Exhibit 99.1
Independent Auditors' Report
The Board of Directors
Texas General Agency, Inc.:
We have audited the accompanying combined balance sheet of Texas General
Agency, Inc. and Subsidiary, Pan American Acceptance Corporation, and TGA
Special Risk, Inc. (collectively the Company) as of December 31, 2005, and
the related combined statements of operations, stockholders' equity and
comprehensive income, and cash flows for the year then ended. These combined
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these combined financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company as
of December 31, 2005, and the results of its operations and its cash flows
for the year then ended in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
------------
KPMG LLP
April 7, 2006
TEXAS GENERAL AGENCY, INC. AND SUBSIDIARY,
PAN AMERICAN ACCEPTANCE CORPORATION,
AND TGA SPECIAL RISK, INC.
Combined Balance Sheet
December 31, 2005
Assets
Cash $ 2,198,918
Bonds 18,259,230
Common stocks 1,337,554
Premium and agents' balances receivable 17,555,501
Premium finance notes receivable 6,146,552
Losses receivable from insurance companies 6,171,761
Reinsurance recoverable 639,881
Deferred policy acquisition costs 1,425,432
Property and equipment, net of accumulated depreciation 674,971
Deferred federal income tax asset 1,788,670
Other assets 331,557
------------
Total assets $ 56,530,027
============
Liabilities and Stockholders' Equity
Liabilities:
Liability for outstanding claims $ 4,376,033
Premiums payable to insurance companies 17,974,854
Reinsurance balances payable 648,913
Unearned premiums 5,090,829
Reserve for unpaid losses and loss adjustment expenses 9,304,128
Notes payable to banks 4,784,694
Accounts payable and other liabilities 851,108
Current federal income taxes payable 863,042
Unearned commissions 6,090,563
------------
Total liabilities 49,984,164
------------
Stockholders' equity:
Common stock 4,205
Additional paid-in capital 20,008
Accumulated other comprehensive income - net
unrealized gains on investment securities 129,637
Retained earnings 6,799,141
Treasury stock, at cost (174 shares) (407,128)
------------
Total stockholders' equity 6,545,863
------------
Total liabilities and stockholder's equity $ 56,530,027
============
See accompanying notes to consolidated financial statements.
TEXAS GENERAL AGENCY, INC. AND SUBSIDIARY,
PAN AMERICAN ACCEPTANCE CORPORATION,
AND TGA SPECIAL RISK, INC.
Combined Statement of Operations
Year ended December 31, 2005
Revenues:
Commissions $ 39,827,572
Premiums earned 9,959,006
Investment income, net 547,403
Interest income on finance notes 1,302,904
Other 368,020
------------
52,004,905
------------
Expenses:
Losses and loss adjustment expenses 5,653,303
Commissions 26,117,856
Operating expenses 15,239,580
Interest expense 218,221
------------
47,228,960
------------
Income before federal income taxes 4,775,945
------------
Federal income tax expense:
Current 867,981
Deferred 624,042
------------
1,492,023
------------
Net income $ 3,283,922
============
See accompanying notes to consolidated financial statements.
TEXAS GENERAL AGENCY, INC. AND SUBSIDIARY,
PAN AMERICAN ACCEPTANCE CORPORATION,
AND TGA SPECIAL RISK, INC.
Combined Statement of Stockholders' Equity
and Comprehensive Income
December 31, 2005
Accumulated
Additional other Total
Common paid-in Retained Treasury comprehensive stockholders'
stock capital earnings stock income equity
------ --------- --------- -------- -------- ---------
Balance, December 31, 2004 $ 4,205 20,008 3,569,357 (32,128) 363,615 3,925,057
Comprehensive income:
Net income - - 3,283,922 - - 3,283,922
Change in accumulated
unrealized net gain on
investment securities, net
of tax effect of $120,512 - - - - (233,978) (233,978)
---------
Total comprehensive
income 3,049,944
---------
Treasury stock acquired - - - (375,000) - (375,000)
Distributions to stockholders - - (54,138) - - (54,138)
------- ------- --------- ------- ------- ---------
Balance, December 31, 2005 $ 4,205 20,008 6,799,141 (407,128) 129,637 6,545,863
======= ======= ========= ======= ======= =========
See accompanying notes to combined financial statements.
TEXAS GENERAL AGENCY, INC. AND SUBSIDIARY
PAN AMERICAN ACCEPTANCE CORPORATION,
AND TGA SPECIAL RISK, INC.
