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EXHIBIT G(2)
PART I -- FINANCIAL INFORMATION
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
Investments:
Fixed maturities held to maturity, at cost........................ $ 74,378 $ 80,271
Fixed maturities available for sale, at market.................... 402,481 390,290
-------- --------
476,859 470,561
Common stocks, at market............................................ 70,169 59,415
Non-redeemable preferred stocks, at market.......................... 33,692 28,687
Other long-term investments......................................... 16,379 13,585
Short-term investments.............................................. 98,430 94,993
-------- --------
Total investments......................................... 695,529 667,241
Cash................................................................ 8,104 3,988
Accrued investment income........................................... 7,824 7,971
Accounts receivable, (less allowance of $171 -- 1997 and 1996)...... 60,174 45,557
Reinsurance recoverables and prepaids, (less allowance of
$200 -- 1997 and 1996)............................................ 87,850 90,781
Property and equipment, (less accumulated depreciation of
$15,188 -- 1997; $13,508 -- 1996)................................. 28,988 29,833
Deferred policy acquisition costs................................... 46,751 44,456
Goodwill, (less accumulated amortization of $6,982 -- 1997;
$6,423 -- 1996)................................................... 34,080 34,639
Other assets........................................................ 1,774 4,626
-------- --------
Total assets.............................................. $ 971,074 $929,092
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses..................................................... $ 299,219 $303,266
Unpaid loss adjustment expenses................................... 72,143 65,142
Unearned premiums................................................. 167,152 154,242
Notes payable..................................................... 101,313 101,688
Reinsurance payables and deposits................................. 10,673 7,268
Deferred income taxes............................................. 4,660 803
Other liabilities................................................. 56,152 58,644
-------- --------
Total liabilities......................................... 711,312 691,053
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value; authorized, 6,000,000 shares;
none issued and outstanding
Common stock, $1 par value; authorized, 30,000,000 shares; issued
15,038,433 shares -- 1997 and 14,975,497 shares -- 1996........ 15,038 14,975
Capital in excess of par............................................ 122,354 121,272
Retained earnings................................................... 100,395 84,685
Net unrealized investment gains..................................... 21,975 17,107
-------- --------
Total shareholders' equity..................................... 259,762 238,039
-------- --------
Total liabilities and shareholders' equity................ $ 971,074 $929,092
======== ========
See notes to consolidated financial statements
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- -------- ----------- --------
(UNAUDITED) (UNAUDITED)
Revenue:
Premiums earned............................ $ 263,272 $234,419 $ 134,597 $118,949
Net investment income...................... 21,608 18,519 10,863 9,266
Realized investment gains.................. 4,955 3,589 3,543 1,608
-------- -------- -------- --------
289,835 256,527 149,003 129,823
Expenses:
Losses and loss adjustment expenses
incurred................................ 183,126 168,507 94,264 83,662
Policy acquisition costs................... 69,336 60,560 33,366 31,478
General and administrative................. 6,527 6,925 3,947 3,397
Interest................................... 3,307 3,403 1,654 1,683
Other...................................... 689 783 342 495
Nonrecurring tender offer charge........... 2,163 2,163
-------- -------- -------- --------
262,985 242,341 133,573 122,878
-------- -------- -------- --------
Earnings before income taxes................. 26,850 14,186 15,430 6,945
Income taxes................................. 7,390 3,174 4,388 1,720
-------- -------- -------- --------
$ 19,460 $ 11,012 $ 11,042 $ 5,225
======== ======== ======== ========
Earnings per common share.................... $ 1.29 $ 0.74 $ 0.73 $ 0.35
======== ======== ======== ========
Dividends per common share................... $ 0.25 $ 0.25 $ 0.125 $ 0.125
======== ======== ======== ========
See notes to consolidated financial statements.
