SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A3
AMENDED CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 4, 1997
GORAN CAPITAL INC.
(Exact name of registrant as specified in its charter)
Canada 000-24366 Not Applicable
(State or other jurisdiction of (Commission (I.R.S. Employer
Incorporation or organization) File Number) Identification No.)
181 University Avenue, Suite 1101 - Box 11, Toronto, Ontario, Canada M5H 3M7
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (416) 594-1155 (Canada)
(317) 259-6300 (USA)
(Former name or former address, if changed since last report) Not Applicable
ITEM 2. Acquisition or Disposition of Assets
In June, 1995, the Company's 100% owned subsidiary, Symon's International Group,
Inc., ("SIG") entered into a letter of intent to acquire Superior Insurance
Company ("Superior")from Fortis, Inc. ("Fortis"), and in January, 1996, SIG
secured a commitment from the GS Capital Partners II, L.P.; GS Capital Partners
II Offshore, L.P.; Stone Street Funds, L.P.; Bridge Street Funds, L.P.; and
Goldman Sachs & Co. VerwaltungsGmblt, five investment funds affiliated with
Goldman, Sachs & Co. (collectively, the "GS Funds") to invest equity capital. On
January 31, 1996, the Company, SIG, Fortis and its wholly-owned subsidiary,
Interfinancial, Inc. ("Interfinancial"), a holding company for Superior, entered
into a Stock Purchase Agreement (the "Superior Purchase Agreement") pursuant to
which SIG agreed to purchase Superior from Interfinancial (the "Acquisition")
for a purchase price of approximately $66.6 million. Simultaneously with the
execution of the Superior Purchase Agreement, the Company, SIG, GGS Management
Holdings, Inc. ("GGS Holdings") and GS Capital Partners II, L.P., a Delaware
limited partnership, entered into an agreement (the "GGS Agreement") to
capitalize GGS Holdings and to cause GGS Holdings to issue its capital stock to
SIG and to the GS Funds, so as to give SIG a 52% ownership interest and the GS
Funds a 48% ownership interest (the "Formation Transaction"). Pursuant to the
GGS Agreement, (a) SIG contributed to GGS Holdings (i) Pafco General Insurance
Company ("Pafco") common stock with a book value determined in accordance with
U.S. GAAP of $16.8 million as reflected on an audited post-closing balance sheet
of Pafco, (ii) its right to acquire Superior pursuant to the Superior Purchase
Agreement and (iii) certain fixed assets, including office furniture and
equipment, having a value of approximately $350,000 and (b) the GS Funds
contributed to GGS Holdings $21.2 million in cash. The Formation Transaction and
the Acquisition were completed on April 30, 1996. GGS Management Inc. "(GGS
Management"), a wholly owned subsidiary at GGS Holdings funded the purchase
price with a combination of the $21.2 million contributed by the GS Funds and
the proceeds of $48.0 million senior bank facility extended to GGS Management
(the "GGS Senior Credit Facility").
Pursuant to the GGS Agreement, Pafco transferred all of the outstanding
capital stock of IGF Insurance Company (the "Transfer") in order to improve the
risk-based capital rating of Pafco and to permit GGS Holdings to focus
exclusively on the nonstandard automobile insurance business. Pafco accomplished
the Transfer by forming a wholly-owned subsidiary, IGF Holdings, Inc. ("IGF
Holdings"), to which Pafco contributed all of the outstanding shares of capital
stock of IGF Insurance Company. Prior to the distribution of the IGF Holdings
capital stock to the Company, IGF Holdings paid to Pafco a dividend in the
aggregate amount of approximately $11.0 million (the "Dividend"), consisting of
$7.5 million in cash and a subordinated promissory note in the principal amount
of approximately $3.5 million (the "IGF Note"). Pafco then distributed the
outstanding capital stock of IGF Holdings to the Company. IGF Holdings funded
the cash portion of the Dividend with bank debt in the principal amount of $7.5
million (the "IGFH Bank Debt"). The IGFH Bank Debt and the IGF Note were repaid
with a portion of the proceeds from SIG's initial public offering.
Prior to January 1, 1996, SIG, through Symons International Group, Inc.
(Florida) ("SIGF"), its specialized surplus lines brokerage unit based in
Florida, provided certain commercial insurance products through retail agencies,
principally in the southeast United States. SIGF writes these specialty products
through a number of different insurers including Pafco, United National
Insurance Group, Munich American Reinsurance Corp. and Lloyd's of London.
Effective January 1, 1996, SIG transferred to the Company all of the issued and
outstanding shares of capital stock of SIGF (the "Distribution").
The following historical financial statements and pro-forma financial
statements amend and restate the historical financial statements and pro forma
financial statements included in Goran Capital Inc.'s Form 8-K originally filed
as of May 14, 1996 and amended as of July 15, 1996 and July 31, 1996:
1. Audited consolidated financial statements of Superior Insurance Company.
2. Unaudited pro-forma consolidated financial statements of Goran Capital Inc.
ITEM 7. Exhibits
23 Consent of Independent Accountants
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GORAN CAPITAL INC.
(Registrant)
April 4, 1997 By: /s/ Alan G. Symons
President and Chief Executive Officer
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Superior Insurance Company, Inc. and Subsidiaries
Table of Contents
Report of Independent Accountants 2
Consolidated Financial Statements:
Consolidated Balance Sheets
as of December 31, 1994 and 1995 3
Consolidated Statements of Operations for the Years
Ended December 31, 1993, 1994 and 1995 4
Consolidated Statements of changes in Stockholders'
Equity for the Years Ended December 31, 1993, 1994
and 1995 5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1993, 1994 and 1995 6
Notes to Consolidated Financial Statements 7-22
Report of Independent Accountants
Board of Directors and Stockholders of
Superior Insurance Company, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Superior
Insurance Company, Inc. and Subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of
Superior Insurance Company, Inc. and Subsidiaries as of December 31, 1994 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board's Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities in 1993.