Consolidated Statements of Cash Flows
Year ended December 31, 2005
Cash flows from operating activities:
Net income $ 3,283,922
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 430,922
Net gain on sales of investments (46,405)
Deferred federal income tax expense 624,042
Decrease in premium and agents' receivable (947,468)
Increase in finance notes receivable 38,443
Increase in losses receivable from insurance companies (1,012,414)
Increase in reinsurance recoverable (84,985)
Decrease in due from affiliates 1,515
Increase in deferred policy acquisition costs (235,007)
Increase in other assets (40,720)
Increase in liability for outstanding claims 2,591,055
Increase in premiums payable to insurance companies 350,605
Increase in losses payable to insurance companies 88,648
Increase in unearned premiums 681,846
Increase in reserve for unpaid losses and
adjustment expenses 1,184,652
Decrease in due to affiliates (1,520)
Increase in unearned commissions (1,320,418)
Decrease in accounts payable and other liabilities (174,013)
Increase in current federal income taxes payable 698,864
------------
Net cash provided by operating activities 6,111,564
------------
Cash flows from investing activities:
Purchase of investments available for sale (4,919,102)
Proceeds from maturities and sales of investments
available for sale 2,467,542
Acquisition of property and equipment (79,474)
Purchase of software (287,425)
------------
Net cash used in investing activities (2,818,459)
------------
Cash flows from financing activities:
Proceeds from notes payable 9,017,685
Payment of notes payable (10,878,889)
Treasury stock acquired (375,000)
Distributions to stockholders (54,138)
------------
Net cash used in financing activities (2,290,342)
------------
Net increase in cash 1,002,763
Cash, beginning of year 1,196,155
------------
Cash, end of year $ 2,198,918
============
Supplemental disclosures of cash flow information:
Interest paid during the year $ 218,221
Federal income taxes paid during the year 153,257
See accompanying notes to consolidated financial statements.
TEXAS GENERAL AGENCY, INC. AND SUBSIDIARY,
PAN AMERICAN ACCEPTANCE CORPORATION,
AND TGA SPECIAL RISK, INC.
Notes to Combined Financial Statements
December 31, 2005
(1) Organization and Summary of Significant Accounting Policies
Texas General Agency, Inc. (TGA) is a managing general agent (MGA) for
several insurance companies, including its wholly owned subsidiary, Gulf
States Insurance Company (GSIC). TGA currently has approximately 800
appointed agents writing property and casualty business. Lines of
business written are primarily personal lines, nonstandard auto,
commercial auto, general liability, commercial property, homeowners,
dwelling, fire, and inland marine in Texas, Louisiana, and Alabama. GSIC
is incorporated under the laws of the State of Oklahoma with operations
emphasizing assumed reinsurance. Through retrocession agreements with a
group of reinsurers, GSIC assumed 10% of the business produced by its
parent, TGA, in 2005.
A portion of the policies produced by TGA are financed by Pan American
Acceptance Corporation (PAAC), a company with shareholders common to
TGA. TGA also has an affiliate relationship with TGA Special Risks, Inc.
(TGASR), which brokers a small amount of mobile home business, also
under common ownership with TGA.
(a) Basis of Presentation
The accompanying combined financial statements have been prepared
in conformity with U.S. generally accepted accounting principles
and include the accounts of TGA and Subsidiary, PAAC and TGASR
(collectively, the Company). All significant intercompany
transactions and balances have been eliminated in combination.
(b) Premiums Receivable
Premiums receivable are carried at cost, which approximates fair
value. Management provides an allowance for uncollectible accounts
in the period that collectibility is deemed impaired. As of
December 31, 2005, no allowance was deemed necessary.
(c) Finance Notes Receivable
Finance notes receivable are nonrenewable, short-term notes
collateralized by the unearned premiums on the related insurance
policies. Management considers current information and events
regarding the borrowers' ability to repay their obligation and deems
a finance note receivable to be impaired when it is probable that
the Company will not be able to collect all amounts due according to
contractual terms of the finance note receivable.
The Company uses the direct write-off method to account for
uncollectible items and performs a monthly review of each loan that
is 30 or more days past due to assess collectibility. Amounts deemed
uncollectible are then written off and expensed monthly.
(d) Investments
The Company's investments in debt and equity securities are
classified as available for sale and are stated at their estimated
fair values.