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
--------- ---------
(UNAUDITED)
Operating Activities:
Premiums collected................................................. $ 263,750 $ 243,895
Net investment income collected.................................... 19,060 17,381
Losses and loss adjustment expenses paid........................... (178,933) (166,909)
Policy acquisition costs and general and administrative expenses
paid............................................................ (77,663) (72,644)
Interest paid...................................................... (3,281) (3,372)
Federal income taxes paid.......................................... (5,047) (6)
Nonrecurring tender offer charge................................... (102)
Other receipts (payments).......................................... 948 (57)
--------- ---------
Net cash provided by operating activities.................. 18,834 18,186
--------- ---------
Investing Activities:
Maturities of fixed maturities held to maturity.................... 4,131 2,000
Maturities of fixed maturities available for sale.................. 30,672 32,309
Sales of fixed maturities available for sale....................... 35,955 31,389
Sales of equity securities......................................... 21,308 17,811
Sales of property and equipment.................................... 241 264
Redemption of mortgage loans....................................... 681
Net change in short-term investments............................... (3,407) (11,925)
Purchases of fixed maturities held to maturity..................... (12,858)
Purchases of fixed maturities available for sale................... (74,094) (43,944)
Purchases of equity securities..................................... (24,109) (17,397)
Net change in other long-term investments.......................... (924) (356)
Purchases of property and equipment................................ (1,361) (2,238)
--------- ---------
Net cash used in investing activities...................... (11,588) (4,264)
--------- ---------
Financing Activities:
Repayment of notes payable......................................... (375) (938)
Dividends paid..................................................... (3,750) (3,741)
Proceeds from exercise of stock options............................ 995 54
--------- ---------
Net cash used in financing activities...................... (3,130) (4,625)
--------- ---------
Net Increase in Cash................................................. 4,116 9,297
Cash, Beginning of Period............................................ 3,988 6,794
--------- ---------
Cash, End of Period.................................................. $ 8,104 $ 16,091
========= =========
See notes to consolidated financial statements.
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1997
NOTE 1 -- GENERAL
The accompanying unaudited consolidated financial statements of Guaranty
National Corporation and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles applicable to interim
reporting and do not include all the information and footnotes required for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months ended June
30, 1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997.
These financial statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report to
Shareholders and Form 10-K for the year ended December 31, 1996, for the more
complete explanations therein.
Certain reclassifications have been made to the 1996 financial statements
to conform with presentations used in 1997.
NOTE 2 -- EARNINGS PER SHARE
Earnings per common share has been computed using the weighted average
number of shares and equivalent shares outstanding of 15,053,857 and 14,967,244
for the six months ended June 30, 1997 and 1996, and 15,115,009 and 14,972,525
for the three months ended June 30, 1997 and 1996, respectively. The common
stock equivalents are stock options which result in a dilutive effect from
assumed exercise of the options.
During the first quarter of 1997, Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" was issued. This SFAS is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. The SFAS
replaces primary earnings per share with basic earnings per share (computed by
dividing income available to common stockholders (the numerator) by the weighted
average number of common shares outstanding (the denominator during the period).
Adoption of SFAS No. 128 would have had no effect on earnings per share for June
30, 1997 and 1996.
NOTE 3 -- INVESTMENTS
At June 30, 1997 and December 31, 1996, the estimated aggregate fair value
of fixed maturities held to maturity was $75,240,000 and $81,430,000,
respectively, the cost of fixed maturities available for sale was $393,793,000
and $382,415,000, respectively, and the cost of equity securities was
$78,741,000 and $69,658,000, respectively. At June 30, 1997 and December 31,
1996, the Company had investments in non-investment grade securities with a cost
of $57,393,000 and $55,205,000 which are carried at fair values of $58,665,000
and $56,477,000, respectively.
Realized investment gains (losses), which include gains (losses) on calls
and maturities of fixed maturities, for the six and three months ended June 30,
1997 and 1996, and write downs for other-than-temporary investment impairments
of approximately $160,000 for the six months ended June 30, 1997, and
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
approximately $434,000 and $300,000 for the six and three months ended June 30,
1996 are as follows (in thousands):
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1997 1997
---------------- ------------------
Fixed maturities available for sale:
Gains..................................... $ 1,054 $ 578
Losses.................................... (612) (233)
------ ------
442 345
------ ------
Equity securities:
Gains..................................... 5,694 3,369
Losses.................................... (1,181) (171)
------ ------
4,513 3,198
------ ------
Total........................... $ 4,955 $3,543
====== ======
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1996
---------------- ------------------
Fixed maturities available for sale:
Gains..................................... $ 948 $ 288
Losses.................................... (203) (183)
------- -------
745 105
------- -------
Equity securities:
Gains..................................... 4,048 2,242
Losses.................................... (1,204) (739)
------- -------
2,844 1,503
------- -------
Total........................... $ 3,589 $1,608
======= =======
NOTE 4 -- REINSURANCE
In the ordinary course of business, the Company reinsures certain risks,
generally on an excess of loss basis with other insurance companies. Such
reinsurance arrangements serve to limit the Company's maximum loss per
occurrence on individual risks to $400,000, $300,000 on property losses and
$600,000 for catastrophe losses. Reinsurance does not discharge the primary
liability of the original insurer. Amounts recoverable from reinsurers are
recognized and estimated in a manner consistent with the claim liabilities
arising from the reinsured policies and incurred but not reported losses.
