<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 17, 1998
UNISTAR FINANCIAL SERVICE CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 2-93426-D 87-0419568
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
4635 MCEWEN ROAD
DALLAS, TEXAS 75244
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (972) 702-0800
================================================================================
<PAGE> 2
The undersigned Registrant hereby amends parts (a) and (b) of Item 7. "Financial
Statements and Exhibits" of its Current Report on Form 8-K dated August 17,
1998, filed with the Securities and Exchange Commission on September 2, 1998
(the "August 8-K"), as set forth herein.
On September 30, 1998, the Registrant also completed the acquisition of the
business and operations of U.S. Fidelity Holding Corp. and its subsidiaries
(the "September 30, 1998, Transaction"). This Current Report on Form 8-K/A
relates only to the transaction reported in the August 8-K, and excludes
information relating to the September 30, 1998, Transaction.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<S> <C>
(a) Financial Statements of Business Acquired.
The following unaudited consolidated interim financial statements of International Fidelity Holding
Corporation ("IFHC") and the accompanying notes as of and for the six months ended June 30, 1998
and 1997, are submitted herewith on the pages indicated:
Balance sheets as of June 30, 1998 and 1997 .............................................................. 3
Statements of operations for each of the six months ended June 30, 1998 and 1997 ........................ 4
Statements of changes in stockholders' equity for each of the six months ended June 30, 1998 and 1997 .... 5
Statements of cash flows for each of the six months ended June 30, 1998 and 1997 ......................... 6
Notes to Interim Financial Statements .................................................................... 7
The following audited consolidated financial statements of IFHC and the accompanying notes as of and for
the year ended December 31, 1997 and 1996 are submitted herewith on the pages indicated:
Independent Auditors' Report (Samson, Robbins & Associates PLLC).......................................... 15
Balance sheets as of December 31, 1997 and 1996 .......................................................... 16
Statements of operations for each of the years ended December 31, 1997 and 1996 .......................... 17
Statements of changes in stockholders' equity for each of the years ended December 31, 1997 and 1996 ..... 18
Statements of cash flows for each of the years ended December 31, 1997 and 1996 .......................... 19
Notes to Financial Statements ............................................................................ 20
(b) Pro Forma Financial Statements.
The following unaudited pro forma combined financial statements of Unistar Financial Service Corp. and
IFHC are submitted herewith on the pages indicated:
Pro Forma Combined Financial Information ................................................................. 29
Pro Forma Combined balance sheet as of June 30, 1998 ..................................................... 30
Pro Forma Combined Statement of Operations for the six months ended June 30, 1998 ........................ 31
Pro Forma Combined Statement of Operations for the year ended December 31, 1997 .......................... 32
Notes to Pro Forma Financial Statements .................................................................. 33
</TABLE>
2
<PAGE> 3
INTERNATIONAL FIDELITY HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
ASSETS
Investments: (Note 1)
Mortgage loans $ 75,480 $ 77,855
Real estate 159,020 50,918
Equity securities acquired from a stockholder, (Note 2)
(net of $329,250 unrealized loss) 1,426,750 --
----------- -----------
Total investments 1,661,250 128,773
Cash and short term investments (including cash in trust accounts
of $1,273,709 at June 30, 1998) 1,759,264 377,485
Accrued investment income 15,624 380
Premiums receivable (Note 3) 210,363 210,520
Accounts receivable 422,415 77,765
Prepaid reinsurance premiums -- 138,766
Deferred acquisition costs (Note 1) 516,273 116,545
Deferred tax asset (Note 5) 281,531 111,700
Other assets 20,065 99,934
----------- -----------
TOTAL ASSETS $ 4,886,785 $ 1,261,868
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unearned premiums (Note 6) $ 2,184,372 $ 277,488
Loss and loss adjustment expense reserves (Note 1) 783,958 390,664
Accounts payable and accrued expenses 4,739 6,907
----------- -----------
Total liabilities 2,973,069 675,059
Commitments and contingencies (Notes 4, 7 and 9) -- --
Stockholders' Equity: (Note 4)
Common Shares, $.01 par value (authorized and issued 100,000) 1,000 1,000
Paid-in capital 795,809 776,119
Additional capital (Note 2) 2,000,000 --
Net unrealized loss on investment securities (329,250) --
Retained earnings (Deficit) (553,843) (190,310)
----------- -----------
Total stockholders' equity 1,913,716 586,809
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,886,785 $ 1,261,868
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
3
<PAGE> 4
INTERNATIONAL FIDELITY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
1998 1997
---------------------------
<S> <C> <C>
REVENUES
Premiums earned (Note 1) $ 1,186,119 $ 886,064
Investment income (Note 1) 41,685 1,107
Net realized gains from sale of equity securities 19,068 --
(Note 2)
----------- -----------
Total Revenues 1,246,872 887,171
EXPENSES
Loss and loss adjustment expenses (Note 1) 1,083,083 766,807
Policy acquisition costs 386,689 162,804
Other underwriting expenses 101,793 285,870
----------- -----------
Total Expenses 1,571,565 1,215,481
NET (LOSS)
(Loss) before income taxes (324,693) (328,310)
(Credit) for income taxes (Note 5) (110,396) (103,000)
----------- -----------
Net (Loss) $ (214,297) $ (225,310)
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
4
<PAGE> 5
INTERNATIONAL FIDELITY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
COMMON SHARES, $.01 PAR VALUE
Balance, Beginning of period $ 1,000 $ 1,000
Issuance of stock -- --
----------- ---------
Balance, End of period 1,000 1,000
PAID IN CAPITAL
Balance, Beginning of period 795,809 748,134
Increase in paid-in capital -- 27,985
----------- ---------
Balance, End of period 795,809 776,119
ADDITIONAL CAPITAL (Notes 2 and 4)
Balance, Beginning of period 2,000,000 --
Contributed capital -- --
----------- ---------
Balance, End of period 2,000,000 --
NET UNREALIZED LOSS ON INVESTMENT SECURITIES
Balance, Beginning of period -- --
Change in net unrealized (loss) (Note 1) (329,250) --
----------- ---------
Balance, End of period (329,250) --
RETAINED EARNINGS (DEFICIT)
Balance, Beginning of period (339,546) 35,000
Net (Loss) (214,297) (225,310)
----------- ---------
Balance, End of period (553,843) (190,310)
----------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 1,913,716 $ 586,809
=========== =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
5
<PAGE> 6
INTERNATIONAL FIDELITY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) $ (214,297) $(225,310)
Adjustments to reconcile net (loss) to net
cash provided by operating activities
Depreciation 1,953 --
Gain on sale of securities (19,068) --
Changes in:
Unearned premiums 1,022,699 101,118
Loss and loss adjustment expense reserves 76,048 256,103
Accounts payable and accrued expenses (468,885) (45,393)
Premiums receivable 817,801 104,169
Accounts receivable (350,740) --
Prepaid reinsurance premiums 125,000 36,234
Deferred acquisition costs (169,591) (46,377)
Deferred income taxes (110,396) (103,000)
Accrued investment income (15,093) --
Other, net 130,856 (174,699)
----------- ---------
Net cash provided by operating activities 826,287 (97,155)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of equity securities (Note 2) 63,068 --
Net decrease in mortgage loans 1,294 7,639
Sales of real estate 29,314 61,952
----------- ---------
Net cash provided by investing activities 93,676 69,591
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution of capital -- 27,985
----------- ---------
Net cash provided (used) in financing
activities -- 27,985
----------- ---------
Increase in cash 919,963 421
Cash and short term investments, Beginning of period 839,301 377,064
----------- ---------
Cash and short term investments, End of period $ 1,759,264 $ 377,485
=========== =========
SUPPLEMENTARY CASH FLOW DISCLOSURES
Interest paid $ -- $ --
=========== =========
Income taxes paid $ -- $ --
=========== =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
6
<PAGE> 7
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Operations
International Fidelity Holding Corporation (the Company), formerly U.S. Fidelity
Holding Corporation, is a closely held company with one subsidiary. The
subsidiary operates as a property and casualty insurance company domiciled in
the State of Texas and writes construction surety bonds and reinsures
non-standard automobile insurance produced in Texas.
