 | — | 1,274 | |||||||||||||
Net realized investment gains | 107 | — | 107 | 494 | — | 494 | |||||||||||||
Other income | (6 | ) | — | (6 | ) | 110 | — | 110 | |||||||||||
Net earned premium | 28,255 | — | 28,255 | 28,388 | — | 28,388 | |||||||||||||
Net losses and loss adjustment expenses | (10,993 | ) | — | (10,993 | ) | (8,949 | ) | — | (8,949 | ) | |||||||||
Member benefit claims | — | (211 | ) | (211 | ) | — | (278 | ) | (278 | ) | |||||||||
Commissions | (16,432 | ) | (8,527 | ) | (24,959 | ) | (17,372 | ) | (10,011 | ) | (27,383 | ) | |||||||
Total Payment Protection Net Revenue | 14,641 | — | 14,641 | 14,192 | — | 14,192 | |||||||||||||
BPO | 4,715 | — | 4,715 | 3,464 | — | 3,464 | |||||||||||||
Brokerage | |||||||||||||||||||
Brokerage commissions and fees | 6,034 | — | 6,034 | 5,452 | — | 5,452 | |||||||||||||
Service and administrative fees | 1,124 | — | 1,124 | 686 | — | 686 | |||||||||||||
Total Brokerage | 7,158 | — | 7,158 | 6,138 | — | 6,138 | |||||||||||||
Total segment net revenue | 26,514 | — | 26,514 | 23,794 | — | 23,794 | |||||||||||||
Operating Expenses | |||||||||||||||||||
Payment Protection | 6,435 | 125 | 6,560 | 5,853 | 605 | 6,458 | |||||||||||||
BPO | 2,588 | — | 2,588 | 2,005 | — | 2,005 | |||||||||||||
Brokerage | 5,783 | — | 5,783 | 5,842 | — | 5,842 | |||||||||||||
Corporate | 1,220 | — | 1,220 | 68 | — | 68 | |||||||||||||
Total operating expenses | 16,026 | 125 | 16,151 | 13,768 | 605 | 14,373 | |||||||||||||
EBITDA | |||||||||||||||||||
Payment Protection | 8,206 | (125 | ) | 8,081 | 8,339 | (605 | ) | 7,734 | |||||||||||
BPO | 2,127 | — | 2,127 | 1,459 | — | 1,459 | |||||||||||||
Brokerage | 1,375 | — | 1,375 | 296 | — | 296 | |||||||||||||
Corporate | (1,220 | ) | — | (1,220 | ) | (68 | ) | — | (68 | ) | |||||||||
Total EBITDA | 10,488 | (125 | ) | 10,363 | 10,026 | (605 | ) | 9,421 | |||||||||||
Depreciation and Amortization | |||||||||||||||||||
Payment Protection | 327 | — | 327 | 970 | — | 970 | |||||||||||||
BPO | 457 | — | 457 | (113 | ) | — | (113 | ) | |||||||||||
Brokerage | 435 | — | 435 | 435 | — | 435 | |||||||||||||
Total depreciation and amortization | 1,219 | — | 1,219 | 1,292 | — | 1,292 | |||||||||||||
Interest Expense | |||||||||||||||||||
Payment Protection | 1,873 | — | 1,873 | 1,959 | — | 1,959 | |||||||||||||
BPO | 126 | — | 126 | 109 | — | 109 | |||||||||||||
Brokerage | 247 | — | 247 | 274 | — | 274 | |||||||||||||
Total interest expense | 2,246 | — | 2,246 | 2,342 | — | 2,342 | |||||||||||||
Income before income taxes and non-controlling interests | |||||||||||||||||||
Payment Protection | 6,006 | (125 | ) | 5,881 | 5,410 | (605 | ) | 4,805 | |||||||||||
BPO | 1,544 | — | 1,544 | 1,463 | — | 1,463 | |||||||||||||
Brokerage | 693 | — | 693 | (413 | ) | — | (413 | ) | |||||||||||
Corporate | (1,220 | ) | — | (1,220 | ) | (68 | ) | — | (68 | ) | |||||||||
Total income before income taxes and non-controlling interests | 7,023 | (125 | ) | 6,898 | 6,392 | (605 | ) | 5,787 | |||||||||||
Income taxes | 2,576 | (44 | ) | 2,532 | 1,831 | (212 | ) | 1,619 |
64
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||
September 30, 2010 | December 31, 2010 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Less: net income attributable to non-controlling interests | — | — | — | 51 | — | 51 | |||||||||||||
Net income | $ | 4,447 | $ | (81 | ) | $ | 4,366 | $ | 4,510 | $ | (393 | ) | $ | 4,117 |
The following table reconciles the restated segment information to the Company's Consolidated Statements of Income and provides a summary of other key financial information for each segment, as restated, for the quarters ending March 31, 2012, June 30, 2012 and September 30, 2012 and for the quarters ending March 31, June 30, September 30, and December 31, 2011 and 2010, respectively.
