The Company leases its principal offices located in South San Francisco, California which are used as the Company's headquarters and as the primary operations center for GPIC, PMSIS, Fastrac, and Pinnacle. In addition the Company leases space in Concord, California and Tucson, Arizona, which is currently used by Pinnacle primarily for making manual flood zone determinations. The Company leases space in Springfield, Ohio which is used by Fastrac with respect to its motor vehicle insurance tracking and outsourcing operations. The Company leases space in Vienna, Virginia and Warwick, Rhode Island, which is used as the primary operations centers of PinTax. The Company also leases other sales and service offices.
(2) Net income (loss) per share is presented as diluted earnings per share. The weighted average shares outstanding includes the number of shares issuable upon exercise of outstanding options as calculated using the treasury stock method.
determinations or higher fee, life-of-loan services where the Company updates the flood determinations over the periods in which the loans are outstanding or over the term of the agreement with the particular customer. Revenues from flood zone determinations are generally related to the volume of mortgage loan originations, both new and refinanced. The Company generates fees on Real Estate Tax Services by charging a fee for each property tracked for tax information. The fees cover services for a one year period, or, for a higher fee, for the life of the loan, where the Company tracks the tax information for its customer during the term of the loan or over the term of the agreement with the particular customer. An additional fee will be generally charged for tax outsourcing. Net premiums written represent direct and assumed premiums generated by GPIC, less premiums canceled or ceded to other insurers, and adjusted for changes in the reserve for return premiums. Net premiums earned represent net premiums written adjusted for changes in unearned premium reserves. Tracking and Outsourcing fees are generated by providing Tracking and Outsourcing Services and are usually based on the number of loans or leases tracked. Net commission income represents commissions received from nonaffiliated insurance companies for lender-placed insurance produced by PMSIS and from the Federal Emergency Management Agency ("FEMA") for flood insurance written by GPIC.
The Company's insurance products include lender-placed insurance policies which have stated terms of either up to ninety (90) days ("short-term policies") or six (6) months to one (1) year ("longer-term policies"), most of which are longer-term policies. Premiums for longer-term policies are recorded as revenues when earned. The Company's lender-placed and flood insurance policies are canceled at a relatively high rate because they generally remain in effect only until financial institutions receive proof that borrowers have obtained their own insurance. At the time the lender-placed policies are issued, a reserve is established to provide for return of premiums for anticipated cancellations, which has the effect of decreasing net premiums written and earned premiums. Since 1993, the reserve has been established at approximately 64% to 68% of gross premiums written. Premiums are written directly by GPIC or by third party insurance companies in certain states where GPIC is not licensed or where its products are not approved. The following table summarizes premiums written net of cancellations after application of the reserve for return premiums during the periods indicated (in thousands):
The Company's strategy includes expanding its authorization to write premiums on a direct basis and reducing premiums ceded to reinsurers. At the present time, the Company generally retains the first $500,000 of each risk and reinsures the rest up to a maximum of $2.0 million per risk, pursuant to reinsurance arrangements. The Company also purchases catastrophic reinsurance, under which the Company is protected against an accumulation of losses arising out of any one event up to 95% of $12.5 million in excess of the initial $2.5 million of losses which the Company incurs. See "Business--Regulation-- Reinsurance" and Note 17 of Notes to Consolidated Financial Statements for a description of the Company's reinsurance arrangements. The Company remains primarily liable to its policyholders in the event any reinsurer is unable or will not fulfill the obligations assumed under reinsurance. As a result of the cost and availability of reinsurance, in the future the Company may elect to retain a higher portion of the risk historically ceded to reinsurers. If the Company were to retain a higher proportion of insured risks, it would increase its exposure to significant losses relating to properties insured by the Company. This increased exposure could have a material adverse effect on the Company's results of operations.
The PinTax Acquisition was accounted for as a purchase of assets. As of the purchase date, the fair market value of the assets acquired from ARTS was approximately $4.4 million, and the fair market value of liabilities assumed was approximately $7.3 million, including approximately $7 million of deferred revenue related to ARTS' then existing portfolio of loans. The amount of goodwill recorded as of the date of PinTax Acquisition was $12.7 million, which is being amortized over a 25-year period as a result of long standing vendor and customer relationships. Goodwill is classified on the Company's balance sheet under "Intangible Assets".