As discussed in Notes 1 and 6 to the consolidated financial statements, the
Company changed its method of accounting for income taxes during the year ended
December 31, 1993.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
June 14, 1996
Superior Insurance Company, Inc. and Subsidiaries
Consolidated Balance Sheets
as of December 31, 1994 and 1995
(in thousands, except share data)
December 31,
--------------------------------
ASSETS 1994 1995
-------------- --------------
Assets:
Investments:
Available for sale:
Fixed maturities, at market $93,860 $99,556
Equity securities, at market 7,140 8,070
Short-term investments, at amortized cost, 5,538 8,462
which approximates market
Other investment, at cost 808 274
Cash and cash equivalents 11 1,430
Receivables (net of allowance for doubtful
accounts of $310 and
$500 at December 31, 1994 and 1995,
respectively) 31,425 30,209
Reinsurance recoverable on unpaid losses 1,099 987
Federal income tax receivable 3521 -
Accrued investment income 1,888 1,602
Deferred policy acquisition costs 9,004 7,574
Deferred income taxes 3,785 44
Property and equipment 357 697
Other assets 3,428 1,225
-------- --------
Total assets $ $
161,864 160,130
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses $54,577 $47,112
Unearned premiums 44,593 41,048
Draft payables 6,509 6,070
Accrued expenses 4,307 4,107
Federal income tax payable - 177
-------- --------
Total liabilities
109,986 98,514
-------- --------
Stockholders' equity:
Common stock, $100 par value, 30,000 3,000 3,000
shares authorized, issued and outstanding
outstanding
Additional paid-in capital 37,025 37,025
Unrealized (loss) gain on investments, net of
deferred tax (benefit) expense of
$(412) in 1994 and $2,605 in 1995 (765) 4,838
Retained earnings 12,618 16,753
-------- --------
Total stockholders' equity 51,878 61,616
-------- --------
Total liabilities and stockholders' equity $161,864 $160,130
-------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
Superior Insurance Company, Inc. and Subsidiaries
Consolidated Statements of Operations
for the years ended December 31, 1993, 1994 and 1995
(in thousands)
Years ended
December 31,
------------------------------------
1993 1994 1995
---------- ---------- ----
Gross premiums written $115,660 $112,906 $94,756
Less ceded premiums (366) (391) (686)
--------- --------- ---------
Net premiums written 115,294 112,515 94,070
Change in unearned premiums 2,842 322 3,544
--------- --------- ---------
Net premiums earned 118,136 112,837 97,614
Net investment income 8170 7024 7093
Other income 5,879 3,344 4,171
Net realized capital gain (loss) 3,559 (200) 1954
--------- --------- ---------
Total revenues 135,744 123,005 110,832
--------- --------- ---------
Expenses:
Losses and loss adjustment
expenses 85,902 92,378 72,343
Policy acquisition and general and
administrative expenses 36,292 38,902 32,705
--------- --------- ---------
Total expenses 122,194 131,280 105,048
--------- --------- ---------
Income (loss) before income
taxes and cumulative
effect of change in 13,550 (8,275) 5,784
accounting principle --------- --------- ---------
Income taxes:
Current income tax expense 3,207 (2,770) 925
(benefit)
Deferred income tax expense (benefit) 774 (1,030) 724
--------- --------- ---------
Total income taxes 3,981 (3,800) 1,649
--------- --------- ---------
Income (loss) before
cumulative effect of a
change in accounting 9,569 (4,475) 4,135
principle
Cumulative effect of a 1,389 - -
change in accounting principle
--------- --------- ---------
Net income (loss) $10,958 $(4,475) $4,135
========= ======= =========
The accompanying notes are an integral part of the consolidated financial
statements.
Superior Insurance Company, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995 (in thousands)
Unrealized on
Additional (Loss) Total
Common Paid-in on Retained Stockholders'
Stock Capital Investment Earnings Equity
----- ------- ---------- -------- ------
Balance at January 1, 1993 $1,500 $37,025 $655 $29,635 $68,815
Change in unrealized (loss)
gain on investments,
net of deferred taxes - - 3,983 - 3,983
Cash dividends paid - - - (10,000) (10,000)
Common stock dividends 1,500 - - (1,500) -
paid
Net income - - - 10,958 10,958
-------- -------- -------- -------- --------
Balance at December 31, 1993 3,000 37,025 4,638 29,093 73,756
Change in unrealized (loss)
gain on investments,
net of deferred taxes - - (5,403) - (5,403)
Cash dividends paid - - - (12,000) (12,000)
Net loss - - - (4,475) (4,475)
-------- -------- -------- -------- --------
Balance at December 31, 1994 $3,000 $37,025 $(765) $12,618 $51,878
Change in unrealized (loss)
gain on investments,
net of deferred taxes - - 5,603 - 5,603
Net income - - - 4,135 4,135
-------- -------- -------- -------- --------
Balance at December 31, 1995 3,000 37,025 4,838 16,753 61,616
====== ======= ====== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
Superior Insurance Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 (in thousands)
Years ended
December 31,
-----------------------------
1993 1994 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $10,958 $(4,475) $4,135
Adjustments to reconcile net income
to net cash provided from
(used in) operations:
Net amortization on fixed maturities 909 499 205
Depreciation of property and 128 185 214
equipment
Deferred income tax expense (615) 724 689
(benefit) (1,030)
Net (gain) loss on sale of fixed (3,546) 210 (1,940)
assets and investments -
Net changes in operating assets and liabilities:
Receivables (4,052) (1,303) 1,216
Reinsurance recoverable on (12) - 49
unpaid losses
Accrued investment income 504 524 286
Federal income taxes receivable (23) 3698
(payable) (4,075)
Deferred policy acquisition costs 248 (78) 1430
Other assets 89 (2,382) 2,203
Losses and loss adjustment
expenses (4,260) 985 (7,402)
Unearned premiums (2,842) (322) (3,545)
Drafts payable
(2,091) (1,897) (439)
Accrued expenses - 4,307 (200)
--------- --------- ---------
Net cash provided from (used
in) operations (4,605) (8,852) 634
--------- --------- ---------
Cash flow from investing activities:
Net (purchases) sales of short-term 5,322 1,845 (2,924)
investments
Proceeds from sales, calls and
maturities of fixed maturities 9,866 77,224 58,725
Purchases of fixed maturities
(76,991) (64,678) (56,222)
Proceeds from sales of equity
securities 91,397 136,121 87,319
Purchase of equity securities
(92,605) (133,482) (86,663)
Proceeds from the sale of other - - 1,105
investments
Proceeds from sales of property and 30 33 -
equipment
Purchases of property and equipment (388 -198 (555)
--------- --------- ---------
Net cash provided from (used
in) investing activities 18,631 16,865 785
--------- --------- ---------
Cash flow from financing activities:
Payment of dividends - - -
--------- --------- ---------
Net cash (used in) financing - - -
activities (10,000) (12,000)
--------- --------- ---------
Increase (decrease) in cash 4,026 (3,987) 1,419
and cash equivalents
Cash and cash equivalents, beginning (28) 3,998 11
of year
--------- --------- ---------
Cash and cash equivalents, end of year $3,998 $11 $1,430
--------- --------- ---------
Supplemental cash flow information:
Cash paid for income taxes, net of refunds $3,230 $1,305 $(2,773)
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Superior Insurance Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
1. Nature of Operations and Significant Accounting Policies:
Superior Insurance Company, Inc. ("Superior" or the "Company") was a
wholly-owned subsidiary of Interfinancial Inc. (the "Parent").