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
March 31, 2012 | June 30, 2012 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Segment Net Revenue | |||||||||||||||||||
Payment Protection | $ | 13,175 | $ | (81 | ) | $ | 13,094 | $ | 15,007 | $ | (96 | ) | $ | 14,911 | |||||
BPO | 4,205 | — | 4,205 | 4,409 | — | 4,409 | |||||||||||||
Brokerage | 10,023 | — | 10,023 | 9,782 | — | 9,782 | |||||||||||||
Segment net revenues | 27,403 | (81 | ) | 27,322 | 29,198 | (96 | ) | 29,102 | |||||||||||
Net losses and loss adjustment expenses | 11,266 | — | 11,266 | 9,576 | — | 9,576 | |||||||||||||
Member benefit claims | — | 1,303 | 1,303 | — | 1,098 | 1,098 | |||||||||||||
Commissions | 20,039 | 11,949 | 31,988 | 19,892 | 11,390 | 31,282 | |||||||||||||
Total segment revenue | 58,708 | 13,171 | 71,879 | 58,666 | 12,392 | 71,058 | |||||||||||||
Operating Expenses | |||||||||||||||||||
Payment Protection | 7,913 | — | 7,913 | 8,729 | — | 8,729 | |||||||||||||
BPO | 3,133 | — | 3,133 | 3,351 | — | 3,351 | |||||||||||||
Brokerage | 7,085 | — | 7,085 | 7,224 | — | 7,224 | |||||||||||||
Total operating expenses | 18,131 | — | 18,131 | 19,304 | — | 19,304 | |||||||||||||
Net losses and loss adjustment expenses | 11,266 | — | 11,266 | 9,576 | — | 9,576 | |||||||||||||
Member benefit claims | — | 1,303 | 1,303 | — | 1,098 | 1,098 | |||||||||||||
Commissions | 20,039 | 11,949 | 31,988 | 19,892 | 11,390 | 31,282 | |||||||||||||
Total operating expenses before depreciation, amortization and interest expense | 49,436 | 13,252 | 62,688 | 48,772 | 12,488 | 61,260 | |||||||||||||
EBITDA | |||||||||||||||||||
Payment Protection | 5,262 | (81 | ) | 5,181 | 6,278 | (96 | ) | 6,182 | |||||||||||
BPO | 1,072 | — | 1,072 | 1,058 | — | 1,058 | |||||||||||||
Brokerage | 2,938 | — | 2,938 | 2,558 | — | 2,558 | |||||||||||||
Total EBITDA | 9,272 | (81 | ) | 9,191 | 9,894 | (96 | ) | 9,798 | |||||||||||
Depreciation and amortization | |||||||||||||||||||
Payment Protection | 849 | — | 849 | 865 | — | 865 | |||||||||||||
BPO | 503 | — | 503 | 498 | — | 498 | |||||||||||||
Brokerage | 868 | — | 868 | 778 | — | 778 | |||||||||||||
Total depreciation and amortization | 2,220 | — | 2,220 | 2,141 | — | 2,141 | |||||||||||||
Interest Expense | |||||||||||||||||||
Payment Protection | 1,012 | — | 1,012 | 971 | — | 971 | |||||||||||||
BPO | 267 | — | 267 | 259 | — | 259 | |||||||||||||
Brokerage | 373 | — | 373 | 360 | — | 360 | |||||||||||||
Total interest expense | 1,652 | — | 1,652 | 1,590 | — | 1,590 | |||||||||||||
65
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
March 31, 2012 | June 30, 2012 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Income (loss) before income taxes and non-controlling interests | |||||||||||||||||||
Payment Protection | 3,401 | (81 | ) | 3,320 | 4,442 | (96 | ) | 4,346 | |||||||||||
BPO | 302 | — | 302 | 301 | — | 301 | |||||||||||||
Brokerage | 1,697 | — | 1,697 | 1,420 | — | 1,420 | |||||||||||||
Corporate | — | — | — | — | — | — | |||||||||||||
Total income before income taxes and non-controlling interests | 5,400 | (81 | ) | 5,319 | 6,163 | (96 | ) | 6,067 | |||||||||||
Income taxes | 1,919 | (32 | ) | 1,887 | 2,146 | (38 | ) | 2,108 | |||||||||||
Less: net income attributable to non-controlling interests | 18 | — | 18 | 15 | — | 15 | |||||||||||||
Net income | $ | 3,463 | $ | (49 | ) | 3,414 | $ | 4,002 | $ | (58 | ) | $ | 3,944 |
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | ||||||||
September 30, 2012 | |||||||||
As Previously Reported | Adjustment | As Restated | |||||||
Segment Net Revenue | |||||||||
Payment Protection | $ | 17,494 | $ | (144 | ) | $ | 17,350 | ||
BPO | 4,951 | — | 4,951 | ||||||
Brokerage | 8,839 | — | 8,839 | ||||||
Segment net revenues | 31,284 | (144 | ) | 31,140 | |||||
Net losses and loss adjustment expenses | 11,430 | — | 11,430 | ||||||
Member benefit claims | — | 1,157 | 1,157 | ||||||
Commissions | 21,548 | 11,829 | 33,377 | ||||||
Total segment revenue | 64,262 | 12,842 | 77,104 | ||||||
Operating Expenses | |||||||||
Payment Protection | 9,563 | — | 9,563 | ||||||
BPO | 3,836 | — | 3,836 | ||||||
Brokerage | 7,268 | — | 7,268 | ||||||
Total operating expenses | 20,667 | — | 20,667 | ||||||
Net losses and loss adjustment expenses | 11,430 | — | 11,430 | ||||||
Member benefit claims | — | 1,157 | 1,157 | ||||||
Commissions | 21,548 | 11,829 | 33,377 | ||||||
Total operating expenses before depreciation, amortization and interest expense | 53,645 | 12,986 | 66,631 | ||||||
EBITDA | |||||||||
Payment Protection | 7,931 | (144 | ) | 7,787 | |||||
BPO | 1,115 | — | 1,115 | ||||||
Brokerage | 1,571 | — | 1,571 | ||||||
Total EBITDA | 10,617 | (144 | ) | 10,473 | |||||
Depreciation and amortization | |||||||||
Payment Protection | 863 | — | 863 | ||||||
BPO | 494 | — | 494 | ||||||
Brokerage | 641 | — | 641 |
66
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | ||||||||
September 30, 2012 | |||||||||
As Previously Reported | Adjustment | As Restated | |||||||
Corporate | — | — | — | ||||||
Total depreciation and amortization | 1,998 | — | 1,998 | ||||||
Interest Expense | |||||||||
Payment Protection | 1,359 | — | 1,359 | ||||||
BPO | 294 | — | 294 | ||||||
Brokerage | 372 | — | 372 | ||||||
Total interest expense | 2,025 | — | 2,025 | ||||||
Income (loss) before income taxes and non-controlling interests | |||||||||
Payment Protection | 5,709 | (144 | ) | 5,565 | |||||