Basis of Consolidation and Reporting
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, International Surety and Casualty
Company (ISCC) as of and for the six months ended June 30, 1998 and 1997. The
consolidated financial statements for the six months ended June 30, 1997 (which
are shown for comparative purposes), do not include the accounts and operations
of three subsidiaries of the Company (Great Southern General Agency, Inc., Eagle
Claims Corp., and Eagle Premium Finance Company) which were conveyed by the
Company to an affiliated company, U.S. Fidelity Holding Corp., on December 31,
1997 (see Note 8). All significant intercompany accounts and transactions have
been eliminated in consolidation.
The accompanying consolidated financial statements were prepared for the purpose
of complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in a Form 8-K related to presenting financial
statements of business acquired. Accordingly, the accompanying consolidated
financial statements are not intended to be a complete presentation of the
consolidated financial statements of the Company (see Note 8). Management
believes that the disclosures are adequate to make the information presented not
misleading. The results for such interim periods are not necessarily indicative
of results for the full year.
Use of Estimates
The presentation of financial statements in conformity with 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 revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Deferred Acquisition Costs
Deferred acquisition costs include commissions and other related expenses
incurred in connection with writing construction surety bonds and non-standard
automobile insurance business. These costs are deferred and amortized over the
period in which the related premiums are earned.
Securities Pledged
At June 30, 1998 and June 30, 1997, ISCC had investments (certificates of
deposit) with an aggregate carrying value of $50,000 which are pledged to the
Texas Department of Insurance as required by law. These certificates of deposit
are included with cash and short term investments in the accompanying
consolidated financial statements.
7
<PAGE> 8
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
The Company carries its investment in equity securities at a cost basis
established by management based upon the estimated fair value of such stocks at
the date of acquisition. This valuation method for stock price is based upon
accounting practices and procedures established by the National Association of
Insurance Commissioners (NAIC) relative to a lack of verification of permanence
regarding market price, because of the non-economic nature of the transaction
when the Company originally received the stock. These securities are reported at
fair market value as of the date of the financial statements. Any unrealized
holding gains and losses on securities are excluded from earnings and are
reported as a separate component of stockholder's equity until realized.
Investment securities are exposed to various risks such as interest rate
changes, market fluctuations and credit risks. Market values of securities
fluctuate based on the magnitude of changing market conditions; significant
changes in market conditions could materially affect portfolio value in the near
term.
Mortgage loans on real estate are carried at their unpaid principal balances.
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure, establishing a new
cost basis. After foreclosure, management periodically performs valuations, and
the real estate is carried at the lower of (1) cost or (2) fair value minus
estimated costs to sell. Depreciation is recognized on the straight-line method
over lives of 31.5 years. Revenue and expenses from operations are included as
investment income.
Premiums Earned
Insurance premiums are reflected as revenue on a pro-rata basis over the lives
of the policies. Surety bond premiums are reflected as revenue on a pro-rata
basis over the estimated term of the related construction project.
Loss and Loss Adjustment Expense
Loss and loss adjustment expenses represent case-basis estimates, reported
losses and estimates based on certain actuarial assumptions regarding industry
experience. Estimated amounts of salvage and subrogation are deducted from the
reserve for unpaid losses and loss expenses. Management believes that the
reserve for unpaid losses and loss adjustment expenses is adequate to cover the
ultimate liability. However, such estimate may be more or less than the amount
ultimately paid when the claims are ultimately settled.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives, ranging
from 3 to 5 years. These have been reflected in other assets on the accompanying
balance sheets.
8
<PAGE> 9
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Equivalents
For purposes of reporting cash flows, cash includes cash on hand, cash on
deposit, and in trust accounts.
(2) EQUITY SECURITIES
On October 20, 1997, the Company contributed to ISCC 240,000 shares of the
250,000 shares of the American Eco Corporation (AEC) stock the Company received
from a third party in exchange for the right granted to such third party to
receive stock of the Company constituting 33-1/3% of the outstanding common
stock of the Company at the time of issuance (see Note 4). The original
carrying value of $8.00 per share was the estimated fair value established by
management. This valuation of the stock price is based upon accounting practices
and procedures established by The National Association of Insurance
Commissioners (NAIC) relative to lack of verification of permanence regarding
the market price, because of the non-economic nature of the transaction when the
Company originally received the stock. These securities are reported at fair
market value as of the date of the financial statements. Any unrealized holding
gains or losses on these securities are excluded from earnings and are reported
as a separate component of stockholders equity until realized.
In December, 1997, the Company and ISCC sold 25,000 shares of the AEC stock in
open market transactions receiving proceeds of approximately $234,493, an
average price of $9.38 per share. The resulting gain of approximately $34,493
was reflected in the consolidated financial statements for the year ended
December 31, 1997.
The AEC stock was valued at $6.50 per share or $1,426,750 in the accompanying
financial statements at June 30, 1998. Such value is based on the closing price
of the common stock as listed on the NASDAQ Exchange as of June 30, 1998.