Interfinancial Inc. is a wholly-owned subsidiary of Fortis, Inc. Fortis,
Inc. is equally owned by Fortis AMEV, The Netherlands ("AMEV") and Fortis
AG, Brussels, Belgium. As further discussed in Note 14 the Company was sold
by the Parent to GGS Holdings on May 1, 1996.
The Company writes primarily private passenger automobile insurance
coverage. Approximately one-half of the Company's business is written in
the State of Florida. As such, a significant portion of agents' balances
and uncollected premiums is due from Florida policyholders.
The following is a description of the significant accounting policies and
practices employed:
Principles of Consolidation
The consolidated financial statements include the accounts, after intercompany
eliminations, of the Company and its wholly owned subsidiaries as follows:
Superior American Insurance Company ("Superior American") and Superior Guaranty
Insurance Company ("Superior Guaranty").
Basis of Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") which differ from statutory
accounting practices ("SAP") prescribed or permitted for insurance companies by
regulatory authorities in the following respects:
o Certain assets are included in the balance sheet that are excluded as
"Nonadmitted Assets" under statutory accounting.
o Costs incurred by the Company relating to the acquisition of new
business which are expensed for statutory purposes are deferred and
amortized on a straight-line basis over the term of the related
policies. Commissions allowed by reinsurers on business ceded are
deferred and amortized with policy acquisition costs.
o The investment in wholly owned subsidiaries is consolidated for GAAP
rather than valued on the statutory equity method. The net income or
loss and changes in unassigned surplus of the subsidiaries is
reflected in net income for the period rather than recorded directly
to unassigned surplus.
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
1. Nature of Operations and Significant Accounting Policies, continued:
o Investments in bonds are designated at purchase as held to maturity,
trading, or available for sale. Held-to-maturity fixed maturity
investments are reported at amortized cost, and the remaining fixed
maturity investments are reported at fair value with unrealized
holding gains and losses reported in operations for those designated
as trading and as a separate component of stockholder's equity for
those designated as available for sale. All securities have been
designated as available for sale. For SAP, such fixed maturity
investments would be reported at amortized cost or market value based
on their NAIC rating.
o The liability for losses and loss adjustment expenses and unearned
premium reserves are recorded net of their reinsured amounts for
statutory accounting purposes.
o Deferred income taxes are not recognized on a statutory basis.
o Credits for reinsurance are recorded only to the extent considered
realizable. Under SAP, credit for reinsurance ceded are allowed to the
extent the reinsurers meet the statutory requirements of the Insurance
Department of the State of Florida, principally statutory solvency.
A reconciliation of statutory net income and capital and surplus to GAAP net
income and stockholders' equity for Superior Insurance Company is as follows:
1993 1994 1995
------------------------- ------------------------- ---------------------
Capital Capital Net Capital
and Net and Income and Net
Surplus Income Surplus (Loss) Surplus Income
------- ------ ------- ------ ------- ------
Statutory balance $56,656 $10,597 $43,577 $201 $49,277 $5,639
Non-admitted assets 130 - 225 - 472 -
Investments market 5,571 - (1,988) - 5,279 -
value adjustment
Deferred acquisition 8,926 (248) 9,004 78 7,574 (1,430)
costs
Losses and loss 2,677 59 (1,600) (4,822) - 600
adjustment expense
Deferred income tax (154) 615 3,785 1,030 44 (724)
Rent rebate - - (333) (333) (277) 55
Pension and other (50) 49 (548) (479) (667) (120)
postretirement benefits
Other - (114) (244) (150) (86) 115
-------- -------- -------- -------- -------- --------
GAAP balance $73,756 $10,958 $51,878 $(4,475) $61,616 $4,135
======= ======= ======= ======= ======= ======
Premiums
Premiums are recognized as income ratably over the life of the related policies
and are stated net of ceded premiums. Unearned premiums are computed on the
semimonthly pro rata basis.
1. Nature of Operations and Significant Accounting Policies, continued:
Investments
During 1993, the Company adopted Financial Accounting Standards Board's
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Accordingly, invest- ments are presented on the following bases: o
Fixed maturities and equity securities - at market value - all such securities
are classified as available for sale and are carried at market value with the
unrealized gain or loss as a component of stockholder's equity.
o Short-term investments - at amortized cost, which approximates market
o Other investment - at cost
Realized gains and losses on sales of investments are recorded on the
trade date and are recognized in net income on the specific
identification basis. Other than temporary market value declines are
recognized in the period in which they are determined. Other changes in
market values of debt and equity securities are reflected as unrealized
gain or loss directly in stockholders' equity, net of deferred tax, and,
accordingly, have no effect on net income. Interest and dividend income
are recognized as earned.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company includes in cash
and cash equivalents all cash on hand and demand deposits with original
maturities of three months or less.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs are comprised of agents' commissions,
premium taxes and certain other costs which are related directly to the
acquisition of new and renewal business, net of expense allowances
received in connection with reinsurance ceded, which have been accounted
for as a reduction of the related policy acquisition costs and are
deferred and amortized accordingly. These costs, to the extent that they
are considered recoverable, are deferred and amortized over the terms of
the policies to which they relate.
Property and Equipment
Property and equipment are recorded at cost. All additions to property
and equipment made in 1995 are depreciated based on the straight-line
method over their estimated useful lives. Additions made prior to 1995
are depreciated using the declining balance method over their estimated
useful lives ranging from five to seven years. Asset and accumulated
depreciation accounts are relieved for dispositions, with resulting gains
or losses reflected in net income.
Notes to Consolidated Financial Statements, Continued (Dollars in thousands)
1. Nature of Operations and Significant Accounting Policies, continued:
Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses includes estimates
for reported unpaid losses and loss adjustment expenses and for estimated
losses incurred, but not reported. This liability has not been
discounted. The Company's losses and loss adjustment expense liability
includes an aggregate stop-loss program. The Company retains an
independent actuarial firm to estimate the liability. The liability is
established using individual case-basis valuations and statistical
analysis as claims are reported. Those estimates are subject to the
effects of trends in loss severity and frequency. While management
believes the liability is adequate, the provisions for losses and loss
adjustment expenses are necessarily based on estimates and are subject to
considerable variability. Changes in the estimated liability are charged
or credited to operations as additional information on the estimated
amount of a claim becomes known during the course of its settlement. The
liability for losses and loss adjustment expenses is reported net of the
receivables for salvage and subrogation of approximately $1,622 and
$2,242 at December 31, 1995 and 1994, respectively.