BPO | 327 | — | 327 | ||||||
Brokerage | 558 | — | 558 | ||||||
Total income before income taxes and non-controlling interests | 6,594 | (144 | ) | 6,450 | |||||
Income taxes | 2,455 | (58 | ) | 2,397 | |||||
Less: net income attributable to non-controlling interests | 29 | — | 29 | ||||||
Net income | $ | 4,110 | $ | (86 | ) | 4,024 |
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
March 31, 2011 | June 30, 2011 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Segment Net Revenue | |||||||||||||||||||
Payment Protection | $ | 14,351 | $ | (180 | ) | $ | 14,171 | $ | 13,750 | $ | (392 | ) | $ | 13,358 | |||||
BPO | 3,564 | — | 3,564 | 3,691 | — | 3,691 | |||||||||||||
Brokerage | 8,891 | — | 8,891 | 9,836 | — | 9,836 | |||||||||||||
Segment net revenues | 26,806 | (180 | ) | 26,626 | 27,277 | (392 | ) | 26,885 | |||||||||||
Net losses and loss adjustment expenses | 9,373 | — | 9,373 | 9,251 | — | 9,251 | |||||||||||||
Member benefit claims | — | 867 | 867 | — | 1,309 | 1,309 | |||||||||||||
Commissions | 18,517 | 11,389 | 29,906 | 17,323 | 11,404 | 28,727 | |||||||||||||
Total segment revenue | 54,696 | 12,076 | 66,772 | 53,851 | 12,321 | 66,172 | |||||||||||||
Operating Expenses | |||||||||||||||||||
Payment Protection | 8,768 | — | 8,768 | 8,644 | — | 8,644 | |||||||||||||
BPO | 2,619 | — | 2,619 | 2,828 | — | 2,828 | |||||||||||||
Brokerage | 6,819 | — | 6,819 | 7,527 | — | 7,527 | |||||||||||||
Corporate | — | — | — | 1,727 | — | 1,727 | |||||||||||||
Total operating expenses | 18,206 | — | 18,206 | 20,726 | — | 20,726 | |||||||||||||
Net losses and loss adjustment expenses | 9,373 | — | 9,373 | 9,251 | — | 9,251 | |||||||||||||
Member benefit claims | — | 867 | 867 | — | 1,309 | 1,309 | |||||||||||||
Commissions | 18,517 | 11,389 | 29,906 | 17,323 | 11,404 | 28,727 | |||||||||||||
Total operating expenses before depreciation, amortization and interest expense | 46,096 | 12,256 | 58,352 | 47,300 | 12,713 | 60,013 | |||||||||||||
EBITDA | |||||||||||||||||||
Payment Protection | 5,583 | (180 | ) | 5,403 | 5,106 | (392 | ) | 4,714 |
67
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
March 31, 2011 | June 30, 2011 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
BPO | 945 | — | 945 | 863 | — | 863 | |||||||||||||
Brokerage | 2,072 | — | 2,072 | 2,309 | — | 2,309 | |||||||||||||
Corporate | — | — | — | (1,727 | ) | — | (1,727 | ) | |||||||||||
Total EBITDA | 8,600 | (180 | ) | 8,420 | 6,551 | (392 | ) | 6,159 | |||||||||||
Depreciation and amortization | |||||||||||||||||||
Payment Protection | 953 | — | 953 | 1,324 | — | 1,324 | |||||||||||||
BPO | 240 | — | 240 | 277 | — | 277 | |||||||||||||
Brokerage | 442 | — | 442 | 591 | — | 591 | |||||||||||||
Total depreciation and amortization | 1,635 | — | 1,635 | 2,192 | — | 2,192 | |||||||||||||
Interest Expense | |||||||||||||||||||
Payment Protection | 1,526 | — | 1,526 | 1,043 | — | 1,043 | |||||||||||||
BPO | 63 | — | 63 | 99 | — | 99 | |||||||||||||
Brokerage | 442 | — | 442 | 783 | — | 783 | |||||||||||||
Total interest expense | 2,031 | — | 2,031 | 1,925 | — | 1,925 | |||||||||||||
Income (loss) before income taxes and non-controlling interests | |||||||||||||||||||
Payment Protection | 3,104 | (180 | ) | 2,924 | 2,739 | (392 | ) | 2,347 | |||||||||||
BPO | 642 | — | 642 | 487 | — | 487 | |||||||||||||
Brokerage | 1,188 | — | 1,188 | 935 | — | 935 | |||||||||||||
Corporate | — | — | — | (1,727 | ) | — | (1,727 | ) | |||||||||||
Total income before income taxes and non-controlling interests | 4,934 | (180 | ) | 4,754 | 2,434 | (392 | ) | 2,042 | |||||||||||
Income taxes | 1,681 | (72 | ) | 1,609 | 907 | (157 | ) | 750 | |||||||||||
Less: net (loss) income attributable to non-controlling interests | (174 | ) | — | (174 | ) | 2 | — | 2 | |||||||||||
Net income | $ | 3,427 | $ | (108 | ) | 3,319 | $ | 1,525 | $ | (235 | ) | $ | 1,290 |
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
September 30, 2011 | December 31, 2011 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Segment Net Revenue | |||||||||||||||||||
Payment Protection | $ | 15,770 | $ | (125 | ) | $ | 15,645 | $ | 16,658 | $ | (135 | ) | $ | 16,523 | |||||
BPO | 3,833 | — | 3,833 | 4,496 | — | 4,496 | |||||||||||||
Brokerage | 9,208 | — | 9,208 | 9,097 | — | 9,097 | |||||||||||||
Corporate | — | — | — | — | — | — | |||||||||||||
Segment net revenues | 28,811 | (125 | ) | 28,686 | 30,251 | (135 | ) | 30,116 | |||||||||||
Net losses and loss adjustment expenses | 9,714 | — | 9,714 | 9,611 | — | 9,611 | |||||||||||||
Member benefit claims | — | 945 | 945 | — | 1,288 | 1,288 | |||||||||||||
Commissions | 17,926 | 16,011 | 33,937 | 20,465 | 13,883 | 34,348 | |||||||||||||
Total segment revenue | 56,451 | 16,831 | 73,282 | 60,327 | 15,036 | 75,363 | |||||||||||||
Operating Expenses | |||||||||||||||||||
Payment Protection | 8,445 | — | 8,445 | 7,657 | — | 7,657 | |||||||||||||
BPO | 2,717 | — | 2,717 | 3,434 | — | 3,434 | |||||||||||||
Brokerage (1) | 7,491 | — | 7,491 | 7,452 | — | 7,452 | |||||||||||||
Corporate | 36 | — | 36 | — | — | — |
68
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
September 30, 2011 | December 31, 2011 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Total operating expenses | 18,689 | — | 18,689 | 18,543 | — | 18,543 | |||||||||||||
Net losses and loss adjustment expenses | 9,714 | — | 9,714 | 9,611 | — | 9,611 | |||||||||||||