The following is an analysis of the stock valuation at June 30, 1998:
<TABLE>
<CAPTION>
Carrying Unrealized
Value Market Loss
----- ------ ----
<S> <C> <C> <C>
Investment in common stock of AEC $ 1,756,000 $ 1,426,750 $ 329,250
</TABLE>
During the six months ended June 30, 1998, ISCC sold 5,500 shares of AEC stock
in open market transactions for an average price of $11.47 per share or $63,068.
As of September 30, 1998, such AEC stock was listed on the NASDAQ exchange for
the following:
<TABLE>
<CAPTION>
Bid Ask Close
--- --- -----
<S> <C> <C>
$2-5/32 $2-5/16 $2-5/16
</TABLE>
9
<PAGE> 10
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) RELATED PARTY TRANSACTIONS
ISCC has entered into a master underwriting agreement effective June 1, 1995
with an affiliate, Great Southern General Agency, Inc (GSGA). This agreement
provides for an exclusive underwriting manager (GSGA) to procure, accept,
underwrite and execute construction surety bonds and administration of claims.
ISCC pays a provisional advance commission of 42% of premiums received. The term
of this agreement expired June 1998, and is renewable for two additional terms
of three years at the option of GSGA.
Additionally, this agreement provides for a retro-commission equal to 50% of net
gains of ISCC from favorable loss ratio experience. ISCC paid commissions,
including retro-commission amounts, of $427,689 and $162,804 to GSGA during the
first six months of 1998 and 1997 respectively.
In the ordinary course of business, GSGA owed ISCC $210,363 at June 30, 1998 and
$216,520 at June 30, 1997, as reflected in premiums receivable in the
accompanying financial statements.
(4) STOCKHOLDERS' EQUITY
Parent Company
Effective October 20, 1997 the Company entered into an option and negative
pledge agreement with a third party. In accordance with this agreement, the
third party contributed 250,000 shares of American Eco Corporation common stock
(see note 2) in exchange for the right granted to such third party to receive
stock of the Company constituting 33-1/3% of the outstanding common stock of the
Company at the time of issuance. On July 30, 1998, the third party exercised
the right and 51,000 newly issued shares of the Company's stock were issued. The
right and share exchange resulting therefrom were approved by the Texas
Commissioner of Insurance effective June 9, 1998.
Insurance Subsidiary
Statutory regulations generally limit the payment of cash dividends in any one
year to an amount equal to the greater of net investment income reported for the
previous calendar year or 10% of surplus as regards policyholders as of the
previous year-end. Surplus in excess of this limitation is not available for
dividends without special approval of the regulatory authorities. The Company
has no surplus available at June 30, 1998, for payment of cash dividends in
fiscal 1998.
Statutory capital and surplus was $1,904,469 and $816,903 at June 30, 1998 and
1997, respectively. Statutory net income was $7,260 and $5,784 for the six
months ended June 30, 1998 and 1997, respectively.
Since August 26, 1997, ISCC has operated under Regulatory Administrative
Oversight by the Texas Department of Insurance ("TDI"). The more significant
requirements were for ISCC to provide certain financial statements, projections
and business plans for approval and review. The TDI also required ISCC to adopt
and amend certain policies and procedures.
ISCC responded to the TDI on November 3, 1997 regarding the aforementioned
issues. As of June 30, 1998, management believes they have adequately addressed
all of the significant issues.
10
<PAGE> 11
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, TDI conducted an examination of ISCC through December 31, 1996.
The Texas Department of Insurance found that ISCC did not have the minimum
capital and surplus invested in prescribed funds as required by Article 2.08 of
the Texas Insurance Code.
On October 20, 1997, the Company (ISCC's sole stockholder) made a capital
contribution (see Note 2) of $1,920,000 consisting of 240,000 shares of American
Eco common stock. ISCC had until August 15, 1998 to come into compliance with
the investment of its capital and surplus per Articles 2.08 and 2.10 of the
Texas Insurance Code. Effective August 12, 1998, the Company contributed
$1,000,000 cash to ISCC as additional capital. Management believes ISCC
currently is in compliance with Articles 2.08 and 2.10 of the Texas Insurance
Code.
(5) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its subsidiary,
ISCC. The Company and ISCC have a tax sharing agreement that requires each
entity to pay taxes on their separate company taxable income. Federal income
taxes receivable based on the Company's consolidated taxable income for the six
months ended June 30, 1998 and 1997, amounted to $15,000 and ($0), respectively,
and is reflected in accounts receivable in the accompanying financial
statements.
Included in the accompanying balance sheets are deferred tax assets of $281,531
and $111,700 as of June 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax asset:
Unearned premium reserve $ 204,064 $ 46,700
NOL carryforward 253,000 105,000
--------- ---------
457,064 151,700
Deferred tax liability:
Deferred acquisition costs (175,533) (40,000)
--------- ---------
Net deferred tax asset $ 281,531 $ 111,700
========= =========
</TABLE>
11
<PAGE> 12
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense (benefit) consists of the following components for the six
months ended June 30:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Deferred income tax (benefit) $ (110,396) $ (103,000)
------------ -----------
Total income tax (benefit) $ (110,396) $ (103,000)
============ ===========
</TABLE>
The following reconciles the Company's consolidated tax provision with the
expected provision obtained by applying statutory rules to pre-tax income:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Expected tax provision $(110,396) $(111,625)
Other -- 8,625
--------- ---------
Income tax (credit) $(110,396) $(103,000)
========= =========
</TABLE>
At June 30, 1997, the Company had the following federal income tax
carryforwards:
<TABLE>
<CAPTION>
Expires
---------
<S> <C> <C>
Net operating loss carryforward $ 745,000 2011 - 13
</TABLE>
(6) REINSURANCE
ISCC assumes non-standard auto risks which are written by affiliated managing
general agencies. The Company assumes a ten (10) percent quota share of each
auto risk.
ISCC currently limits its construction surety (payment and performance bonding)
capacity to $2,000,000 per principal and was reinsured in excess of $100,000 per
principal in 1997 and $250,000 per principal in 1998.
In the ordinary course of its construction and surety business, ISCC reinsures
certain risks with other insurance organizations to provide greater
diversification of risk and minimize exposures on larger risks. Although
reinsurance agreements contractually obligate re-insurers to reimburse for their
proportionate shares of losses, they do not discharge the primary liability of
ISCC. ISCC is contingently liable for the ceded amount of unpaid losses and loss
adjustment expenses and unearned premiums in the event the assuming insurance
organizations are unable to meet their contractual obligations.