Unrealized gains and losses on these investments are included
in accumulated other comprehensive income as a component of
stockholders' equity net of deferred federal income taxes and,
accordingly, have no effect on net income. Realized gains and losses
are measured as the difference between the net sales proceeds and
the investment's cost, determined on the specific identification
method. Amortization of bond premium or discount is calculated using
the scientific interest method. When impairment of the value of an
investment is considered to be other than temporary, a provision for
the write-down to estimated net realizable value is recorded.
(e) Revenue Recognition
Interest income on finance notes receivable is recognized over the
term of the related note using the sum of the years digits method
which approximates the level yield method. Interest continues to
accrue until the finance note receivable is paid off or management
deems the collectibility of the principal and interest to be
doubtful.
Premium income is recognized on a pro rata basis over the periods
covered by the policies. Commission revenues related to insurance
policies issued by TGA on behalf of unaffiliated insurance companies
are recognized in accordance with EITF 00-21, Revenue Arrangements
with Multiple Deliverables, which requires determining allocated
fair value for selling and servicing the policy and processing
claims. Commission revenues for selling and servicing the policies
are recognized on a pro rata basis over the periods covered by the
policies, and the commission revenues for servicing claims are
recognized over the service period in proportion to the historical
trends of the claim cycle. Unearned commissions disclosed in the
financial statements are presented net of related deferred commission
expenses of $10.6 million as of December 31, 2005.
TGA retroactively participates in the loss experience under the terms
of its reinsurance contracts. Contingent commissions receivable
or payable are recorded on a cash basis in accordance with the
terms of the reinsurance contracts. The Company recorded contingent
commissions of $1,961,787 for the year ended December 31, 2005.
Pursuant to the agreement with Hallmark Financial Services, Inc. for
the sale of outstanding stock of the Company, as disclosed in note
14, contingent commissions for underwriting years prior to January 1,
2006, were assigned to the stockholders of the Company as of December
31, 2005. Therefore, no receivable has been reflected in the combined
financial statements for any contingent commissions.
(f) Federal Income Taxes
The Company accounts for federal income taxes under the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years 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
income in the period that includes the enactment date. TGA files a
consolidated federal income tax return with GSIC.
(g) Deferred Policy Acquisition Costs
The net costs incurred by GSIC in acquiring new business, consisting
primarily of net commissions, are deferred and amortized over
the life of the policy acquired. The deferred policy acquisition
costs asset is reviewed for any potential premium deficiency at
each balance sheet date. A premium deficiency represents future
estimated losses, loss adjustment expenses, and amortization of
deferred policy acquisition costs in excess of related unearned
premiums and related future investment earnings. If a premium
deficiency is determined to exist, the amount thereof is deducted
from the Company's deferred policy acquisition costs asset and is
charged to income in the current period as an expense. To the
extent the amount of the premium deficiency exceeds the related
deferred policy acquisition costs asset, the deficiency is recorded
as a liability and charged to income in the current period. No such
deficiency was determined to exist as of December 31, 2005.
(h) Property and Equipment
Property, equipment, and software are stated at cost less
accumulated depreciation. Depreciation and amortization are
calculated using the straight-line method over the estimated useful
lives of the assets. Expenditures for repairs and maintenance are
expensed as incurred while betterments and renewals are capitalized.
(i) Reserve for Unpaid Losses and Loss Adjustment Expenses
The reserve for unpaid losses and loss adjustment expenses
represents the undiscounted amount of case-basis estimates of
reported losses, estimates based on certain actuarial assumptions
regarding the past experience of unreported losses, and estimates of
loss adjustment expenses to be incurred in the settlement of claims.
Management believes that the reserve for unpaid losses and loss
adjustment expenses is adequate to cover the ultimate liability;
however, the ultimate costs associated with settling claims may be
more or less than amounts reserved.
(j) Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles 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
income and expenses during the reporting period. Actual results
could differ from those estimates.