Income Taxes
During January 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. The Company adopted SFAS No. 109 during the year ended
December 31, 1993. The Statement adopts the liability method of
accounting for deferred income taxes. Under the liability method,
companies establish a deferred tax liability or asset for the future tax
effects of temporary differences between book and taxable income. Changes
in future tax rates result in immediate adjustments to deferred taxes.
(See Note 6.) Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income
tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements, and reserves
related to reinsured business are accounted for on bases consistent with
those used in accounting for the original policies and the terms of the
reinsurance contracts. Premiums ceded to other companies have been
reported as a reduction of premium income.
Other Income
Other income consists of finance and service fees paid by policyholders
in relation to installment billings.
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
1. Nature of Operations and Significant Accounting Policies, continued:
Recently Issued Accounting Pronouncements:
In March 1995, SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, was issued. SFAS No.
121 requires that long-lived assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
This Statement is effective for financial statements for fiscal years
beginning after December 31, 1995. The Company intends to adopt SFAS No.
121 in 1996. Based upon management's review and analysis, adoption of
SFAS No. 121 is not expected to have a material impact on the Company's
results of operations in 1996.
Vulnerability from Concentration
At December 31, 1995, the Company did not have a material concentration
of financial instruments in a single investee, industry or geographic
location. Also at December 31, 1995, the Company did not have a
concentration of (1) business transactions with a particular customer,
lender or distributor, (2) revenues from a particular product or service,
(3) sources of supply of labor or services used in the business, or (4) a
market or geographic area in which business is conducted that makes it
vulnerable to an event that is at least reasonably possible to occur in
the near term and which could cause a serious impact to the Company's
financial condition, except for the market and geographic concentration
described in the following paragraph.
The Company writes nonstandard automobile insurance primarily in
California and Florida. As a result, the Company is always at risk that
there could be significant losses arising in certain geographic areas.
The Company protects itself from such events by purchasing catastrophe
insurance.
Reclassifications
Certain amounts from the previous years have been reclassified to conform
to the current year's presentation.
Use of Estimates
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known
which could impact the amounts reported and disclosed herein.
2. Investments: Investments are summarized as follows:
Unrealized Estimated
Amortized ------------------------ Market
December 31, 1994 Cost Gain Loss Value
- ----------------- ---- ---- ---- -----
Fixed maturities:
U.S. Treasury securities and
obligations of U.S.
government corporations and $ 25,312 $31 $(767) $24,576
Obligations of states and
political subdivisions 30,567 380 (680) 30,267
Corporate securities 39,969 292 (1,244) 39,017
--------- --------- --------- ---------
Total fixed maturities 95,848 703 (2,691) 93,860
--------- --------- --------- ---------
Equity securities:
Preferred stocks 713 32 - 745
Common stocks 5,616 1,201 (422) 6,395
--------- --------- --------- ---------
6,329 1,233 (422) 7,140
Short-term investments 5,538 - - 5,538
Other investments 808 - - 808
--------- --------- --------- ---------
Total investments $108,523 $1,936 $(3,113) $107,346
========= ========= ========= =========
Unrealized Estimated
Amortized ------------------------ Market
December 31, 1995 Cost Gain Loss Value
- ----------------- ---- ---- ---- -----
Fixed maturities:
U.S. Treasury securities and
obligations of U.S.
government corporations and $28,612 $1,057 $ - $29,669
agencies
Obligations of states and
political subdivisions 24,595 1,251 (15) 25,831
Corporate securities
41,070 2,988 (2) 44,056
------- ------ ----- --------
Total fixed maturities 5,296 (17) 94,277 99,556
------- ------ ----- --------
Equity securities:
Preferred stocks 713 25 - 738
Common stocks 5,193 2,370 (231) 7,332
------- ------ ----- --------
5,906 2,395 (231) 8,070
Short-term investments 8,462 - - 8,462
Other investments 274 - - 274
------- ------ ----- --------
Total investments 108,919 $7,691 $(248) $116,362
======= ====== ===== ========
2. Investments, continued:
The amortized cost and estimated market value of fixed maturities at
December 31, 1995 and 1994, by contractual maturity, are shown in the
table which follows. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without penalty:
1994 1995
-------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ----------- --------- ----------
Maturity:
Due in one year or less $5,514 $5,521 $2,508 $2,510
Due after one year through five
years 20,403 20,086 31,166 32,164
Due after five years through ten
years 33,522 32,550 33,012 35,338
Due after ten years
36,409 35,703 27,591 29,544
------- ------- ------- --------
Total $95,848 $93,860 $94,277 $ 99,556
======= ======= ======= ========
Gains and losses realized on sales of investments are as follows:
1993 1994 1995
------ ------ ------
Gross gains realized on fixed matur$ $3,040 $779 $1,442
Gross losses realized on fixed maturities 95 1,270 322
Gross gains realized on equity securities 637 694 507
Gross losses realized on equity securities 28 457 256
An analysis of net investment income for the years ended December 31, 1993,
1994, and 1995 follows:
1993 1994 1995
------ ------ ------
Fixed maturities $7,939 $6,691 $6,630
Equity securities 461 538 603
Short-term investments 141 106 68
------ ------ ------
Total investment income 8,541 7,335 7,301
Investment expenses 371 311 208
------ ------ ------
Net investment income $8,170 $7,024 $7,093
------ ------ ------
Investments with an approximate market value of $17,384 and $2,366 (amortized
cost of $16,907 and $2,362) as of December 31, 1995 and 1994, respectively, were
on deposit in the United States and Canada. The deposits are required by law to
support certain reinsurance contracts, performance bonds and outstanding loss
liabilities on assumed business.
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
2. Investments, continued:
In May 1990, Superior entered into a limited partnership agreement with
AMEV Venture Management ("AVM"), an AMEV affiliate. The Limited
Partnership, AMEV Venture III, is an investment pool which is managed by
AVM as a general partner. The purpose of the pool is to make speculative
investments in small business, with the partners sharing in the
profits/losses resulting from the pool. Superior committed to an
investment of $2,000,000 which is approximately 8% of the total pool.
This investment is carried at cost and included in, "other investment."
As of May, 1996, the Company had disposed of its remaining interest in
this investment.