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Premiums, losses, and loss adjustment expenses, including the effect of
reinsurance, are comprised of (in thousands):
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
----------------------------------------------- -----------------------------------------------
1997 1996 1997 1996
--------------------- --------------------- --------------------- ---------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- -------- -------- --------
Premiums:
Direct.................. $276,113 $265,445 $247,392 $240,242 $140,625 $135,675 $122,190 $121,686
Assumed................. 21,817 19,327 22,990 19,276 9,630 9,465 11,153 9,717
Ceded................... (19,728) (21,500) (26,027) (25,099) (10,350) (10,543) (12,601) (12,454)
-------- -------- -------- -------- -------- -------- -------- --------
Net..................... $278,202 $263,272 $244,355 $234,419 $139,905 $134,597 $120,742 $118,949
======== ======== ======== ======== ======== ======== ======== ========
% Assumed to Net........ 7.84% 9.41% 6.88% 9.24%
======== ======== ======== ========
INCURRED INCURRED INCURRED INCURRED
-------- -------- -------- --------
Losses and loss
adjustment expenses:
Direct.................. $178,214 $163,275 $ 93,163 $ 76,918
Assumed................. 19,368 20,096 10,282 15,934
Ceded................... (14,456) (14,864) (9,181) (9,190)
------- ------- ------- -------
Net..................... $183,126 $168,507 $ 94,264 $ 83,662
======= ======= ======= =======
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
During 1995, the Company acquired Viking Insurance Company of Wisconsin
("Viking") in a business combination accounted for as a purchase. As part of the
1995 Viking acquisition, and based upon Viking's favorable loss development
since the acquisition date, the Company estimates that is will pay Talegen
Holdings, Inc. ("Seller") an additional purchase price in the maximum amount
agreed to in the purchase agreement. This amount, which is approximately
$4,333,000 plus interest at 6.28%, will be payable to the Seller as of December
31, 1998. The Company has accrued this amount and the related interest payable
in the accompanying consolidated balance sheet.
As discussed in the Company's report on Schedule 14D-9, filed with the
Securities and Exchange Commission on May 22, 1996, as amended on June 1, 1996,
June 7, 1996 and June 19, 1996, three separate complaints naming the Company and
one or more of its directors, and Orion Capital Corporation ("Orion"), as
defendants were filed on behalf of the Company's shareholders, alleging that the
Orion tender offer was unfair and inadequate. On July 2, 1996, counsel for Orion
and the Company signed a Memorandum of Understanding resulting in the settlement
and dismissal of the three cases in June 1997, based on the revisions which the
Purchasers had made in the terms of the Offer to Purchase. In the judgment of
the Company's management, the costs incurred to defend and settle these
complaints did not have a materially adverse effect on the results of the
Company's operations. The settlement costs have been accrued in the Company's
consolidated financial statements as of June 30, 1997.
In addition to the three complaints described above, the Company is subject
to litigation in the normal course of operating its insurance business. The
Company is not engaged in any such litigation which it believes would have a
material adverse impact on its financial condition or results of operations,
taking into account the reserves established therefore and giving effect to
insurance.
NOTE 6 -- ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income", which requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. This statement is effective
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GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
for periods beginning after December 15, 1997. Management is currently
evaluating the effects of this change on the Company's financial statements.
Additionally, in June 1997 the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which changes the way public
companies report information about segments. This statement is effective for
periods beginning after December 15, 1997. Management is currently evaluating
the effects of this change on the Company's financial statements.
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