(k) Capitalization
Capitalization of the Company as of December 31, 2005, was as
follows:
Common stock - Texas General Agency, Inc., no par
value. Authorized 500,000 shares Class A no par
value voting common stock; 1,000 shares issued
and outstanding. Authorized 500,000 shares
Class B no par value non-voting common stock;
none issued $ 1,000
Common stock - Pan American Acceptance Corporation,
$1 par value. Authorized 500,000 shares Class A
voting common stock; 2,205 shares issued and 2,031
shares outstanding. Authorized 500,000 shares
Class B non-voting common stock; none issued 2,205
Common stock - TGA Special Risk, Inc., $1 par
value. Authorized 1,000,000 shares; 1,000
shares issued and outstanding 1,000
-----------
Combined common stock 4,205
-----------
Additional paid-in capital - Texas General
Agency, Inc. & Subsidiary 1,224
Additional paid-in capital - Pan American
Acceptance Corporation 18,784
-----------
Combined additional paid-in capital 20,008
-----------
Treasury stock, at cost - Pan American
Acceptance Corporation (174 shares) (407,128)
-----------
Total $ (382,915)
===========
(2) Investments
The amortized cost and estimated fair value by type of investment at
December 31, 2005 were as follows:
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
---------- ---------- ---------- ----------
Bonds:
U.S. treasury securities $ 622,592 2,440 (29) 625,003
U.S. government agencies 375,218 836 - 376,054
Obligations of states and
political subdivisions 17,078,553 18,653 (225,287) 16,871,919
Corporate securities 385,260 1,011 (17) 386,254
---------- ---------- ---------- ----------
18,461,623 22,940 (225,333) 18,259,230
Common stocks 938,717 410,051 (11,214) 1,337,554
---------- ---------- ---------- ----------
$19,400,340 432,991 (236,547) 19,596,784
========== ========== ========== ==========
The amortized cost and estimated fair value of fixed maturities at
December 31, 2005 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities as borrowers may have
the right to prepay obligations with or without prepayment penalties.
Amortized Estimated
costs fair value
----------- -----------
Due in one year or less $ 3,036,941 3,030,872
Due after one year through five years 14,522,947 14,336,169
Due after five years through ten years 601,735 592,189
Due after ten years through 20 years 300,000 300,000
----------- -----------
$ 18,461,623 18,259,230
=========== ===========
Proceeds from sales of investments were $2,467,542 in 2005. Gross gains
and losses of $78,577 and $32,172, respectively, in 2005 were realized
on these transactions.
Bonds with amortized cost of $297,732 and an estimated fair value of
$297,703 were held under joint control with the Oklahoma Insurance
Department at December 31, 2005.
During 2005, the Company did not record any impairment charges for fixed
maturity or equity securities.
Following is a summary of the Company's gross unrealized losses in its
fixed maturities portfolio as of December 31, 2005:
Unrealized loss Unrealized loss
less than 12 months 12 months or longer Total
---------------------- ---------------------- ----------------------
Unrealized Unrealized Unrealized
Description of securities Fair value losses Fair value losses Fair value losses
--------------------------- ---------- ---------- ---------- ---------- ---------- ----------
U.S. Treasury securities $ 297,703 (29) - - 297,703 (29)
Obligations of states and
political subdivisions 6,319,157 (67,983) 6,606,777 (138,820) 12,925,934 (206,803)
Special revenue 786,557 (8,452) 267,238 (10,032) 1,053,795 (18,484)
Public utilities, industrial
and miscellaneous 100,136 (17) - - 100,136 (17)
--------- ---------- ---------- ---------- ---------- ----------
Total securities $7,503,553 (76,481) 6,874,015 (148,852) 14,377,568 (225,333)
========= ========== ========== ========== ========== ==========
At December 31, 2005, the Company had $225,333 of unrealized losses in
its fixed maturities portfolio, $148,852 of which was in excess of 12
months attributable to 54 securities with unrealized losses of less than
10%.
Following is a summary of the Company's gross unrealized losses in its
equity securities as of December 31, 2005:
Unrealized loss Unrealized loss
less than 12 months 12 months or longer Total
---------------------- ---------------------- ----------------------
Unrealized Unrealized Unrealized
Description of securities Fair value losses Fair value losses Fair value losses
--------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Common stock $ 76,998 (5,284) 68,225 (5,930) 145,223 (11,214)
--------- ---------- ---------- ---------- ---------- ----------
Total securities $ 76,998 (5,284) 68,225 (5,930) 145,223 (11,214)
========= ========== ========== ========== ========== ==========
At December 31, 2005, the Company had $11,214 of unrealized losses in
its equity portfolio, $5,930 of which was in excess of 12 months
attributable to six securities with unrealized losses of less than 10%.
The Company continually monitors these investments and believes the
unrealized loss in these investments is temporary.