3. Deferred Policy Acquisition Costs:
Policy acquisition costs are capitalized and amortized over the life of
the policies. Policy acquisition costs are those costs directly related
to the issuance of insurance policies including commissions and
underwriting expenses net of reinsurance commission income on such
policies. Policy acquisition costs deferred and the related amortization
charged to income were as follows:
1993 1994 1995
------ ------ ------
Balance, beginning of year $9,174 $8,926 $9,004
Costs deferred during year
23,561 23,029 17,606
Amortization during year
(23,809) (22,951) (19,036)
------ ------ ------
Balance, end of year $8,926 $9,004 $7,574
====== ====== ======
4. Property and Equipment:
Property and equipment at December 31 are summarized as follows:
1995
----------------------------------
1994 Accumulated
Net Cost Depreciation Net
--- ---- ------------ ---
Office furniture and $62 $1,099 $723 $376
equipment
Automobiles - 20 20 -
Computer equipment 295 1,086 765 321
Leasehold improvements - 6 6 -
------ ------ ------ ------
$357 $2,211 $1,514 $697
==== ====== ====== ====
Accumulated depreciation at December 31, 1994 was $1,370. Depreciation expense
related to property and equipment for the years ended December 31, 1995, 1994
and 1993 was $214, $185 and $128, respectively.
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
5. Unpaid Losses and Loss Adjustment Expenses:
Activity in the liability for unpaid losses and loss adjustment expenses
is summarized as follows:
1993 1994 1995
-------- -------- --------
Balance at January 1 $57,164 $52,610 $54,577
Less reinsurance recoverables 361 68 1,099
-------- -------- --------
Net balance at January 1 56,803 52,542 53,478
-------- -------- --------
Incurred related to:
Current year 92,619 91,064 77,266
Prior years (6,717) 1,314 (4,923)
-------- -------- --------
Total incurred 85,902 92,378 72,343
-------- -------- --------
Paid related to:
Current year 57,929 56,505 48,272
Prior years 32,234 34,937 31,424
-------- -------- --------
Total paid 90,163 91,442 79,696
-------- -------- --------
Net balance at December 31 52,542 53,478 46,125
Plus reinsurance recoverables 68 1,099 987
-------- -------- --------
Balance at December 31 $52,610 $54,577 $47,112
-------- -------- --------
The foregoing reconciliation shows that redundancies of $4,923 and $6,717
in the December 31, 1994 and 1992 liabilities, respectively, emerged in
the following year. These redundancies resulted from lower than
anticipated losses resulting from a change in settlement costs relating
to those estimates. The reconciliation shows that a deficiency of $1,314
in the December 31, 1993 liability emerged in the following year. This
deficiency resulted from higher than anticipated losses resulting
primarily from a change in the settlement cost of loss reported in 1990.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and loss adjustment expenses. While
anticipated price increases due to inflation are considered in estimating
the ultimate claim costs, the increase in average severities of claims is
caused by a number of factors that vary with the individual type of
policy written. Future average severities are projected based on
historical trends adjusted for implemented changes in underwriting
standards, policy provisions, and general economic trends. Those
anticipated trends are monitored based on actual development and are
modified if necessary.
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
5. Unpaid Losses and loss Adjustment Expenses, continued:
Case liabilities (and costs of related litigation) have been established
when sufficient information has been developed to indicate the
involvement of a specific insurance policy. In addition, incurred but not
reported liabilities have been established to cover additional exposure
on both known and unasserted claims. Those liabilities are reviewed and
updated continually.
6. Income Taxes:
For the year ended December 31, 1995, the Company will file a
consolidated federal income tax return with its former subsidiaries owned
by Fortis, Inc. An intercompany tax sharing agreement between the Company
and its subsidiaries provided that income taxes will be allocated based
upon the percentage that each subsidiary's separate return tax liability
bears to the total amount of tax liability calculated for all members of
the group in accordance with the Internal Revenue Code of 1986, as
amended. Intercompany tax payments are remitted at such times as
estimated taxes would be required to be made to the Internal Revenue
Service. A reconciliation of the differences between federal tax computed
by applying the federal statutory rate of 35% to income before income
taxes and the income tax provision is as follows:
1993 1994 1995
------- ------- -------
Computed income taxes at statutory rate $4,743 $(2,896) $2,024
Dividends received deduction (118) (69) (53)
Tax-exempt interest (1,136) (866) (538)
Proration 188 140 89
Other 304 (109) 127
------- ------- -------
Income tax expense (benefit) $3,981 $(3,800) $1,649
------- ------- -------
As described in Note 1, the Company adopted SFAS No. 109 effective in 1993. The
effect on years prior to 1993 of changing to this method was a benefit of $1,389
and is reflected in the consolidated statement of operations as the cumulative
effect of a change in accounting principle. The current or deferred tax
consequences of a transaction are measured by applying the provisions of enacted
tax laws to determine the amount of taxes payable currently or in future years.
The method of accounting for income taxes prior to SFAS No. 109 provided that
deferred taxes, once recorded, were not adjusted for changes in tax rates.
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
6. Income Taxes, continued:
The net deferred tax asset at December 31, 1995 and 1994 is comprised of the
following:
1994 1995
------ ------
Deferred tax assets:
Unpaid losses and loss adjustment expenses $1,848 $1,454
Unearned premiums 3,122 2,873
Allowance for doubtful accounts 109 175
Unrealized losses on investments 412 -
Salvage and subrogation 694 541
Other 751 257
------ ------
Net deferred tax asset 6,936 5,300
------ ------
Deferred tax liabilities: -
Deferred policy acquisition costs 3,151 2,651
Unrealized gain on investments - 2,605
------ ------
3,151 5,256
------ ------
Net deferred tax asset $3,785 $44
====== ===
The Company is required to establish a "valuation allowance" for any
portion of its deferred tax assets which is unlikely to be realized. No
valuation allowance was established as of December 31, 1995 or 1994 on
the deferred tax assets, since management believes it is more likely than
not that the Company will realize the benefit of its deferred tax assets.
Federal income tax attributed to the Company has been examined through
1993. In the opinion of management, the Company has adequately provided
for the possible effects of future assessments related to prior years.
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
7. Retirement and Other Employee Benefits:
As part of the sale of the Company, as described in Note 14, the Company
withdrew from all of the plans mentioned below and paid Fortis $557 to
assume the related liabilities.
Superior participated in a non-contributory defined benefit pension plan
("the Pension Plan") administered by Fortis, Inc., covering substantially
all employees who were at least 21 years of age and who had one year of
service with Superior. The Pension Plan provided benefits payable to
participants on retirement or disability and to beneficiaries of
participants in the event of death. The benefits were based on years of
service and the employee's compensation during such years of service. The
Company's funding policy was to contribute annually at least the amount
required to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974. Contributions were
intended to provide not only for benefits attributed to service to date,
but also for those expected to be earned in the future. The net periodic
pension cost allocated to Superior under the Pension Plan for 1993, 1994
and 1995 was $206, $186 and $119, respectively. In 1993, pension expense
includes a one-time accrual for implementation of SFAS 106 of $81.