The Company has considered the potential impact of the year 2000 to its computer systems. Through normal, planned enhancements of existing systems, future development of new systems, and upgrades to operation systems and databases already covered by maintenance agreements, some of the Company's systems are already Year 2000 compliant, and the Company believes that Year 2000 compliance will be achieved prior to December 31, 1998 on the balance of its systems. The Company does not anticipate any significant purchases of specific software or hardware, nor does it anticipate the need to engage outside consultants, to achieve compliance. While management expects some costs associated with compliance, it is anticipated that those costs will not be material. The accounting treatment of costs incurred solely in connection with Year 2000 compliance will be treated as period costs and will be expensed as incurred. The Company's customers and companies and others from which the Company receives data are also dependent upon computer systems. It is out of the Company's control whether such entities are or will be Year 2000 compliant; however, the Company believes that most of them are aware of the issue.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1997
Total revenue increased from $40.7 million in 1996 to $53.1 million in 1997, an increase of $12.4 million or 30.5%. Net premiums written increased from $12.6 million in 1996 to $20.5 million in 1997, an increase of $7.9 million or 62.7%. The increase in net premiums written was principally due to growth in loan portfolios of the Company's existing and former Tracking and Outsourcing Services clients. There was no material price change related to the Company's insurance products in 1997.
Tracking fees increased from $5.5 million in 1996 to $7.5 million in 1997, an increase of $2.1 million or 37.7%. The increase was primarily due to higher volumes of motor vehicle leases tracked for new and existing customers.
remaining increase in all other expenses was due to several factors, including an increase in direct costs related to growth in revenues (e.g., data, telecommunications cost, postage) and an increase in sales, marketing, consulting and advertising costs.
YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1996
The dollar amounts referred to in this section comparing operating results for the year ended December 31, 1995 with December 31, 1996 are approximate amounts stated in millions and are based on the financial statements included elsewhere in this Report, which amounts are stated in thousands. All percentages referred to in this section comparing operating results for the year ended December 31, 1995 with December 31, 1996 are approximate percentages and are based only on dollar amounts set forth in the financial statements contained elsewhere in this Report, which amounts are stated in thousands.
Total revenue increased from $35.9 million in 1995 to $40.7 million in 1996, an increase of $4.8 million or 13.2%. Net premiums written decreased from $15.0 million in 1995 to $12.6 million in 1996, a decrease of $2.4 million or 15.5%. The decrease in net premiums written was principally due to an increase in reserves to provide for return of premiums for anticipated policy cancellations and the run-off of certain accounts.
Net premiums earned decreased from $17.0 million in 1995 to $13.6 million in 1996, a decrease of $3.4 million or 20.2%. The decrease was partially due to the increase in reserve for return premiums and also partially due to a decline in written premiums.
Commissions paid to nonaffiliates decreased from $4.1 million (24.0% of premiums earned) in 1995 to $2.0 million (14.4% of premiums earned) in 1996, a decrease of $2.1 million, or 52.1%, due primarily to the fact that a larger percentage of the insurance business has transferred to customers with lower commission rates.
Personnel expenses increased from $16.9 million in 1995 to $18.9 million in 1996, an increase of $2.0 million or 12.2%. The increase in personnel expenses was due to staff additions and increased outside labor in response to the
All other expenses increased from $12.2 million in 1995 to $14.2 million in 1996, an increase of $2 million, or 16.1%. In June 1996, the Company accrued $1.4 million of expense as a result of retention agreements entered into with certain executives. The purpose of the agreements was to ensure the availability and employment of those executives through the transition following the change of control of the Company which occurred in July 1996.
Of the Company's cash and short-term investments, $8.7 million is held by GPIC. Insurance companies, including GPIC, are subject to laws and regulations which restrict their ability to pay dividends to parent companies or other shareholders. Under California law, the maximum amount of dividends that GPIC may pay the Company in any twelve (12) month period without prior regulatory approval is the greater of (i) net income for the preceding calendar year, or (ii) 10% of policyholders' surplus (shareholders' equity adjusted to a statutory basis) as of the previous December 31. For the year ended December 31, 1997, GPIC had net income of $1.7 million and as of December 31, 1997, statutory policyholders' surplus of $25.6 million. For the year ended December 31, 1997, the maximum dividend permitted to be paid by GPIC to National was approximately $2.8 million. For 1998, the maximum dividend permitted to be paid by GPIC to National is approximately $2.6 million. See "Market for Registrant's Common Equity and Related Stockholder Matters" and Note 14 of Notes to Consolidated Financial Statements.