During the year ended December 31, 2005, investment income was earned in
the following investment categories:
Bonds $ 515,319
Common stocks 39,706
Net realized investment gains 46,405
Other 1,696
-----------
Total investment income 603,126
Investment expenses (55,723)
-----------
Net investment income $ 547,403
===========
See also note 6 regarding investments in trust accounts.
(3) Premium and Agents' Balances Receivable
Premium and agents' balances receivable consisted of the following at
December 31, 2005:
Receivable from agents $ 16,429,382
Receivables from insurance companies 1,119,362
Other 6,757
-----------
$ 17,555,501
===========
(4) Notes Payable to Banks
Notes payable at December 31, 2005 consisted of various short-term notes
payable to banks, bearing variable interest rates ranging from 4.75%
to 7.75%. These notes were secured by the Company's finance notes
receivables and were personally guaranteed by stockholders of TGA.
The line of credit available under the Company's current borrowing
arrangements is $5,000,000, approximately $4,800,000 of which was
borrowed at December 31, 2005.
The Company's borrowing arrangements contain various restrictive
covenants which, among other things, require the Company to maintain
minimum amounts of tangible net worth and working capital. At
December 31, 2005, the Company was not in compliance with certain of such
covenants but had received a waiver for the violations.
During 2005, the Company paid interest of $194,835 related to notes
payable to banks.
(5) Reserve for Unpaid Losses and Loss Adjustment Expenses
Activity in the reserve for unpaid losses and loss adjustment expenses
is summarized as follows:
2005
-----------
Balance, January 1 $ 8,119,476
Less reinsurance recoverables (554,896)
-----------
Net balance, January 1 7,564,580
-----------
Incurred related to:
Current year 6,690,192
Prior years (1,036,889)
-----------
Total incurred 5,653,303
-----------
Paid related to:
Current year 1,971,835
Prior years 2,577,174
-----------
Total paid 4,549,009
-----------
Net balance, December 31 8,668,874
Plus reinsurance recoverable 635,254
-----------
Balance, December 31 $ 9,304,128
===========
The change in incurred losses and loss adjustment expenses related to
prior years was the result of the reestimation of unpaid losses and loss
adjustment expenses principally on the general liability and commercial
auto lines of insurance. This change in each year is generally the
result of ongoing analysis of recent loss development trends. Original
estimates are increased or decreased as additional information becomes
known regarding individual claims.
(6) Reinsurance
GSIC assumes business, originally produced by TGA, from unaffiliated
insurance companies.
Reinsurance transactions as of and for the year ended December 31, 2005
are summarized as follows:
Reserve for unpaid losses and loss
adjustments expenses:
Assumed $ 9,304,128
Ceded (635,254)
-----------
$ 8,668,874
-----------
Unearned premiums - assumed $ 5,090,829
===========
Premiums written:
Assumed $ 11,783,869
Ceded (1,143,017)
-----------
$ 10,640,852
===========
Earned premiums - assumed $ 9,959,006
===========
Net losses and loss adjustment expenses
incurred:
Direct $ (35,000)
Assumed 6,421,389
Ceded (733,086)
-----------
$ 5,653,303
===========
Although the ceding of insurance does not discharge the original insurer
from its primary liability to its policyholder, the insurance company
that assumes the coverage assumes the related liability, and it is the
practice of insurers for accounting purposes to treat insured risks, to
the extent of the reinsurance ceded, as though they were risks for which
the original insurer is not liable.
GSIC is required by a reinsurance agreement to maintain investments in
trust accounts equal to approximately $14,749,000 at December 31, 2005
representing unearned premiums, outstanding losses, and incurred but not
reported losses. GSIC's trust accounts at December 31, 2005 totaled
approximately $15,251,000.
(7) Stockholders' Equity
GSIC is required to file statutory financial statements prepared in
accordance with accounting practices prescribed or permitted by the
Oklahoma Insurance Department, which vary in some respects from U.S.
generally accepted accounting principles (GAAP). The primary differences
affecting GSIC are that certain acquisition costs (principally
commissions) which are deferred and amortized over the respective policy
periods under GAAP are expensed as incurred under statutory accounting
principles. Deferred federal income taxes are provided for temporary
differences between the statutory balance sheet and tax basis balance
sheet rather than the differences between the GAAP balance sheet and tax
basis balance sheet, are credited directly to capital and surplus rather
than net income, and are subject to certain limitations involving
admissibility. GSIC reported statutory net income of $128,686 and
statutory surplus of $6,420,659 as of December 31, 2005. 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.