Superior also participated in a contributory profit sharing plan ("the
Profit Sharing Plan") sponsored by Fortis, Inc. This Profit Sharing Plan
covered all employees with one year of service to the Company and
provided benefits payable to participants on retirement or disability and
to beneficiaries of participants in the event of death. The amount
expensed for the Profit Sharing Plan for 1993, 1994 and 1995 was $252,
$381 and $146, respectively.
In addition to retirement benefits, the Company participated in other
health care and life insurance benefit plans ("postretirement benefits")
for retired employees, sponsored by Fortis, Inc. Health care benefits,
either through a Fortis-sponsored retiree plan for retirees under age 65
or through a cost offset for individually purchased Medigap policies for
retirees over age 65, were available to employees who retired on or after
January 1, 1993, at age 55 or older, with 15 or more years of service.
Life insurance, on a retiree pay all basis, was available to those who
retired on or after January 1, 1993. Both the retiree medical and retiree
life programs were implemented in 1993. The Company made contributions to
these plans as claims were incurred; no claims were incurred during 1993,
1994 or 1995. In 1993, the NAIC issued new rules that required the
projected future cost of providing postretirement benefits, such as
health care and life insurance, be recognized as an expense as employees
render service instead of when the benefits are paid.
As required, Superior complied with the new rules beginning in 1995 and
elected to record these costs on a prospective basis. The effect of this
accounting change on the financial statements of the Company was not
material.
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
8.Reinsurance:
The Company limits the maximum net loss that can arise from a large risk, or
risks in concentrated areas of exposure, by reinsuring (ceding) certain levels
of risks with other insurers or reinsurers. Superior has a casualty excess of
loss treaty which covers loses in excess of $100,000 up to a maximum of
$4,000,000. Superior maintains both auto and property catastrophe excess
reinsurance. Superior's first automobile casualty excess contains limits of
$200,000 excess of $100,000, its second casualty excess contains limits of
$700,000 excess of $300,000 and its third casualty excess has a limit of $4
million excess of $1 million. Further, Superior's first layer of property
catastrophe excess reinsurance covers 95% of $500,000 with an annual limit of $1
million and its second layer or property catastrophe excess reinsurance covers
95% of $2 million excess of $1 million with an annual limit of $4 million. The
Company remains contingently liable with respect to reinsurance, which would
become an ultimate liability of the Company in the event that such reinsuring
companies might be unable, at some later date, to meet their obligations under
the reinsurance agreements. In 1993, 1994 and 1995, 100% of amounts recoverable
from reinsurers are with Prudential Re, which maintains an A.M. Best rating of
A. Company management believes amounts recoverable from reinsurers are
collectible. Amounts recoverable from reinsurers relating to unpaid losses and
loss adjustment expenses were $1,099 and $987 as of December 31, 1994 and 1995,
respectively. Reinsurance activity for 1993, 1994 and 1995, which includes
reinsurance with related parties, is summarized as follows:
Direct Assumed Ceded Net
------ ------- ----- ---
1993
Premiums written $88,877 $26,783 $366 115,294
Premiums earned 87,618 31,183 665 118,136
Incurred losses and loss
adjustment expenses 64,228 21,896 222 85,902
Commission expenses 13,700 4,570 18,270
1994
Premiums written $92,540 $20,366 $391 $112,515
Premiums earned 89,755 23,437 355 112,837
Incurred losses and loss
adjustment expenses 73,181 20,244 1,047 92,378
Commission expenses 14,165 3,192 17,357
1995
Premiums written $84,840 $9,916 $686 $94,070
Premiums earned 84,641 13,592 619 97,614
Incurred losses and loss
adjustment expenses 63,462 8,777 (104) 72,343
Commission expenses 12,314 1,324 13,638
9. Related-Party Transactions:
The Company and its subsidiaries have entered into transactions with various
related parties including transactions with its affiliated companies and Fortis,
Inc. The following transactions occurred with related parties in the years ended
December 31, 1993, 1994, and 1995:
1993 1994 1995
------ ------ ------
Management fees charged by Fortis $832 $842 $729
Reinsurance with affiliated companies, net:
Assumed premiums earned 8,321 9,092 7,786
Assumed losses and loss adjustment
expenses incurred 8,480 6,266 5,847
Assumed commissions 1,337 1,755 1,112
10. Effects of Statutory Accounting Practices and Dividend Restrictions:
Under state of Florida insurance regulations, the maximum amount of
dividends Superior, Superior American and Superior Guaranty can pay to
their stockholders without prior approval of the Insurance Commissioner
of the State of Florida is limited. The maximum amount of dividends which
Superior can pay to its stockholders during 1996 is approximately $4,900.
The maximum amount of dividends which Superior American can pay to its
stockholder during 1996 is approximately $320. The maximum amount of
dividends which Superior Guaranty can pay to its stockholder during 1996
is approximately $277.
11. Regulatory Matters:
Superior, Superior American and Superior Guaranty, domiciled in Florida,
prepare their statutory financial statements in accordance with
accounting practices prescribed or permitted by the Florida Department of
Insurance ("FDOI"). Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance
Commissioners ("NAIC"), as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. Superior, Superior American
and Superior Guaranty utilize no significant permitted practices.
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
11. Regulatory Matters, continued:
The NAIC has promulgated risk-based capital ("RBC") requirements for
property/casualty insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks, such as asset
quality, asset and liability matching, loss reserve adequacy and other business
factors. The RBC information is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio (the
"Ratio") of the enterprise's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level RBC, as defined by the NAIC.
Generally, a Ratio in excess of 200% of authorized control level RBC (the
"company action level") requires no corrective actions by Superior, Superior
American, Superior Guaranty, or regulators. As of December 31, 1995, all three
company's RBC level were in excess of the company action level.
12. Leases:
The Company has certain commitments under long-term operating leases for
its home and sales offices. Rental expense under these commitments was
$800, $483 and $1,012 for 1993, 1994 and 1995, respectively. Future
minimum lease payments required under these noncancelable operating
leases are as follows:
1996 $ 948
1997 921
1998 440
1999 350
2000 and thereafter 58
------
Total $2,717
======
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands)
13. Contingencies:
The Company, and its subsidiaries, are named as defendants in various
lawsuits relating to their business. Legal actions arise from claims made
under insurance policies issued by the Company and its subsidiaries.
These actions were considered by the Company in establishing its loss
liabilities. The Company believes that the ultimate disposition of these
lawsuits will not materially affect the Company's operations or financial
position.