Member benefit claims | — | 945 | 945 | — | 1,288 | 1,288 | |||||||||||||
Commissions | 17,926 | 16,011 | 33,937 | 20,465 | 13,883 | 34,348 | |||||||||||||
Total operating expenses before depreciation, amortization and interest expense | 46,329 | 16,956 | 63,285 | 48,619 | 15,171 | 63,790 | |||||||||||||
EBITDA | |||||||||||||||||||
Payment Protection | 7,325 | (125 | ) | 7,200 | 9,001 | (135 | ) | 8,866 | |||||||||||
BPO | 1,116 | — | 1,116 | 1,062 | — | 1,062 | |||||||||||||
Brokerage (1) | 1,717 | — | 1,717 | 1,645 | — | 1,645 | |||||||||||||
Corporate | (36 | ) | — | (36 | ) | — | — | — | |||||||||||
Total EBITDA | 10,122 | (125 | ) | 9,997 | 11,708 | (135 | ) | 11,573 | |||||||||||
Depreciation and amortization | |||||||||||||||||||
Payment Protection | 927 | — | 927 | 1,001 | — | 1,001 | |||||||||||||
BPO | 307 | — | 307 | 300 | — | 300 | |||||||||||||
Brokerage | 650 | — | 650 | 1,017 | — | 1,017 | |||||||||||||
Corporate | — | — | — | — | — | — | |||||||||||||
Total depreciation and amortization | 1,884 | — | 1,884 | 2,318 | — | 2,318 | |||||||||||||
Interest Expense | |||||||||||||||||||
Payment Protection | 1,053 | — | 1,053 | 1,027 | — | 1,027 | |||||||||||||
BPO | 96 | — | 96 | 161 | — | 161 | |||||||||||||
Brokerage | 757 | — | 757 | 591 | — | 591 | |||||||||||||
Total interest expense | 1,906 | — | 1,906 | 1,779 | — | 1,779 | |||||||||||||
Income (loss) before income taxes and non-controlling interests | |||||||||||||||||||
Payment Protection | 5,345 | (125 | ) | 5,220 | 6,973 | (135 | ) | 6,838 | |||||||||||
BPO | 713 | — | 713 | 601 | — | 601 | |||||||||||||
Brokerage (1) | 310 | — | 310 | 37 | — | 37 | |||||||||||||
Corporate | (36 | ) | — | (36 | ) | — | — | — | |||||||||||
Total income before income taxes and non-controlling interests | 6,332 | (125 | ) | 6,207 | 7,611 | (135 | ) | 7,476 | |||||||||||
Income taxes | 2,259 | (50 | ) | 2,209 | 2,626 | (54 | ) | 2,572 | |||||||||||
Less: net income attributable to non-controlling interests | 1 | — | 1 | 1 | — | 1 | |||||||||||||
Net income | $ | 4,072 | $ | (75 | ) | 3,997 | $ | 4,984 | $ | (81 | ) | $ | 4,903 | ||||||
(1) - Includes loss on sale of subsidiary of $477 for the three months ended September 30, 2011. |
69
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
March 31, 2010 | June 30, 2010 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Segment Net Revenue | |||||||||||||||||||
Payment Protection | $ | 9,903 | $ | — | $ | 9,903 | $ | 12,210 | $ | — | $ | 12,210 | |||||||
BPO | 4,563 | — | 4,563 | 4,327 | — | 4,327 | |||||||||||||
Brokerage | 8,261 | — | 8,261 | 7,680 | — | 7,680 | |||||||||||||
Segment net revenues | 22,727 | — | 22,727 | 24,217 | — | 24,217 | |||||||||||||
Net losses and loss adjustment expenses | 8,777 | — | 8,777 | 7,316 | — | 7,316 | |||||||||||||
Member benefit claims | — | — | — | — | (23 | ) | (23 | ) | |||||||||||
Commissions | 19,349 | — | 19,349 | 17,850 | 3,105 | 20,955 | |||||||||||||
Total segment revenue | 50,853 | — | 50,853 | 49,383 | 3,082 | 52,465 | |||||||||||||
Operating Expenses | |||||||||||||||||||
Payment Protection | 5,094 | 656 | 5,750 | 6,191 | 167 | 6,358 | |||||||||||||
BPO | 2,774 | — | 2,774 | 2,635 | — | 2,635 | |||||||||||||
Brokerage | 6,119 | — | 6,119 | 5,785 | — | 5,785 | |||||||||||||
Corporate | 230 | — | 230 | 612 | — | 612 | |||||||||||||
Total operating expenses | 14,217 | 656 | 14,873 | 15,223 | 167 | 15,390 | |||||||||||||
Net losses and loss adjustment expenses | 8,777 | — | 8,777 | 7,316 | — | 7,316 | |||||||||||||
Member benefit claims | — | — | — | — | (23 | ) | (23 | ) | |||||||||||
Commissions | 19,349 | — | 19,349 | 17,850 | 3,105 | 20,955 | |||||||||||||
Total operating expenses before depreciation, amortization and interest expense | 42,343 | 656 | 42,999 | 40,389 | 3,249 | 43,638 | |||||||||||||
EBITDA | |||||||||||||||||||
Payment Protection | 4,809 | (656 | ) | 4,153 | 6,019 | (167 | ) | 5,852 | |||||||||||
BPO | 1,789 | — | 1,789 | 1,692 | — | 1,692 | |||||||||||||
Brokerage | 2,142 | — | 2,142 | 1,895 | — | 1,895 | |||||||||||||
Corporate | (230 | ) | — | (230 | ) | (612 | ) | — | (612 | ) | |||||||||
Total EBITDA | 8,510 | (656 | ) | 7,854 | 8,994 | (167 | ) | 8,827 | |||||||||||
Depreciation and amortization | |||||||||||||||||||
Payment Protection | 470 | — | 470 | 585 | — | 585 | |||||||||||||
BPO | 174 | — | 174 | 80 | — | 80 | |||||||||||||
Brokerage | 410 | — | 410 | 398 | — | 398 | |||||||||||||
Total depreciation and amortization | 1,054 | — | 1,054 | 1,063 | — | 1,063 | |||||||||||||
Interest Expense | |||||||||||||||||||
Payment Protection | 1,661 | — | 1,661 | 1,704 | — | 1,704 | |||||||||||||
BPO | 106 | — | 106 | 92 | — | 92 | |||||||||||||
Brokerage | 124 | — | 124 | 189 | — | 189 | |||||||||||||
Total interest expense | 1,891 | — | 1,891 | 1,985 | — | 1,985 | |||||||||||||
Income (loss) before income taxes and non-controlling interests | |||||||||||||||||||
Payment Protection | 2,678 | (656 | ) | 2,022 | 3,730 | (167 | ) | 3,563 | |||||||||||
BPO | 1,509 | — | 1,509 | 1,520 | — | 1,520 | |||||||||||||
Brokerage | 1,608 | — | 1,608 | 1,308 | — | 1,308 | |||||||||||||
Corporate | (230 | ) | — | (230 | ) | (612 | ) | — | (612 | ) | |||||||||
Total income before income taxes and non-controlling interests | 5,565 | (656 | ) | 4,909 | 5,946 | (167 | ) | 5,779 | |||||||||||