The maximum amount of dividends which can be paid by State of Oklahoma
domiciled insurance companies to shareholders without prior approval of
the Insurance Commissioner is subject to restrictions relating to
statutory capital and surplus. Based on capital and surplus at
December 31, 2005, the maximum amount of dividends not requiring
regulatory approval that can be paid by GSIC to TGA in 2006 is
approximately $640,000.
The Oklahoma Insurance Department imposes certain risk-based capital
(RBC) requirements for property-casualty insurance companies that were
developed by the NAIC. The required RBC calculation specifies various
formulas and weighting factors that are applied to statutory financial
balances or activity levels based on the perceived degree of risk. As of
December 31, 2005, GSIC's capital and surplus exceeded the amount
calculated under the RBC requirements.
(8) Other Comprehensive Income (Loss)
The changes in the components of other comprehensive income (loss) are
reported net of income taxes for the year ended December 31, 2005, as
follows:
Before-tax Tax (expense) Net-of-tax
amount or benefit amount
---------- ------------- ----------
Net unrealized gains (losses)
on investment securities:
Net unrealized holding
losses arising during period $ (400,895) 136,290 (264,605)
Less reclassification adjustment
for net gains realized in income 46,405 (15,778) 30,627
--------- -------- ---------
Other comprehensive income
(loss) - net unrealized
gains (loss) $ (354,490) 120,512 (233,978)
========= ======== =========
(9) Federal Income Taxes
Deferred federal income taxes are summarized as follows as of December
31, 2005:
Deferred tax assets:
Discounting of reserves for unpaid
losses and loss adjustment expenses
for tax purposes $ 247,950
Unearned premium deductions for tax
purposes 376,416
Unearned commissions 1,739,184
Salvage and subrogation 41,200
Net operating loss 36,844
-----------
Total deferred tax assets 2,441,594
Deferred tax liabilities:
Deferred acquisition costs 526,982
Depreciable assets 59,135
Unrealized gains on investments 66,807
-----------
Total deferred tax liabilities 652,924
-----------
Net deferred federal
income tax asset $ 1,788,670
===========
Management believes that realization of the gross deferred tax assets is
more likely than not based on the expectation that such benefits will be
utilized in future tax returns of the Company.
The principal differences between the federal income tax expense
computed at the statutory federal income tax rate and the Company's
provision for federal income taxes for the year ended December 31, 2005,
are as follows:
Net income before federal income taxes $ 4,775,945
-----------
Federal income tax expense at 34% $ 1,623,821
Increase (decrease) resulting from:
State income taxes 141,846
Tax-exempt interest on investments
and dividends received deduction (131,408)
Meals and entertainment 11,453
Depreciable assets (154,454)
Other, net 765
-----------
Actual federal income
tax expense $ 1,492,023
===========
(10) Other Related-Party Transactions
A portion of the policies produced and managed by TGA are financed by
PAAC. At December 31, 2005, there was $1,476,895 due from the affiliated
finance company for policies financed by the affiliate.
TGA shares office space, facilities, equipment, and certain management
and administrative support functions with PAAC. The cost of such items
is paid by TGA and allocated to its affiliate based on usage.
TGA makes lease payments under an operating lease entered into by PAAC.
Under the terms of the lease agreement, monthly payments are $27,528
through May 2007.
During 2005, the Company paid interest of $23,386 on loans due to
stockholders, which were paid off as of December 31, 2005.
(11) Property and Equipment
Property and equipment at December 31, 2005, consisted of the following:
Useful life
in years
-----------
Furniture and equipment 7 years $ 921,508
Automobiles 7 years 85,324
Software 3 years 1,161,557
----------
2,168,389
Less accumulated depreciation and amortization (1,493,418)
----------
$ 674,971
==========
(12) Profit Sharing Plan
The Company maintains a qualified profit sharing plan for certain
salaried employees who meet age and service requirements. Contributions
to the plan are discretionary, but may not exceed 15% of the aggregate
annual salaries of participants. Contributions to the plan for the year
ended December 31, 2005 were $89,717.
(13) Contingencies
The Company is involved in various legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's financial condition.
(14) Subsequent Events
Effective January 1, 2006, all of the outstanding stock of TGA and its
affiliated companies, PAAC and TGASRI was purchased by Hallmark Financial
Services, Inc. TGA owns all of the issued and outstanding shares of
common stock of GSIC.