12
<PAGE> 13
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997 and 1998, the Company reinsured under separate treaties for their
different lines of business, resulting in the following net retention per
occurrence:
<TABLE>
<CAPTION>
1997 1998
--------------------------------- ---------------------------------------
Primary Excess Primary Excess
Retention Policy Retention Policy Total
--------- ------ --------- ------ -----
<S> <C> <C> <C> <C> <C>
Reinsurance Ceded:
Construction Surety $100,000/bond $1,900,000 $ 250,000 $1,750,000 $2,000,000
</TABLE>
<TABLE>
<CAPTION>
Physical Automobile
damage liability
------ ---------
<S> <C> <C>
Reinsurance Assumed:
Non-standard
automobile $ 5,000 $ 4,000
</TABLE>
Effective January 1, 1998, the Company exercised the options to no-claim bonuses
of $41,000 on its surety reinsurance treaties for 1997. On January 14, 1998 the
Company renewed its reinsurance agreements for 1998. These agreements include
all unexpired risk with effective dates prior to January 1, 1998.
An analysis of net premiums written is summarized as follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1998 1997
---------- --------
<S> <C> <C>
Assumed:
Private passenger auto liability &
Auto physical damage $2,203,275 $566,827
Direct:
Surety & Accidental and health 27,166 665,356
Ceded:
Surety & Accidental and health 135,492 169,433
========== ========
</TABLE>
Effective June 30, 1998, ISCC commuted its retrocession agreement with
Underwriters Reinsurance Company for the assumption of Non-Standard Auto
Insurance. Effective July 1, 1998, ISCC entered into a new Retrocession
Agreement with Trenwick Reinsurance Company. The effective change in the
agreement is that premiums are now ceded as earned.
(7) CONTINGENT LIABILITIES
The Company is a defendant in several other claims relating to matters arising
in the ordinary course of its surety business. The amount of the liability, if
any, from the claims cannot be estimated, but management is of the opinion that
the outcome of the claims will not have a material impact in the Company's
financial position. Nevertheless, due to uncertainties in the settlement
process, it is at least reasonably possible that management's view of the
outcome will change in the near term.
13
<PAGE> 14
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company does not have any financial instruments where there is
off-balance-sheet-risk of accounting loss due to credit or market risk.
(8) CORPORATE REORGANIZATION
Effective December 31, 1997 the Company conveyed certain stock it owned in three
subsidiary corporations, (Eagle Premium Finance Company, Great Southern General
Agency, Inc. and Eagle Claim Company) to an affiliated entity. The transactions
have been accounted for as a spin-off of entities under common control and
accordingly, the assets, liabilities, equity and operating results of these
subsidiaries for 1997 and 1998 are not included in the accompanying consolidated
financial statements.
(9) SUBSEQUENT EVENTS
Effective August 17, 1998, the stockholders of the Company exchanged 100% of
their common stock in the Company for 19,777,000 shares of $.01 par value common
stock in Caldera, Inc., a Delaware corporation. Caldera, Inc. was an inactive
corporation with no business or assets. At year-end 1997, Caldera, Inc. had a
net operating loss carryforward for federal income tax purposes of $38,000. Due
to the changes in operations and ownership, the Internal Revenue Code will not
allow this NOL carryforward to be utilized. On August 17, 1998, Caldera, Inc.
changed its name to Unistar Financial Services Corp. (Unistar), upon the
effectiveness of the August 17, 1998, transaction.
On August 12, 1998, the Company contributed $1,000,000 of cash as additional
capital to ISCC.
On September 30, 1998, Unistar completed the acquisition of the business and
operations of U.S. Fidelity Holding Corp. and its subsidiaries (collectively,
"USFH") for consideration consisting of 3,975,000 shares of Unistar common
stock. Immediately prior to the acquisition, Unistar had 20,000,000 shares of
common stock outstanding, resulting in 23,975,000 shares of common stock
outstanding after giving effect to the acquisition.
14
<PAGE> 15
Independent Auditors' Report
To the Board of Directors
International Fidelity Holding Corporation
We have audited the accompanying consolidated balance sheets of International
Fidelity Holding Corporation and its subsidiary, International Surety and
Casualty Company, as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1997. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements include the accounts of
International Fidelity Holding Corporation and its wholly owned subsidiary,
International Surety and Casualty Company for 1997 and 1996. The consolidated
financial statements described above do not include the accounts and operations
of three previously owned subsidiaries of International Fidelity Holding
Corporation (Great Southern General Agency, Inc., Eagle Claims Corp. and Eagle
Premium Finance Company) which were sold by International Fidelity Holding
Corporation to an affiliated company, U. S. Fidelity Holding Corp., on December
31, 1997. The accompanying consolidated financial statements were prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in a Form 8-K related to presenting financial
statements of businesses acquired. Accordingly, as described in Note 1, the
accompanying consolidated financial statements are not intended to be a complete
presentation of the consolidated financial statements of International Fidelity
Holding Corporation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Fidelity Holding Corporation and its subsidiary, International
Surety and Casualty Company, as of December 31, 1997 and 1996, and the
consolidated results of operations, changes in stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Dallas, Texas
August 21, 1998, except as to /s/ SAMSON, ROBBINS, & ASSOCIATES P.L.L.C.
Note 9 which is as of
September 30, 1998.