Income taxes | 2,076 | (230 | ) | 1,846 | 2,220 | (58 | ) | 2,162 | |||||||||||
Less: net income (loss) attributable to non-controlling interests | 15 | — | 15 | (46 | ) | — | (46 | ) |
70
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
March 31, 2010 | June 30, 2010 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Net income | $ | 3,474 | $ | (426 | ) | 3,048 | $ | 3,772 | $ | (109 | ) | $ | 3,663 |
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
September 30, 2010 | December 31, 2010 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
Segment Net Revenue | |||||||||||||||||||
Payment Protection | $ | 14,641 | $ | — | $ | 14,641 | $ | 14,192 | $ | — | $ | 14,192 | |||||||
BPO | 4,715 | — | 4,715 | 3,464 | — | 3,464 | |||||||||||||
Brokerage | 7,158 | — | 7,158 | 6,138 | — | 6,138 | |||||||||||||
Segment net revenues | 26,514 | — | 26,514 | 23,794 | — | 23,794 | |||||||||||||
Net losses and loss adjustment expenses | 10,993 | — | 10,993 | 8,949 | — | 8,949 | |||||||||||||
Member benefit claims | — | 211 | 211 | — | 278 | 278 | |||||||||||||
Commissions | 16,432 | 8,527 | 24,959 | 17,372 | 10,011 | 27,383 | |||||||||||||
Total segment revenue | 53,939 | 8,738 | 62,677 | 50,115 | 10,289 | 60,404 | |||||||||||||
Operating Expenses | |||||||||||||||||||
Payment Protection | 6,435 | 125 | 6,560 | 5,853 | 605 | 6,458 | |||||||||||||
BPO | 2,588 | — | 2,588 | 2,005 | — | 2,005 | |||||||||||||
Brokerage | 5,783 | — | 5,783 | 5,842 | — | 5,842 | |||||||||||||
Corporate | 1,220 | — | 1,220 | 68 | — | 68 | |||||||||||||
Total operating expenses | 16,026 | 125 | 16,151 | 13,768 | 605 | 14,373 | |||||||||||||
Net losses and loss adjustment expenses | 10,993 | — | 10,993 | 8,949 | — | 8,949 | |||||||||||||
Member benefit claims | — | 211 | 211 | — | 278 | 278 | |||||||||||||
Commissions | 16,432 | 8,527 | 24,959 | 17,372 | 10,011 | 27,383 | |||||||||||||
Total operating expenses before depreciation, amortization and interest expense | 43,451 | 8,863 | 52,314 | 40,089 | 10,894 | 50,983 | |||||||||||||
EBITDA | |||||||||||||||||||
Payment Protection | 8,206 | (125 | ) | 8,081 | 8,339 | (605 | ) | 7,734 | |||||||||||
BPO | 2,127 | — | 2,127 | 1,459 | — | 1,459 | |||||||||||||
Brokerage | 1,375 | — | 1,375 | 296 | — | 296 | |||||||||||||
Corporate | (1,220 | ) | — | (1,220 | ) | (68 | ) | — | (68 | ) | |||||||||
Total EBITDA | 10,488 | (125 | ) | 10,363 | 10,026 | (605 | ) | 9,421 | |||||||||||
Depreciation and amortization | |||||||||||||||||||
Payment Protection | 327 | — | 327 | 970 | — | 970 | |||||||||||||
BPO | 457 | — | 457 | (113 | ) | — | (113 | ) | |||||||||||
Brokerage | 435 | — | 435 | 435 | — | 435 | |||||||||||||
Total depreciation and amortization | 1,219 | — | 1,219 | 1,292 | — | 1,292 | |||||||||||||
Interest Expense | |||||||||||||||||||
Payment Protection | 1,873 | — | 1,873 | 1,959 | — | 1,959 | |||||||||||||
BPO | 126 | — | 126 | 109 | — | 109 | |||||||||||||
Brokerage | 247 | — | 247 | 274 | — | 274 | |||||||||||||
Total interest expense | 2,246 | — | 2,246 | 2,342 | — | 2,342 | |||||||||||||
Income (loss) before income taxes and non-controlling interests | |||||||||||||||||||
Payment Protection | 6,006 | (125 | ) | 5,881 | 5,410 | (605 | ) | 4,805 |
71
FORTEGRA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
Reconciliation of Segment Net Revenue to Total Revenue and EBITDA to Net Income | For the Three Months Ended | For the Three Months Ended | |||||||||||||||||
September 30, 2010 | December 31, 2010 | ||||||||||||||||||
As Previously Reported | Adjustment | As Restated | As Previously Reported | Adjustment | As Restated | ||||||||||||||
BPO | 1,544 | — | 1,544 | 1,463 | — | 1,463 | |||||||||||||
Brokerage | 693 | — | 693 | (413 | ) | — | (413 | ) | |||||||||||
Corporate | (1,220 | ) | — | (1,220 | ) | (68 | ) | — | (68 | ) | |||||||||
Total income before income taxes and non-controlling interests | 7,023 | (125 | ) | 6,898 | 6,392 | (605 | ) | 5,787 | |||||||||||
Income taxes | 2,576 | (44 | ) | 2,532 | 1,831 | (212 | ) | 1,619 | |||||||||||
Less: net income attributable to non-controlling interests | — | — | — | 51 | — | 51 | |||||||||||||
Net income | $ | 4,447 | $ | (81 | ) | 4,366 | $ | 4,510 | $ | (393 | ) | $ | 4,117 |
72
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements:
The following Consolidated Financial Statements of Fortegra Financial Corporation and subsidiaries are included in this report:
(a) | Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements. |
(b) | Consolidated Balance Sheets as of December 31, 2012 and 2011(Restated). |
(c) | Consolidated Statements of Income for the years ended December 31, 2012, 2011 (Restated) and 2010 (Restated). |
(d) | Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 (Restated) and 2010 (Restated). |
(e) | Consolidated Statements of Stockholders' Equity for the years ended December 31, 2012, 2011(Restated) and 2010(Restated). |
(f) | Consolidated Statements of Cash Flows the years ended December 31, 2012, 2011(Restated) and 2010 (Restated). |
(g) | Notes to Consolidated Financial Statements. |
(a)2. Consolidated Financial Statement Schedules
The following financial statement schedule is attached hereto:
Schedule II - Condensed Financial Information of the Registrant
* All other schedules are omitted because they are not applicable, not required, or the information is included in the Consolidated Financial Statements or the Notes thereto.