The increase in number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in
increased assessments by state guaranty funds to cover losses to
policyholders of insolvent or rehabilitated insurance companies. Those
mandatory assessments may be partially recovered through a reduction in
future premium taxes in certain states. The Company recognizes its
obligations for guaranty fund assessments when it receives notice that an
amount is payable to a guaranty fund. The ultimate amount of these
assessments may differ from that which has already been assessed.
14. Subsequent Event (unaudited):
On May 1, 1996, the Symons International Group Incorporated entered into
an agreement ("Agreement") with GS Capital Partners II, L.P. to create a
company, GGS Management Holdings, Inc. ("GGS Holdings") to be owned 52%
by Symons and 48% by investment funds associated with Goldman, Sachs &
Co.
In connection with the above transaction, GGS Holdings acquired all of
the outstanding shares of common stock of the Company and its wholly
owned subsidiaries, Superior American and Superior Guaranty, for cash of
$65,057.
The purchase of the Company shall be accounted for in accordance with the
purchase method of accounting.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF GORAN CAPITAL, INC.
The following unaudited pro forma consolidated statements of operations of
the Company for the year ended December 31, 1995 and the three months ended
March 31, 1996 present results for the Company as if the Acquisition, Formation
Transaction, Transfer and Distribution (collectively, the "Transactions") had
occurred as of January 1, 1995 and January 1, 1996, respectively. The
accompanying unaudited pro forma consolidated balance sheet as of March 31, 1996
gives effect to the Transactions as if they had occurred as of March 31, 1996.
The pro forma adjustments are based on available information and certain
assumptions that the Company currently believes are reasonable in the
circumstances. The unaudited pro forma consolidated financial statements have
been derived from and should be read in conjunction with the historical
Consolidated Financial Statements and Notes of the Company for the year ended
December 31, 1995 and as of and for the unaudited three months ended March 31,
1996 and the historical Consolidated Financial Statements and Notes of Superior
for the year ended December 31, 1995 and as of and for the unaudited three
months ended March 31, 1996, and should be read in conjunction with the
accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements. The
pro forma adjustments and pro forma consolidated amounts are provided for
informational purposes only.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the results of operations or financial position
that would have occurred had the Transactions described above been consummated
on the dates assumed; nor is the pro forma information intended to be indicative
of the Company's future results of operations or financial position.
Goran Capital Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1995
Pro Forma
Goran Superior for the
Historical Historical Adjustments (1) Transactions
---------- ---------- --------------- ------------
(amounts in thousands, except per share amounts)
Gross premiums written........... $151,790 $94,756 $--- $246,546
-------- ------ -------- -------
Net premiums written............. 86,360 94,070 --- 180,430
-------- ------ -------- -------
Net premiums earned.............. 76,102 97,614 --- 173,716
Net investment income
and other income.............. 5,872 11,264 280 C.3 17,416
Net realized capital gain (loss). --- 1,954 --- 1,954
-------- ------ -------- -------
Total revenues................ 81,974 110,832 280 193,086
Losses and loss adjustment
expenses...................... 54,193 72,343 --- 126,536
Policy acquisition and general
and administrative expenses 16,352 32,705 101 A.1- 49,158
A.3,
B.3
Interest expense................ 1,761 -- 4,963 A.4, 6,724
-------- ------ -------- C.2 -------
Total expenses................ 72,306 105,048 5,064 182,418
-------- ------ -------- -------
Income before income taxes
and minority interest......... 9,668 5,784 (4,784) 10,668
Provision for income taxes....... 2,497 1,649 (1,565) D 2,581
Minority interest................ --- --- 136 B.2 136
-------- ------ -------- -------
Net income.................. $ 7,171 $4,135 $ (3,355) $ 7,951
======== ====== ======== =======
Net income per common share...... $ 1.43 $ 1.59
===== =======
Weighted average shares
outstanding................... 5,012 5,012
===== =====
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
Goran Capital Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Three Months Ended March 31, 1996
Pro Forma
Goran Superior for the
Historical Historical Adjustments (1) Transactions
---------- ---------- --------------- ------------
(amounts in thousands, except per share amounts)
Gross premiums written .......... $41,422 $32,289 $ --- $73,711
-------- ------ ------- ------
Net premiums written............. 25,339 32,126 $ --- 57,465
-------- ------ ------- ------
Net premiums earned ............. 24,518 28,659 $ --- 53,177
Net investment income
and other income.............. 1,464 3,280 70 C.3 4,814
Net realized capital
gain (loss)................... --- 29 --- 29
-------- ------ ------- ------
Total revenues.............. 25,982 31,968 70 58,020
Losses and loss
adjustment expenses........... 16,597 19,511 --- 36,108
Policy acquisition and general
and administrative expenses... 5,993 8,188 25 A.1- 14,206
A.3,
B.3
Interest expense................. 337 --- 1,240 A.4, 1,577
-------- ------ ------- C.2 ------
Total expenses................ 22,927 27,699 1,265 51,891
-------- ------ ------- ------
Income before income taxes
and minority interest......... 3,055 4,269 (1,195) 6,129
Provision for income taxes....... 851 1,455 (394) D 1,912
Minority interest................ --- --- 1,304 B.2 1,304
-------- ------ ------- ------
Net income.................. $ 2,204 $2,814 $(2,105) $2,913
======== ====== ======= ======
Net income per
common share.................. $ .43 $0.57
===== =====
Weighted average
shares outstanding............ 5,085 5,085
===== =====
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
Goran Capital Inc.
Unaudited Pro Forma Consolidated Balance Sheet
At March 31, 1996
Pro Forma
Goran Superior for the
Historical Historical Adjustments (1) Transactions
---------- ---------- --------------- ------------
(amounts in thousands, except per share amounts)
Assets
Total invested assets and cash... $50,698 $120,886 $7,692 A.1 $179,276
C.1
Receivables...................... 43,234 32,530 --- 75,764
Other assets..................... 12,795 12,598 2,617 A.1 28,010
B.3
Goodwill......................... --- --- 3,638 A.2 3,638
-------- -------- ------- --------
Total Assets ................. $106,727 $166,014 $13,947 $286,688
======== ======== ======= ========
Liabilities
Losses and loss
adjustment expenses........... $42,889 $45,700 $--- $88,589
Unearned premiums................ 27,636 44,516 --- 72,152
Payables......................... 9,071 12,222 --- 21,293
Federal income taxes payable..... 927 823 --- 1,750
Subordinated dibentures.......... 11,013 --- --- 11,013
Notes payable and line of credit. 250 --- 7,500 C.1 7,750
Term loan........................ --- --- 48,000 A.1 48,000
Minority interest................ --- --- 21,200 B.1 21,200
-------- -------- ------- --------
Total liabilities........... 91,786 103,261 76,700 271,147
-------- -------- ------- --------
Shareholders' equity ............ 14,941 62,753 (62,753) A.5 14,941
-------- -------- ------- --------
Total liabilities and
shareholders' equity........ $106,727 $166,014 $13,947 $286,688
======== ======== ======= ========
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANACIAL STATEMENTS
(1) Pro Forma Adjustments Relating to the Transactions
Acquisition of Superior
The acquisition of Superior will be accounted for under the purchase method of
accounting. Under this method, the total cost to acquire Superior will be
allocated to the assets and liabilities based on their fair values as of the
date of the acquisition with any excess of the total purchase price over the
fair value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. Under the terms of the Superior Purchase Agreements the
total purchase price for Superior was approximately $66 million. The GAAP
carrying value of assets acquired and liabilities assumed at the Acquisition
date approximated fair value. There were not significant indentifiable
intangible assets. Therefore, the excess cost of the total purchase price was
recorded as goodwill.