In connection with the PinTax Acquisition, National and New Arts entered into a term note facility (the "Term Facility") with the Company's primary commercial bank. The Term Facility allows for a maximum borrowing of $11.3 million, including $2 million for any Additional Consideration which may be payable pursuant to the Agreement on or before May 25, 1998. The Term Facility matures in May 2003 and calls for interest payments at the rate of the lending bank's prime rate plus one and one-quarter percent, beginning September 1997. Principal is paid monthly,
beginning May 30, 1998, in accordance with a variable amortization schedule. Collateral for the loan includes non-insurance company cash deposits of the Company, the common stock of Pinnacle, as well as the stock of PinTax and of New Arts. As of December 31, 1997, the Company has utilized $9.3 million of the $11.3 million Term Facility.
On April 2, 1997, the Company obtained a $5 million revolving credit facility from the Company's primary commercial bank (the "Revolving Facility"). On September 18, 1997, the Revolving Facility was amended. The primary amendment to the Revolving Facility was the reduction in borrowing limits to $1 million from $5 million. As of December 31, 1997, the Company had no borrowings under the Revolving Facility and was in compliance with the financial covenants of the Revolving Facility. The Revolving Facility expires March 31, 1999. See Note 7 of Notes to Consolidated Financial Statements.
Consolidated stockholders' equity at December 31, 1997, totaled $27.8 million or $6.73 per share compared to $28.6 million or $7.28 per share at December 31, 1996.
The Company anticipates that it may incur certain costs in 1998 in connection with various new business activities, including building its customer base, reorganizing operations and carrying on its product quality improvement programs. The overall goal of these activities is to enhance the long term value of the Company. The Company has begun to hire additional personnel, purchase new computer and other equipment, lease additional office space and incur other expenses in connection with these business activities. There can be no assurance that such costs will be offset by increases in revenue; and, in any event, the Company expects that any increase in revenue will lag the periods in which expenses are incurred. Furthermore, there can be no assurances that the hiring of additional personnel or the reorganizing of operations will lead to higher profitability. If such increases in expenses are not fully offset by increases in revenue, the Company's financial position and results of operations and earnings could be materially adversely affected.
GPIC is required to maintain reserves to cover its estimated ultimate liability for loss and loss adjustment expenses with respect to reported losses and incurred but not reported claims. These reserves are estimates of what GPIC expects the ultimate settlement and administration of claims will cost, and are based on known facts and circumstances, predictions of future events, estimates of future trends in claims severity and other variable, subjective factors. No assurances can be given that such estimates will be adequate to cover actual losses incurred by GPIC. Any significant changes in GPIC's estimate of ultimate losses on reported claims may materially adversely affect the results of GPIC's operations in the period reported. GPIC has in the past experienced adverse developments in its loss reserves. GPIC's loss and loss adjustment expense reserves are reviewed on an annual basis by unaffiliated actuaries. GPIC's most recent actuarial review of such reserves as of December 31, 1997 concluded that the reserves (i) met the requirements of the insurance laws of California; (ii) were computed in accordance with accepted loss reserving standards and principles and (iii) make a reasonable provision for all unpaid loss and loss expense obligations of GPIC under the terms of its policies and agreements.
GPIC also maintains a reserve for return premiums which is based upon GPIC's historical experience. As is prevalent in the lender-placed insurance industry, a substantial amount of GPIC's net premiums written are refunded to policyholders. The amount of such refunds can be affected by, among other things, inaccurate or untimely data submitted by customers, which GPIC uses as a basis for recording written premiums or the loss of customers. No assurance can be given that the reserve for return premiums will be adequate to cover actual refunded premiums paid by GPIC in the future. See, "Business - Insurance Operations".
PinTax indemnifies its customers for real estate late-payment penalties, interest on late-paid taxes and loss of tax payment discounts as a result of certain errors or omissions made by PinTax. PMSIS and Fastrac indemnify customers for certain errors and omissions made by either of them. The Company maintains insurance coverage in the maximum aggregate amount of $5 million for certain types of errors and omissions. The policy is on a claims made and occurrence basis. While to date the Company has experienced no significant losses related to errors or omissions and maintains reserves equal to its self insured retention for errors and omissions losses, there can be no assurance such reserves will prove adequate in the future or that the Company's insurance will avert adverse impacts as a result of any errors or omissions.
The Company's delivery and upgrade of products and services to its customers is dependent upon, among other factors, the Company's ability to attract and retain key analytical and management professionals, including skilled computer programmers and systems analysts. Businesses located in San Francisco, San Mateo, Contra Costa and Santa Clara counties of California are experiencing a tightening of the local labor market for these professionals, which may result in one or more of the following: an increase in personnel costs, a delay in service installations and a reduction in customer service. The Company is unable to predict when the conditions in the local labor market will change.