Schedule II — Condensed Financial Information of Registrant
FORTEGRA FINANCIAL CORPORATION | |||||||||||
PARENT COMPANY ONLY CONDENSED STATEMENTS OF INCOME | |||||||||||
(All Amounts in Thousands) | Years Ended December 31, | ||||||||||
2012 | 2011 | 2010 | |||||||||
Revenues | As Restated | As Restated | |||||||||
Management fee from subsidiaries* | $ | — | $ | — | $ | — | |||||
Net investment income | 290 | 298 | 307 | ||||||||
Other income | — | — | — | ||||||||
Total net revenue | 290 | 298 | 307 | ||||||||
Expenses | |||||||||||
Personnel costs* | — | — | — | ||||||||
Other operating expenses | 1,036 | 558 | 598 | ||||||||
Interest expense | 210 | 1,062 | 904 | ||||||||
Total expenses | 1,246 | 1,620 | 1,502 | ||||||||
Income before interest and income taxes interest | (956 | ) | (1,322 | ) | (1,195 | ) | |||||
Income taxes | (335 | ) | (357 | ) | (287 | ) | |||||
Income before equity in net income in subsidiaries | (621 | ) | (965 | ) | (908 | ) | |||||
Equity in net income of subsidiaries* | 15,786 | 14,474 | 16,102 | ||||||||
Net income | $ | 15,165 | $ | 13,509 | $ | 15,194 | |||||
* Eliminated in consolidation |
73
FORTEGRA FINANCIAL CORPORATION | |||||||
PARENT COMPANY ONLY CONDENSED BALANCE SHEETS | |||||||
(All Amounts in Thousands) | December 31, | ||||||
2012 | 2011 | ||||||
Assets: | As Restated | ||||||
Investment in subsidiaries * | $ | 120,406 | $ | 102,788 | |||
Cash and cash equivalents | 279 | 138 | |||||
Due from subsidiaries, net* | 13,960 | 19,891 | |||||
Notes receivable* | 4,999 | 3,351 | |||||
Other assets | 933 | 903 | |||||
Total assets | $ | 140,577 | $ | 127,071 | |||
Liabilities: | |||||||
Long-term debt | $ | — | $ | — | |||
Other liabilities | 194 | 496 | |||||
Total liabilities | 194 | 496 | |||||
Stockholders' equity: | |||||||
Total stockholders' equity | 140,383 | 126,575 | |||||
Total liabilities and stockholders' equity | $ | 140,577 | $ | 127,071 | |||
* Eliminated in consolidation |
FORTEGRA FINANCIAL CORPORATION | |||||||||||
PARENT COMPANY ONLY CONDENSED STATEMENTS OF CASH FLOWS | |||||||||||
(All Amounts in Thousands) | Years Ended December 31, | ||||||||||
2012 | 2011 | 2010 | |||||||||
Operating Activities: | As Restated | As Restated | |||||||||
Net income | $ | 15,165 | $ | 13,509 | $ | 15,194 | |||||
Adjustments to reconcile net income to net cash flows (used in) provided by operating activities | |||||||||||
Equity in net income of subsidiaries* | (15,786 | ) | (14,474 | ) | (16,102 | ) | |||||
Cash dividend from subsidiaries | — | — | — | ||||||||
Deferred income tax expense | — | — | 93 | ||||||||
Stock based compensation | 384 | 409 | 176 | ||||||||
Other changes in assets and liabilities: | |||||||||||
Net due to subsidiaries | 5,931 | 14,012 | (16,083 | ) | |||||||
Other assets and other liabilities | (332 | ) | 344 | 1,226 | |||||||
Net cash flows provided by (used in) operating activities | 5,362 | 13,800 | (15,496 | ) | |||||||
Investing Activities: | |||||||||||
Proceeds from maturities of investments | — | — | — | ||||||||
Net paid for the acquisition of subsidiaries | — | — | — | ||||||||
Proceeds from notes receivable | (1,648 | ) | 84 | 703 | |||||||
Net cash flows (used in) provided by investing activities | (1,648 | ) | 84 | 703 | |||||||
Financing Activities: | |||||||||||
Repayments of notes payable | — | (11,040 | ) | (11,487 | ) | ||||||
Additional borrowings under notes payable | — | — | — | ||||||||
Net proceeds from issuance of common stock | — | — | 40,203 | ||||||||
Initial public offering costs | — | (826 | ) | — | |||||||
Net proceeds from exercise of stock options | 20 | 651 | 203 | ||||||||
(Purchase) issuance of treasury stock | (3,923 | ) | (2,552 | ) | — | ||||||
Net proceeds received from stock issued in the Employee Stock Purchase Plan | 330 | — | — | ||||||||
Stockholder funds disbursed at purchase | — | — | (14,105 | ) | |||||||
Net cash flows (used in) provided by financing activities | (3,573 | ) | (13,767 | ) | 14,814 | ||||||
Net increase in cash and cash equivalents | 141 | 117 | 21 | ||||||||
Cash and cash equivalents at beginning of period | 138 | 21 | — | ||||||||
Cash and cash equivalents at end of period | $ | 279 | $ | 138 | $ | 21 | |||||
* Eliminated in consolidation |
74
(a)3. Exhibits
Exhibits listed in this Exhibit Index of this Form 10-K/A (Amendment No. 1) are filed herein or are incorporated by reference.