The Acquisition was funded with (i) $21,200,000 of cash contributions from the
GS Funds in exchange for a 48% minority interest in GGS Holdings; and (ii)
$48,000,000 in cash from a senior bank facility. Funds received in excess of the
total purchase price of Superior plus acquisition costs financed, estimated to
be $192,000, are reflected as cash until final determination of the Acquisition
purchase price. No additional investment income is assumed to be earned on the
excess cash retained from the proceeds of the Acquisition financing.
Pro forma adjustments to give effect to the Acquisition and related transactions
are summarized as follows:
A1. Notes payable is adjusted to reflect the Acquisition financing of the
$48,000,000 GGS Senior Credit Facility as at March 31, 1996, and total
invested assets and cash are adjusted by $192,000 for funds received in
excess of the total purchase price.
Policy acquisition and general and administrative expenses for the
periods prior to the Acquisition is adjusted by $232,000 for the year
ended December 31, 1995 and by $58,000 for the three months ended March
31, 1996 to reflect the amortization of deferred loan origination costs
of $1,397,000 incurred related to the GGS Senior Credit Facility. The
debt issuance costs are amortized over six years, the term of the GGS
Senior Credit Facility.
A2. Goodwill related to the Acquisition on a pro forma basis is $3,638,000
and is based on a preliminary valuation of the total purchase price.
Accordingly, the allocation of the excess purchase price may be
adjusted upon final determination of such value.
Policy acquisition and general and administrative expenses for the
periods prior to the Acquisition is adjusted by $146,000 for the year
ended December 31, 1995 and by $36,000 for the three months ended March
31, 1996 to reflect the amortization of goodwill. Goodwill is
amoritized over a 25-year period on a straight line basis based on
management's estimate of the expected benefit period.
A3. Policy acquisition and general and administrative expenses for the
periods prior to the Acquisition is adjusted by $521,000 for the year
ended December 31, 1995 and by $130,000 for the three months ended
March 31, 1996 to reflect the elimination of management fees charged by
Superior's former parent, Fortis, for corporate expenses. Subsequent to
the Acquisition date, no such management fees have or will be charged
to Superior by the Company.
A4. Interest expense for the periods prior to the Acquisition is adjusted
by $3,989,000 for the year ended December 31, 1995 and by $997,000 for
the three months ended March 31, 1996 to reflect the GGS Senior Credit
Facility financing of $48,000,000 related to the Acquisition. It is
assumed that the interest rate on the GGS Senior Credit Facility was
8.31% percent. The Company entered into an interest rate swap to
effectively fix its borrowing costs at 8.31% through November 15, 1996.
A5. Shareholder's equity at March 31, 1996 has been adjusted to reflect the
elimination of Superior's historical shareholder's equity of
$62,753,000 as of March 31, 1996.
The Formation Transaction
B1. In connection with the financing of the Acquisition, GGS Holdings was
formed, and $21,200,000 of cash contributions from GS Funds was
provided in exchange for a 48% minority interest in GGS Holdings. As
part of the Formation Transaction, the Company contributed Pafco to GGS
Holdings in exchange for a 52% controlling interest.
B2. Minority interest for the periods prior to the Formation Transaction
has been adjusted by $136,000 for the year ended December 31, 1995 and
by $1,304,000 for the three months ended March 31, 1996 to reflect the
48% minority interest in GGS Holdings.
B3. Other assets has been adjusted to reflect the capitalization of
organizational costs of $1,220,000 incurred in connection with the
Formation Transaction, consisting principally of legal, accounting and
finders fees.
Policy acquisition and general and administrative expenses for the
periods prior to the Formation Transaction is adjusted by $244,000 for
the year ended December 31, 1995 and by $61,000 for the three months
ended March 31, 1996 to reflect the amortization of organizational
costs. Organizational costs are amoritized over a 5-year period on a
straight line basis.
The Transfer
In connection with the Transfer and immediately prior to the Formation
Transaction, IGF Holdings distributed to Pafco a dividend of $7,500,000 in cash
and the IGF Note of $3,500,000. IGF Holdings funded the cash portion of the
distribution to Pafco with the proceeds of the $7,500,000 IGFH Bank Debt.
Pro forma adjustments to give effect to the Transfer and related transactions
are summarized as follows:
C1 Notes payable and line of credit is adjusted to reflect the financing
of the dividend to Pafco for the IGFH Bank Debt of $7,500,000, as at
March 31, 1996. Pro forma notes payable and line of credit is not
adjusted to reflect the issuance of the IGF Note of $3,500,000 to
Pafco, in accordance with GAAP, since such intercompany transactions
are eliminated in consolidation.
C2 Interest expense for the periods prior to the Transfer is adjusted to
reflect the financing of the dividend to Pafco. It is assumed that the
interest rate on the IGFH Bank Debt was 9.25 percent (prime rate plus
1%). This rate reflects the interest rate enviornment which existed at
the Transfer date. The stated interest rate on the IGF Note is 8.0
percent. Pro forma adjustments to give effect to the financing are
summarized as follows:
Year ended Three months ended
December 31, 1995 March 31, 1996
----------------- ------------------
IGFH Bank Debt .................... $694,000 $173,000
IGF Note........................... 280,000 70,000
-------- --------
$974,000 $243,000
======== ========
C3 Other income has been adjusted by $280,000 for the year ended December
31, 1995 and by $70,000 for the three months ended March 31, 1996 to
reflect the interest income Pafco would earn which is derived from the
IGFH Note of $3,500,000, at a stated rate of 8%. No additional
investment income is assumed to be earned on the cash retained in Pafco
from the proceeds of the IGF Note.
D. All applicable pro forma adjustments to operations are tax effected at
the appropriate rate.