15
<PAGE> 16
INTERNATIONAL FIDELITY HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Investments: (Note 1)
Mortgage loans $ 76,774 $ 85,494
Real estate 190,286 112,870
Equity securities acquired from a stockholder (Note 2) 1,800,000 --
----------- -----------
Total investments 2,067,060 198,364
Cash and short term investments (Note 1) 839,301 377,064
Accrued investment income 532 --
Premiums receivable (Note 3) 1,028,164 314,689
Accounts receivable 71,675 --
Prepaid reinsurance premiums 125,000 175,000
Deferred acquisition costs (Note 1) 346,682 70,168
Deferred tax asset (Note 5) 171,135 8,700
Other assets 150,921 3,380
----------- -----------
TOTAL ASSETS $ 4,800,470 $ 1,147,365
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unearned premiums (Note 1) $ 1,161,673 $ 176,370
Loss and loss adjustment expense reserves (Note 1) 707,910 134,561
Accounts payable and accrued expenses 473,624 52,300
----------- -----------
Total liabilities 2,343,207 363,231
Commitments and contingencies (Notes 4, 7 and 9) -- --
Stockholders' Equity: (Note 4)
Common Shares, $.01 par value (authorized and issued 100,000) 1,000 1,000
Paid-in capital 795,809 748,134
Additional capital 2,000,000 --
Retained earnings (339,546) 35,000
----------- -----------
Total stockholders' equity 2,457,263 784,134
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,800,470 $ 1,147,365
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
16
<PAGE> 17
INTERNATIONAL FIDELITY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Premiums earned (Note 1) $ 2,101,249 $ 917,493
Investment income (Note 1) 27,327 28,691
Miscellaneous income 10,704 5,188
Net realized gain from sale of equity securities (Note 2) 34,493 --
----------- -----------
Total Revenues 2,173,773 951,372
EXPENSES
Losses and loss adjustment expenses (Note 1) 1,769,589 203,046
Policy Acquisition costs 677,129 484,330
Other underwriting expenses 226,133 208,146
Investment expenses (Note 1) 22,791 12,350
----------- -----------
Total Expenses 2,695,642 907,872
NET INCOME (LOSS)
Income (Loss) before income taxes (521,869) 43,500
Provision (Credit) for income taxes (Note 5) (177,435) 8,500
----------- -----------
Net Income (Loss) $ (344,434) $ 35,000
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
17
<PAGE> 18
INTERNATIONAL FIDELITY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
COMMON SHARES, $.01 PAR VALUE
Balance, Beginning of year $ 1,000 $ --
Issuance of stock -- 1,000
----------- -----------
Balance, End of year 1,000 1,000
PAID IN CAPITAL
Balance, Beginning of year 748,134 --
Acquisition of net assets in ISCC -- 748,134
Other 47,675 --
----------- -----------
Balance, End of year 795,809 748,134
ADDITIONAL CAPITAL
Balance, Beginning of year -- --
Contributed Capital (Note 4) 2,000,000 --
----------- -----------
Balance, End of year 2,000,000 --
RETAINED EARNINGS
Balance, Beginning of year 35,000 --
Net Income (Loss) (344,434) 35,000
Other, net (30,112) --
----------- -----------
Balance, End of year (339,546) 35,000
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ 2,457,263 $ 784,134
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
18
<PAGE> 19
INTERNATIONAL FIDELITY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (344,434) $ 35,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,904 3,904
Gain on sale of securities (34,493) --
Changes in:
Unearned premiums 985,303 131,292
Loss and loss adjustment expense reserves 573,349 134,561
Accounts payable and accrued expenses 421,324 27,164
Premiums receivable (713,475) (289,052)
Prepaid reinsurance premiums 50,000 (25,000)
Deferred acquisition costs (276,514) (51,236)
Deferred income taxes (177,435) 8,500
Other, net (119,414) (17,566)
----------- -----------
Net cash provided (used) by operating activities 368,115 (42,433)
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of equity securities (Note 2) 234,493 --
Net decrease (increase) in mortgage loans 8,720 (26,844)
Sales (acquisitions) of real estate (77,416) 30,000
----------- -----------
Net cash provided by investing activities 165,797 3,156
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of stock -- 1,000
Contribution of capital -- 40,000
Advances from (to) affiliate (71,675) 70,000
----------- -----------
Net cash provided (used) in financing activities (71,675) 111,000
----------- -----------
Increase in cash 462,237 71,723
Cash and short term investments, Beginning of year 377,064 305,341
----------- -----------
Cash and short term investments, End of year $ 839,301 $ 377,064
=========== ===========
SUPPLEMENTARY CASH FLOW DISCLOSURES
Interest paid $ -- $ --
=========== ===========
Income taxes paid $ 15,000 $ --
=========== ===========
SUPPLEMENTAL SCHEDULE FOR NON-CASH ACTIVITIES
Common stock of American Eco contributed by stockholder $ 2,000,000 $ --
=========== ===========
Impact of net assets acquired in exchange for holding company stock $ -- $ 748,134
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
19
<PAGE> 20
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Operations
International Fidelity Holding Corporation (the Company), formerly U.S. Fidelity
Holding Corporation, is a closely held company with one subsidiary. The
subsidiary operates as a property and casualty insurance company domiciled in
the State of Texas which writes a limited amount of construction surety bonds
and reinsures non-standard automobile insurance produced and underwritten by
affiliated companies in Texas.
Basis of Consolidation and Reporting
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, International Surety and Casualty
Company (ISCC) for 1997 and 1996. The consolidated financial statements do not
include the accounts and operations of three subsidiaries of the Company (Great
Southern General Agency, Inc., Eagle Claims Corp, and Eagle Premium Finance
Company) which were conveyed by the Company to an affiliated company, U. S.
Fidelity Holding Corp., on December 31, 1997. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements were prepared for the purpose
of complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in a Form 8-K related to presenting financial
statements of businesses acquired. Accordingly, the accompanying consolidated
financial statements are not intended to be a complete presentation of the
consolidated financial statements of the Company (see Note 8).
Use of Estimates
The presentation of financial statements in conformity with 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 revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Deferred Acquisition Costs
Deferred acquisition costs include commissions incurred in connection with
writing construction surety bonds and non-standard automobile insurance
business. These costs are deferred and amortized over the period in which the
related premiums are earned.
Securities Pledged
At December 31, 1997, ISCC had investments (certificates of deposit) with an
aggregate carrying value of $50,000 which are pledged to the Texas Department of
Insurance as required by law. These certificates of deposits are included with
cash and short term investments in the accompanying consolidated financial
statements.
20
<PAGE> 21
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
The Company carries its investment in equity securities at a cost basis
established by management based upon the estimated fair value of such stock at
the date of acquisition. This valuation method for stock price is based upon
accounting practices and procedures established by the National Association of
Insurance Commissioners (NAIC) relative to a lack of verification of permanence
regarding market price, because of the non-economic nature of the transaction
when the Company originally received the stock. These securities are reported at
fair market value as of the date of the financial statements. Any unrealized
holding gains and losses on securities are excluded from earnings and are
reported as a separate component of stockholder's equity until realized.
Investment securities are exposed to various risks such as interest rate
changes, market fluctuations and credit risks. Market values of securities
fluctuate based on the magnitude of changing market conditions.
Mortgage loans on real estate are carried at their unpaid principal balances.
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure, establishing a new
cost basis. After foreclosure, management periodically performs valuations, and
the real estate is carried at the lower of (1) cost or (2) fair value minus
estimated costs to sell. Depreciation is recognized on the straight-line method
over lives of 31.5 years. Revenue and expenses from operations are included as
investment income.
Premiums Earned
Insurance premiums are reflected as revenue on a pro-rata basis over the
lives of the policies. Surety bond premiums are reflected as revenue on a
pro-rata basis over the estimated term of the related construction project.