Incorporated by Reference | |||||||
Exhibit Number | Description of Exhibits | Form | File Number | Date Filed | Original Exhibit Number | Filed Herewith | Furnished Herewith |
1.1 | Form of Underwriting Agreement. | S-1/A | 333-169550 | 11/29/2010 | 1.1 | ||
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. | S-1 | 333-169550 | 9/23/2010 | 2.1 | ||
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., Life of the South Corporation and N.G. Houston, III, as Stockholder Representative. | S-1 | 333-169550 | 9/23/2010 | 2.2 | ||
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. | S-1 | 333-169550 | 9/23/2010 | 2.3 | ||
2.4 | Agreement and Plan of Merger, dated March 3, 2011 by and among eReinsure.com, Inc., a Delaware corporation, Alpine Acquisition Sub., Inc., a Delaware corporation, and Century Capital Partners III, L.P., as Agent solely for the purposes of Section 10.02, and LOTS Intermediate Co., a Delaware corporation. | 8-K | 001-35009 | 3/7/2011 | 2.1 | ||
3.1 | Third Amended and Restated Certificate of Incorporation of Fortegra Financial Corporation. | S-1/A | 333-169550 | 12/13/2010 | 3.3 | ||
3.3 | Amended and Restated Bylaws of Fortegra Financial Corporation. | S-1/A | 333-169550 | 11/29/2010 | 3.2 | ||
4.1 | Form of Common Stock Certificate. | S-1/A | 333-169550 | 12/13/2010 | 4.1 | ||
4.2 | Stockholders Agreement, dated as of March 7, 2007, among Life of the South Corporation(together with its successors), the Rollover Stockholders (as defined therein), Employee Stockholders (as defined therein) and Investors (as defined therein). | S-1/A | 333-169550 | 10/29/2010 | 4.2 | ||
10.1 | Indenture, dated as of June 20, 2007, between LOTS Intermediate Co. and Wilmington Trust Company. | S-1 | 333-169550 | 9/23/2010 | 10.1 | ||
10.2 | Form of Fixed/Floating Rate Senior Debenture (included in Exhibit 10.1). | S-1 | 333-169550 | 9/23/2010 | 10.2 | ||
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. | S-1 | 333-169550 | 9/23/2010 | 10.3 | ||
10.4 | Form of Subordinated Debenture (included in Exhibit 10.3). | S-1 | 333-169550 | 9/23/2010 | 10.4 | ||
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. | S-1 | 333-169550 | 9/23/2010 | 10.5 |
75
Incorporated by Reference | |||||||
Exhibit Number | Description of Exhibits | Form | File Number | Date Filed | Original Exhibit Number | Filed Herewith | Furnished Herewith |
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. | S-1 | 333-169550 | 9/23/2010 | 10.6 | ||
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. | S-1/A | 333-169550 | 10/29/2010 | 10.6.1 | ||
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. | S-1/A | 333-169550 | 12/13/2010 | 10.6.2 | ||
10.6.3 | Joinder Agreement, dated March 1, 2011, by Wells Fargo Bank, N.A., Suntrust Bank, as Administrative Agent and Fortegra Financial Corporation and LOTS Intermediate Co., as Borrowers | 8-K | 001-35009 | 3/7/2011 | 10.1 | ||
10.7 | Revolving Credit Note, dated June 16, 2010, among Fortegra Financial Corporation and LOTS Intermediate Co., as borrowers, and SunTrust Bank, as lender. | S-1 | 333-169550 | 9/23/2010 | 10.7 | ||
10.8 | Subsidiary Guaranty Agreement, dated June 16, 2010, among Bliss and Glennon, Inc., LOTSolutions, Inc., as guarantors and SunTrust Bank, as administrative agent. | S-1 | 333-169550 | 9/23/2010 | 10.8 | ||
10.9 | Security Agreement, dated June 16, 2010, by Fortegra Financial Corporation and LOTS Intermediate Co., as borrowers and SunTrust Bank, as administrative agent. | S-1 | 333-169550 | 9/23/2010 | 10.9 | ||
10.10 | Pledge Agreement, dated June 16, 2010 by and among Fortegra Financial Corporation, as pledgor and SunTrust Bank, as administrative agent. | S-1 | 333-169550 | 9/23/2010 | 10.10 | ||
10.11 | Form of Fortegra Financial Corporation Director Indemnification Agreement for John R. Carroll and J.J. Kardwell. | S-1/A | 333-169550 | 11/29/2010 | 10.18 | ||
10.12 | Form of Fortegra Financial Corporation Director Indemnification Agreement for Francis M. Colalucci, Frank P. Filipps, Arun Maheshwari, Ted W. Rollins and Sean S. Sweeney. | S-1/A | 333-169550 | 11/29/2010 | 10.19 | ||
10.13 | Form of Fortegra Financial Corporation Officer Indemnification Agreement. | S-1/A | 333-169550 | 12/3/2010 | 10.20 | ||
10.14 | 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. | S-1/A | 333-169550 | 10/29/2010 | 10.21 | ||
10.15 * | Executive Employment and Non-Competition Agreement, dated as of March 7, 2007, by and between Life of the South Corporation and Richard S. Kahlbaugh. | S-1/A | 333-169550 | 12/3/2010 | 10.22 | ||
10.15.1* | 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. | S-1/A | 333-169550 | 12/3/2010 | 10.22.1 | ||
10.16 * | Executive Employment and Non-Competition Agreement, dated as of October 1, 2010, by and between Fortegra Financial Corporation and Walter P. Mascherin. | S-1/A | 333-169550 | 12/3/2010 | 10.27 | ||
10.17 * | 2005 Equity Incentive Plan. | S-1/A | 333-169550 | 10/29/2010 | 10.28 | ||
10.18 * | Key Employee Stock Option Plan (1995) Agreement. | S-1/A | 333-169550 | 10/29/2010 | 10.29 |
76
Incorporated by Reference | |||||||
Exhibit Number | Description of Exhibits | Form | File Number | Date Filed | Original Exhibit Number | Filed Herewith | Furnished Herewith |
10.19 | 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. | S-1/A | 333-169550 | 11/16/2010 | 10.30 | ||
10.20 | Stock Option Agreement by and between Life of the South Corporation and Richard Kahlbaugh, dated as of October 25, 2007. | S-1/A | 333-169550 | 11/16/2010 | 10.31 | ||
10.21 * | 2010 Omnibus Incentive Plan. | S-1/A | 333-169550 | 12/3/2010 | 10.32 | ||
10.22 * | Employee Stock Purchase Plan. | S-1/A | 333-169550 | 12/3/2010 | 10.33 | ||
10.23 * | Deferred Compensation Agreement, dated January 1, 2006 between Life of the South Corporation and Richard S. Kahlbaugh. | S-1/A | 333-169550 | 10/29/2010 | 10.35 | ||
10.24 | 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. (CONFIDENTIAL TREATMENT HAS BEEN GRANTED WITH RESPECT TO CERTAIN PORTIONS, WHICH HAVE BEEN FILED SEPERATELY WITH THE SECURTIES AND EXHANGE COMMISSION) | S-1/A | 333-169550 | 11/16/2010 | 10.37 | ||