Loss and Loss Adjustment Expense
Loss and loss adjustment expenses represent case-basis estimates, reported
losses and estimates based on certain actuarial assumptions regarding industry
experience. Estimated amounts for salvage and subrogation are deducted from the
reserve for unpaid losses and loss expenses. Management believes that the
reserve for unpaid losses and loss adjustment expenses is adequate to cover the
ultimate liability. However, such estimates may be more or less than the amount
paid when the claims are ultimately settled.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives, ranging
from 3 to 5 years. These have been reflected in other assets on the accompanying
balance sheet.
21
<PAGE> 22
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Equivalents
For purposes of reporting cash flows, cash includes cash on hand and cash on
deposit.
(2) EQUITY SECURITIES
On October 20, 1997, the Company contributed to ISCC 240,000 shares of the
250,000 shares of the American Eco Corporation (AEC) stock the Company received
from a third party in exchange for the right granted to such third party to
receive stock of the Company constituting 33 1/3% of the outstanding common
stock of the Company at the time of issuance (see Note 4). The original carrying
value of $8.00 per share was the estimated fair value established by management.
This valuation of the stock price is based upon accounting practices and
procedures established by The National Association of Insurance Commissioners
(NAIC) relative to lack of verification of permanence regarding the market
price, because of the non-economic nature of the transaction when the Company
originally received the stock. These securities are reported at fair
market value as of the date of the financial statements. Any unrealized holding
gains or losses on these securities are excluded from earnings and are reported
as a separate component of stockholders' equity until realized.
In December, 1997, the Company and ISCC sold 25,000 shares of the AEC stock in
open market transactions receiving proceeds of approximately $234,493, an
average price of $9.38 per share . The resulting gain of approximately $34,493
has been reflected in the consolidated financial statements for the year ended
December 31, 1997.
The following is an analysis of the valuation of the remaining 225,000 shares of
AEC stock at December 31, 1997:
<TABLE>
<CAPTION>
Carrying Unrecognized
Value Market Gain
----------- ------------- ------------
<S> <C> <C> <C>
Equity Securities $ 1,800,000 $ 2,432,813 $ 632,813
</TABLE>
The AEC stock is traded on the NASDAQ Exchange. There are no encumbrances on
this stock or repurchase requirements by either the prospective stockholder or
the Company.
Subsequent to December 31, 1997, 5,500 shares of AEC stock were sold in open
market transactions at an average price of $11.50 per share for proceeds of
approximately $63,258. As of August 26, 1998, the AEC stock was listed on the
NASDAQ Exchange as follows:
<TABLE>
<CAPTION>
Bid Ask Close
--- --- -----
<S> <C> <C>
$2-3/4 $3-1/8 $2-7/8
</TABLE>
(3) RELATED PARTY TRANSACTIONS
Previously, ISCC leased office space from the Company under a management and
service agreement which was terminated in June 1996. Total rental expense under
this agreement in 1996 was $37,500, A current management agreement was approved
by the Texas Department of Insurance (see Note 4). Total rental expense in 1997
of $31,500 was paid to an affiliated company.
22
<PAGE> 23
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ISCC has entered into a master underwriting agreement effective June 1, 1995
with an affiliate, Great Southern General Agency, Inc (GSGA). This agreement
provides for an exclusive underwriting manager (GSGA) to procure, accept,
underwrite and execute construction surety bonds and administration of claims.
ISCC pays a provisional advance commission of 42% of premiums received. The
initial three year term of this agreement expired June 1998, and is renewable
for two additional terms of three years each, at the option of GSGA.
Additionally, this agreement provides for a retro-commission equal to 50% of net
gains of ISCC from favorable loss ratio experience. ISCC paid commissions,
including retro-commission amounts, of $358,867 and $516,995 to GSGA during 1997
and 1996 respectively.
In the ordinary course of business, GSGA owed ISCC $55,925 at December 31, 1997
and $191,441 at December 31, 1996, as reflected in premiums receivable in the
accompanying financial statements.
During 1996, the Company paid consulting fees to certain of its officers and
directors of $17,552 and paid management fees of $31,500 to its then parent
company. During 1997, the Company paid no consulting or director fees.
(4) STOCKHOLDERS' EQUITY
Parent Company
Effective October 20, 1997 the Company entered into an option and negative
pledge agreement with a third party. In accordance with this agreement, the
third party contributed 250,000 shares of American Eco Corporation common stock
(see note 2) in exchange for the right granted to such third party to receive
stock of the company constituting 33 1/3% of the outstanding common stock of the
company at the time of issuance. On July 30, 1998, the third party exercised
the right and 51,000 newly issued shares of the Company's stock were issued. The
right and share exchange resulting therefrom were approved by the Texas
Commissioner of Insurance effective June 9, 1998.
Insurance Subsidiary
Statutory regulations generally limit the payment of cash dividends in any one
year to an amount equal to the greater of net investment income reported for the
previous calendar year or 10% of surplus as regards policyholders as of the
previous year-end. Surplus in excess of this limitation is not available for
dividends without special approval of the regulatory authorities. The Company
has no surplus available at December 31, 1997, for payment of cash dividends in
fiscal 1998.
Statutory capital and surplus was $2,810,574 and $811,119 at December 31, 1997
and 1996, respectively. Statutory net income (loss) was ($654,917) and $97,571
for the years ended December 31, 1997, and 1996, respectively.
Since August 26, 1997, ISCC has operated under Regulatory Administrative
Oversight by the Texas Department of Insurance (the "TDI"). The more significant
requirements were for ISCC to provide certain financial statements, projections
and business plans for approval and review. The TDI also required ISCC to adopt
and amend certain policies and procedures.
23
<PAGE> 24
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ISCC responded to the Texas Department of Insurance on November 3, 1997
regarding the aforementioned issues. As of December 31, 1997, management
believes they have adequately addressed all of the significant issues.
During 1997, TDI conducted an examination of ISCC through December 31, 1996. The
Texas Department of Insurance found that ISCC did not have the minimum capital
and surplus invested in prescribed funds as required by Article 2.08 of the
Texas Insurance Code.
On October 20, 1997, the Company (ISCC's sole stockholder) made a capital
contribution (see Note 2) of $1,920,000 consisting of 240,000 shares of American
Eco common stock. ISCC had until August 15, 1998 to come into compliance with
the investment of its capital and surplus per Articles 2.08 and 2.10 of the
Texas Insurance Code. Effective August 12, 1998, the Company contributed
$1,000,000 cash to ISCC as additional capital. Management believes ISCC
currently is in compliance with Articles 2.08 and 2.10 of the Texas Insurance
Code.
(5) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its subsidiary,
ISCC. The Company and its subsidiary have a tax sharing agreement that requires
each entity to pay taxes on their separate company taxable income. Federal
income taxes receivable or (payable) based on the Company's consolidated taxable
income for the years ended December 31, 1997 and 1996 amounted to $15,000 and
($15,000), and is reflected in accounts receivable and accounts payable,
respectfully, in the accompanying financial statements.