10.24.1 | Amendment No. 4, dated January 31, 2012, to the 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-K | 001-35009 | 4/1/2013 | 10.24.1 | ||
10.24.2 | Amendment No. 5, dated February 1, 2012, to the 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, August 1, 2008, and January 31, 2012. | 10-K | 001-35009 | 4/1/2013 | 10.24.2 | ||
10.25 | 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. (CONFIDENTIAL TREATMENT HAS BEEN GRANTED WITH RESPECT TO CERTAIN PORTIONS, WHICH HAVE BEEN FILED SEPERATELY WITH THE SECURTIES AND EXHANGE COMMISSION) | S-1/A | 333-169550 | 11/16/2010 | 10.38 | ||
10.25.1 | Amendment No. 2, dated January 1, 2012, to the 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-K | 001-35009 | 4/1/2013 | 10.25.1 | ||
10.26 * | Form of Restricted Stock Award Agreement for Directors. | S-1/A | 333-169550 | 12/3/2010 | 10.47 | ||
10.26.1 * | Amended - Form of Restricted Stock Award Agreement for Directors. | 10-K | 001-35009 | 4/1/2013 | 10.26.1 | ||
10.27 * | Form of Restricted Stock Award Agreement for Employees. | S-1/A | 333-169550 | 12/3/2010 | 10.48 | ||
10.28 * | Form of Restricted Stock Award Agreement (Bonus Pool). | S-1/A | 333-169550 | 12/3/2010 | 10.49 | ||
10.29 * | Form of Nonqualified Stock Option Award Agreement. | S-1/A | 333-169550 | 12/3/2010 | 10.50 | ||
10.30 * | Form of Nonqualified Stock Option Award Agreement for Walter P. Mascherin. | S-1/A | 333-169550 | 12/3/2010 | 10.51 |
77
Incorporated by Reference | |||||||
Exhibit Number | Description of Exhibits | Form | File Number | Date Filed | Original Exhibit Number | Filed Herewith | Furnished Herewith |
10.31* | Executive Employment and Non-Competition Agreement, dated as of January 1, 2011, by and between Fortegra Financial Corporation and Alex Halikias. | 10-Q | 001-35009 | 5/15/2012 | 10.38 | ||
10.32 * | Executive Employment and Non-Competition Agreement, dated as of January 1, 2009, by and between Fortegra Financial Corporation and Joseph McCaw. | 10-Q | 001-35009 | 5/15/2012 | 10.39 | ||
10.33 * | Executive Employment and Non-Competition Agreement, dated as of October 1, 2010, by and between Fortegra Financial Corporation and John G. Short. | 10-Q | 001-35009 | 5/15/2012 | 10.40 | ||
10.34 | Credit Agreement, dated August 2, 2012, among Fortegra Financial Corporation and LOTS Intermediate Co., as borrowers; the initial lenders named therein; Wells Fargo Bank, N.A., as administrative agent, swingline lender, and issuing lender; Wells Fargo Securities, LLC, as bookrunner and joint lead arranger; and Synovus Bank as joint lead arranger and syndication agent. | 8-K | 001-35009 | 8/7/2012 | 10.1 | ||
10.35 | Subsidiary Guaranty Agreement, dated August 2, 2012, among certain subsidiaries of Fortegra Financial Corporation and LOTS Intermediate Co., as guarantors, and Wells Fargo Bank, N.A. | 8-K | 001-35009 | 8/7/2012 | 10.2 | ||
10.36 | Pledge Agreement, dated August 2, 2012, by Fortegra Financial Corporation and LOTS Intermediate Co., as pledgors, and Wells Fargo Bank, N.A. | 8-K | 001-35009 | 8/7/2012 | 10.3 | ||
10.37 | Security Agreement, dated August 2, 2012, among Fortegra Financial Corporation, LOTS Intermediate Co. and certain of its subsidiaries, as grantors, and Wells Fargo Bank, N.A. | 8-K | 001-35009 | 8/7/2012 | 10.4 | ||
10.38 | Trademark Security Agreement, dated August 2, 2012, among the Fortegra Financial Corporation, LOTSolutions, Inc., Pacific Benefits Group Northwest, L.L.C., eReinsure.com, Inc., as grantors, and Wells Fargo Bank, N.A. | 8-K | 001-35009 | 8/7/2012 | 10.5 | ||
10.39 | Patent Security Agreement, dated August 2, 2012, by eReinsure.com, Inc., as grantor, and Wells Fargo Bank, N.A. | 8-K | 001-35009 | 8/7/2012 | 10.6 | ||
10.40* | Executive Employment and Non-Competition Agreement, dated as of January 1, 2011, by and between Fortegra Financial Corporation and Igor Best-Devereux | 10-K | 001-35009 | 4/1/2013 | 10.40 | ||
11.1 | Statement Regarding Computation of Per Share Earnings (incorporated by reference to Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A). | ||||||
21 | List of Subsidiaries of Fortegra Financial Corporation | 10-K | 001-35009 | 4/1/2013 | 21 | ||
23.1 | Consent of Johnson Lambert LLP, Independent Registered Public Accounting Firm | 10-K | 001-35009 | 4/1/2013 | 23 | ||
23.2 | Consent of Johnson Lambert LLP, Independent Registered Public Accounting Firm | X | |||||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | 10-K | 001-35009 | 4/1/2013 | 31.1 | ||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | X | |||||
31.3 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | 10-K | 001-35009 | 4/1/2013 | 31.2 | ||
31.4 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | X |
78
Incorporated by Reference | |||||||
Exhibit Number | Description of Exhibits | Form | File Number | Date Filed | Original Exhibit Number | Filed Herewith | Furnished Herewith |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 10-K | 001-35009 | 4/1/2013 | 32.1 | ||
32.2 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | |||||
101 | The following materials from Fortegra Financial Corporation's Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at December 31, 2012 and December 31, 2011, (ii) the Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2011, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2011, (iv) the Consolidated Statements of Stockholders' Equity for the years ended December 31, 2012, 2011 and 2011, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2011, and (vi) the Notes to Consolidated Financial Statements. (1) | 10-K | 001-35009 | 4/1/2013 | 101 (1) | ||
* | Management contract or compensatory plan or arrangement. | ||||||
(1) | Previously furnished with the Annual Report on Form 10-K of Fortegra Financial Corporation for the year ended December 31, 2012, as filed on April 1, 2013. |
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Fortegra Financial Corporation | ||||
Date: | August 23, 2013 | By: | /s/ Richard S. Kahlbaugh | |
Richard S. Kahlbaugh | ||||
Chairman, President and Chief Executive Officer |
80