Included in the accompanying balance sheets are deferred tax assets of $171,135
and $8,700 as of December 31, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax asset:
Unearned premium reserve $ 184,135 $ 32,600
NOL carryforward 105,000 --
--------- ---------
289,135 32,600
Deferred tax liability:
Deferred acquisition costs (118,000) (23,900)
--------- ---------
Net deferred tax asset $ 171,135 $ 8,700
========= =========
</TABLE>
24
<PAGE> 25
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense credit consists of the following components for the year
ended December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Currently payable (refundable) $ (15,000) $ 15,000
Deferred income tax benefit (162,435) (6,500)
--------- ---------
Total income tax provision
(credit) $(177,435) $ 8,500
========= =========
</TABLE>
The following reconciles the Company's consolidated tax provision with the
expected provision obtained by applying statutory rules to pre-tax income:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Expected tax provision (credit) $(222,535) 15,000
Progressive tax rates 45,100 (6,500)
--------- ---------
Income tax provision (credit) $(177,435) $ 8,500
========= =========
</TABLE>
At December 31, 1997, the Company had the following federal income tax
carryforwards:
<TABLE>
<CAPTION>
Expires
-------
<S> <C> <C>
Net operating loss carryforward $380,000 2011-13
Capital loss carryforward $ 95,194 2002-03
</TABLE>
(6) REINSURANCE
ISCC assumes non-standard auto risks which are written by affiliated managing
general agencies. The Company assumes a ten (10) percent quota share of each
auto risk.
ISCC currently limits its construction surety (payment and performance bonding)
capacity to $2,000,000 per principal and is reinsured in excess of $250,000 per
principal.
In the ordinary course of its construction and surety business, ISCC reinsures
certain risks with other insurance organizations to provide greater
diversification of risk and minimize exposures on larger risks. Although
reinsurance agreements contractually obligate re-insurers to reimburse for their
proportionate shares of losses, they do not discharge the primary liability of
ISCC. ISCC is contingently liable for the ceded amount of reserves for unpaid
losses and loss adjustment expenses and unearned premiums in the event the
assuming insurance organizations are unable to meet their contractual
obligations.
25
<PAGE> 26
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996 and 1997, the Company reinsured under separate treaties for their
different lines of business, resulting in the following net retention per
occurrence:
<TABLE>
<CAPTION>
Primary Excess
Retention Policy Total
--------------- ---------------- ----------------
<S> <C> <C> <C>
Ceded:
Construction Surety $ 100,000/bond $ 1,900,000 $ 200,000
</TABLE>
<TABLE>
<CAPTION>
Physical Automobile
Damage Liability
--------------- ----------------
Assumed:
<S> <C> <C>
Non-standard automobile $ 5,000 $ 4,000
</TABLE>
Effective January 1, 1997 and 1996, the Company exercised the options to
no-claim bonuses of $41,000 and $35,000 respectively on its surety reinsurance
treaties for 1997 and 1996. On January 14, 1997 the Company renewed its
reinsurance agreements for 1997 at similar limits to those in 1996. These
agreements include all unexpired risk with effective dates of 1996 and 1997.
An analysis of net premiums written is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Assumed:
Private passenger auto liability $ 1,288,425 --
Auto physical damage 1,156,848 --
Direct:
Surety 854,442 1,191,231
Accidental and health (9,585) 57,720
Ceded:
Surety (209,194) (170,866)
Accidental and health 5,616 (29,300)
=========== ===========
</TABLE>
Effective June 30, 1998, ISCC commuted its retrocession agreement with
Underwriters Reinsurance Company for the assumption of Non-Standard Auto
Insurance. Effective July 1, 1998, ISCC entered into a new Retrocession
Agreement with Trenwick Reinsurance Company. The effective change in the
agreement is that premiums are now ceded as earned.
26
<PAGE> 27
INTERNATIONAL FIDELITY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) CONTINGENT LIABILITIES
The Company is a defendant in several claims relating to matters arising in the
ordinary course of its surety business. The amount of the liability, if any,
from the claims cannot be estimated, but management is of the opinion that the
outcome of the claims will not have a material impact in the Company's financial
position. Nevertheless, due to uncertainties in the settlement process, it is at
least reasonably possible that management's view of the outcome will change in
the near term.
The Company does not have any financial instruments where there is
off-balance-sheet-risk of accounting loss due to credit or market risk.
(8) CORPORATE REORGANIZATION
Effective December 31, 1997 the Company conveyed certain stock it owned in three
subsidiary corporations, (Eagle Premium Finance Company, Great Southern General
Agency, Inc. and Eagle Claim Company) to an affiliated entity. The transactions
have been accounted for as a spin-off of entities under common control and
accordingly, the assets, liabilities, equity and operating results of these
subsidiaries for 1996 and 1997 are not included in the accompanying consolidated
financial statements.
(9) SUBSEQUENT EVENTS
Effective August 17, 1998, the stockholders of the Company exchanged 100% of
their common stock in the Company for 19,777,000 shares (approximately 99%) of
$.01 par value common stock in Caldera, Inc., a Delaware corporation. Caldera,
Inc., an affiliate of the Company, was an inactive public corporation with no
business or assets. At year-end 1997, Caldera, Inc. had a net operating loss
carryforward for federal income tax purposes of $38,000. Due to the changes in
operations and ownership, the Internal Revenue Code will not allow this NOL
carryforward to be utilized. On August 17, 1998, Caldera, Inc. changed its name
to Unistar Financial Services Corp. (Unistar), upon the effectiveness of the
August 17, 1998, transaction.
On August 12, 1998, the Company contributed $1,000,000 cash to ISCC as
additional capital.
On September 30, 1998, Unistar completed the acquisition of the business and
operations of U.S. Fidelity Holding Corp. and its subsidiaries (collectively,
"USFH") for consideration consisting of 3,975,000 shares of Unistar common
stock. Immediately prior to the acquisition, Unistar had 20,000,000 shares of
common stock outstanding, resulting in 23,975,000 shares of common stock
outstanding after giving effect to the acquisition.
27
<PAGE> 28
Unistar Financial Service Corp.
Unaudited Pro Forma Combined Financial Information
The following unaudited pro forma combined balance sheet and statements of
operations present the combined financial position and operations of Unistar
Financial Service Corp. ("Unistar") and International Fidelity Holding Corp. and
its wholly-owned subsidiary International Surety and Casualty Company (together
referred to as "IFHC") at June 30, 1998 and for the six month period ended June
30, 1998 and for the year ended December 31, 1997. This unaudited pro forma
information gives effect to the transaction which occurred on August 17, 1998,
pursuant to which Unistar acquired all of the issued and outstanding capital
stock of IFHC in exchange for 19,777,000 shares of Unistar common stock. The
pro forma combined balance sheet as of June 30, 1998, gives effect to the
transaction as if it occurred on June 30, 1998. The pro forma combined
statements of operations for the six months ended June 30, 1998, and for the
year ended December 31, 1997, assume the transaction occurred at the beginning
of each respective period presented. The unaudited pro forma adjustments treat
the transaction as a recapitalization of IFHC, or a reverse merger, as if IFHC
acquired Unistar. This unaudited pro forma combined information should be read
in conjunction with the consolidated statements of IFHC and notes thereto
presented herein.
28
<PAGE> 29
-2-
Unistar Financial Service Corp.
Pro Forma Combined Balance Sheet
June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Unaudited
Historical Pro Forma Pro Forma
IFHC Unistar Adjustments Combined
--------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Assets
Investments $ 1,661,250 $ 1,661,250
Cash and short-term investments 1,759,264 1,759,264
Premiums receivable 210,363 210,363
Accounts receivable 422,415 422,415
Deferred acquisition costs 516,273 516,273
Deferred tax asset 281,531 281,531
Other assets 35,689 35,689
-------------- ----------- ----------- -----------
Total assets $ 4,886,785 $ - $ - $ 4,886,785
============== =========== =========== ===========
Liabilities
Unearned premiums $ 2,184,372 $ 2,184,372
Loss and loss adjustment reserves 783,958 783,958
Accounts payable and accrued expenses 4,739 4,739
-------------- ----------- ----------- -----------
Total liabilities 2,973,069 - - 2,973,069
-------------- ----------- ----------- -----------
Equity
Common stock and paid-in capital 2,796,809 608,152 (608,152) 2,796,809
Net unrealized loss on investment
securities (329,250) (329,250)
Retained earnings (deficit) (553,843) (608,152) 608,152 (553,843)
-------------- ----------- ----------- -----------
Total equity (deficit) 1,913,716 - - 1,913,716
-------------- ----------- ----------- -----------
Total liabilities and equity $ 4,886,785 $ - $ - $ 4,886,785
============== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
29
<PAGE> 30
-3-
Unistar Financial Service Corp.
Pro Forma Combined Statement of Operations
For the Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Unaudited
Historical Pro Forma Pro Forma
IFHC Unistar Adjustments Combined
------------- ------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues
Premiums earned $ 1,186,119 $ 1,186,119
Other revenues 60,753 60,753
------------- -------- ------- -------------
Total revenues 1,246,872 - - 1,246,872
------------- -------- ------- -------------
Expenses
Losses and loss adjustment expenses 1,083,083 1,083,083
Policy acquisition costs 386,689 386,689
Other underwriting expenses 101,793 101,793
------------- -------- ------- -------------
Total expenses 1,571,565 - - 1,571,565
------------- -------- ------- -------------
Net income (loss)
Income (loss) before income taxes (324,693) (324,693)
Provision (credit) for income taxes (110,396) (110,396)
------------- -------- ------- -------------
Net income (loss) $ (214,297) $ - $ - $ (214,297)
============= ======== ======= =============
Computation of earnings (loss) per share:
Basic Average shares outstanding 20,000,000
Earnings (loss) per share $ (0.01)
=============
</TABLE>
The accompanying notes are an integral part of this statement.
30
<PAGE> 31
-4-
Unistar Financial Service Corp.
Pro Forma Combined Statement of Operations
For the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Unaudited
Historical Pro Forma Pro Forma
IFHC Unistar Adjustments Combined
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Premiums earned $ 2,101,249 $ $ $ 2,101,249
Other revenues 72,524 72,524
------------ ------------- ----------- ------------
Total revenues 2,173,773 - - 2,173,773
------------ ------------- ----------- ------------
Expenses
Losses and loss adjustment expenses 1,769,589 1,769,589
Policy acquisition costs 677,129 677,129
Other underwriting expenses 226,133 226,133
Other expenses 22,791 22,791
------------ ------------- ----------- ------------
Total expenses 2,695,642 - - 2,695,642
------------ ------------- ----------- ------------
Net income (loss)
Income (loss) before income taxes (521,869) (521,869)
Provision (credit) for income taxes (177,435) (177,435)
------------ ------------- ----------- ------------
Net income (loss) $ (344,434) $ - $ - $ (344,434)
============ ============== =========== ============
Computation of earnings (loss) per share:
Basic Average shares outstanding 20,000,000
Earnings (loss) per share $ (0.02)
============
</TABLE>
The accompanying notes are an integral part of this statement.
31
<PAGE> 32
-5-
Unistar Financial Service Corp.
Notes to Unaudited Pro Forma Combined Financial Information
(1) DESCRIPTION OF ACQUISITION AND BASIS OF PRESENTATION
On August 17, 1998, IFHC entered into an acquisition agreement with
Caldera, Inc., a dormant public shell corporation. Under the terms of
the agreement, Caldera, Inc. acquired 100% of the outstanding shares of
IFHC common stock in exchange for common stock of Caldera, Inc. This
stock exchange resulted in the shareholders of IFHC owning
approximately 99% of Caldera, Inc.'s common stock. Simultaneously with
the acquisition, Caldera, Inc. changed its name to Unistar Financial
Service Corp.
For accounting purposes, the acquisition has been treated as a
recapitalization of IFHC, or a reverse acquisition, that is, as if IFHC
had acquired Caldera, Inc. in exchange for 223,000 shares of common
stock. Such stock represents the post-acquisition shares owned by
Caldera, Inc.'s pre-acquisition stockholders. The pre-acquisition
stockholders of Caldera, Inc. include an affiliate of IFHC, U.S.
Fidelity Holding Corp., who owned 53,333, or 23.9% of the
post-acquisition common shares prior to the August 17, 1998 acquisition
transaction described above. The stockholders' equity reflects the
capital structure of IFHC recording the acquisition of Caldera, Inc. as
an issuance of stock for assets.
(2) PRO FORMA ADJUSTMENTS
The pro forma adjustments are necessary to reflect the post-transaction
stockholders' equity section as if IFHC is the acquirer and Unistar is
the acquired. Accordingly, the retained earnings of IFHC will be
carried forward in the equity section of the combined balance sheet.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
UNISTAR FINANCIAL SERVICE CORP.
(Registrant)
/s/ F. Jeffrey Nelson
----------------------------------
F. Jeffrey Nelson
President and Chief Financial
Officer
Date: December 17, 1998
