SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 30, 1996
Amwest Insurance Group, Inc.
----------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 1-9580 95-2672141
----------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File number) Identification No.)
6320 Canoga Avenue, Suite 300 Woodland Hills, California 91367
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818)704-1111
<PAGE>
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) The following financial statements of Condor Services,
Inc. ("Condor"), as previously reported by Condor, are
being provided pursuant to Rule 3.05(b) of Regulation S-X
and are being filed within 60-days of the Registrant's
Report on Form 8-K dated November 30, 1995.
1. Independent Auditors' Report for Condor Services,
Inc.
2. Consolidated Balance Sheets as of December 31,
1994 and 1993.
3. Consolidated Statements of Income for the years
ended December 31, 1994, 1993 and 1992.
4. Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1993 and 1992.
5. Notes to Consolidated Financial Statements.
6. Consolidated Balance Sheets as of September 30,
1995 and December 31, 1994.
7. Consolidated Statements of Income for the three
months and nine months ended September 30, 1995
and 1994.
8. Consolidated Statements of Cash Flows for the nine
months ended September 30, 1995 and 1994.
9. Notes to Interim Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Condor Services, Inc.:
We have audited the accompanying consolidated financial statements of Condor
Services, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Condor Services,
Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities", in 1993.
KPMG Peat Marwick LLP
Los Angeles, California
February 23, 1995
<PAGE>
CONDOR SERVICES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
Assets 1994 1993
----------- -----------
<S> <C> <C>
Investments:
Fixed maturities, available-for-sale,
at fair market value (amortized cost
$23,706,182 and $25,153,453) ...................... $22,427,419 26,194,963
Equity securities, trading, at fair
market value (cost $397,409
and $125,000) ..................................... 314,475 121,875
Equity securities, available-for-sale,
at fair market value (cost $2,853,885
and $3,746,341) ................................... 2,675,650 3,954,125
Short-term investments .............................. 2,264,324 1,693,597
----------- -----------
27,681,868 31,964,560
Cash .................................................. 82,896 380,151
Accrued investment income ............................. 449,167 482,230
Premiums receivable, net .............................. 853,899 1,812,566
Reinsurance recoverable on paid losses ................ 141,217 786,541
Reinsurance recoverable on unpaid losses .............. 6,802,294 15,533,469
Deposit held by reinsurer ............................. -- 154,000
Deferred policy acquisition costs ..................... 264,884 888,694
Furniture, equipment and improvements, net
of accumulated depreciation of $1,353,941 and $958,872 1,176,573 977,724
Income taxes recoverable .............................. -- 521,953
Deferred tax asset .................................... 1,423,748 1,256,667
Deferred tax asset on holding losses
on fixed maturities and equity securities ........... 495,379 --
Intangible assets, net of accumulated
amortization of $38,980 and $31,660 .................. 28,930 36,250
Prepaid expenses and other assets ..................... 631,439 369,462
----------- -----------
Total assets ................................ $40,032,294 55,164,267
=========== ===========
</TABLE>
(Continued)
<PAGE>
CONDOR SERVICES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets, continued
December 31, 1994 and 1993
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1994 1993
------------ ------------
<S> <C> <C>
Liabilities:
Unpaid losses and loss adjustment
expenses ............................................ $ 25,752,923 37,575,246
Unearned premiums ....................................... 979,638 3,475,290
Reinsurance funds held .................................. 885,255 --
Reinsurance premiums payable ............................ 1,087,390 720,214
Commissions payable ..................................... 262,221 503,462
Income taxes payable .................................... 91,421 --
Accounts payable and accrued expenses ................... 810,461 925,658
------------ ------------
Total liabilities ............................... 29,869,309 43,199,870
------------ ------------
Stockholders' equity:
Preferred stock, par value $.01 per share
Authorized 200,000 shares; none outstanding ......... -- --
Common stock, par value $.01 per share
Authorized 3,800,000 shares; outstanding
1,969,806 and 1,983,006 shares; held in
treasury 0 and 744 shares ........................... 19,698 19,837
Additional paid-in capital .............................. 7,899,622 7,946,005
Unrealized gains (losses) on investments ................ (961,619) 1,249,295
Retained earnings ....................................... 3,205,284 2,752,288
------------ ------------
Total stockholders' equity ...................... 10,162,985 11,967,425
Less: Shares held in treasury ........................... -- (3,028)
------------ ------------
Net stockholders' equity ........................ 10,162,985 11,964,397
Commitments and contingencies
------------ ------------
Total liabilities and
stockholders' equity ............................ $ 40,032,294 55,164,267
============ ============
</TABLE>
See accompanying notes to consolidated
financial statements.
<PAGE>
CONDOR SERVICES, INC.
AND SUBSIDIARIES
Consolidated Income Statements
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Gross premiums earned .................... $ 26,233,962 26,233,140 18,032,747
Less: Earned premiums ceded to reinsurers 6,773,950 4,237,913 2,744,038
------------ ------------ ------------
Net premiums earned .......................... 19,460,012 21,995,227 15,288,709
Commissions and fees ......................... 1,378,703 815,037 584,898
Net investment income ........................ 1,629,469 1,471,582 1,456,832
Net unrealized gain (loss) on trading
securities ................................. (79,809) (3,125) --
Net realized gains ........................... 385,429 1,052,077 221,981
Other revenue ................................ 44,087 27,593 197,924
------------ ------------ ------------
22,817,891 25,358,391 17,750,344
------------ ------------ ------------
Expenses:
Gross losses and loss adjustment expenses 20,087,549 19,060,496 12,597,625
Ceded losses and loss adjustment expenses 5,454,175 2,604,391 2,674,531
------------ ------------ ------------
Net losses and loss adjustment
expenses ....................... 14,633,374 16,456,105 9,923,094
Underwriting and acquisition costs ....... 4,709,236 4,176,265 2,889,169
Loss on broker misappropriation of funds . -- 1,870,022 --
General and administrative ............... 3,034,444 2,838,254 3,012,224
------------ ------------ ------------
22,377,054 25,340,646 15,824,487
------------ ------------ ------------
Income before provision for
income taxes ................... 440,837 17,745 1,925,857
Provision (benefit) for income tax expense ... (12,159) (223,654) 298,920
------------ ------------ ------------
Net income ..................... $ 452,996 241,399 1,626,937
============ ============ ============
Net income per common share .................. $ .23 .12 .82
============ ============ ============
Weighted average number of common shares
outstanding during the periods ........... 1,981,460 1,977,703 1,976,015
============ ============ ============
</TABLE>
See accompanying notes to consolidated
financial statements.
<PAGE>
CONDOR SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 452,996 241,399 1,626,937
Equity securities, trading:
Purchases ............................................................. (13,894,944) -- --
Sales ................................................................. 13,622,535 -- --
Add items not affecting cash:
Depreciation and amortization ......................................... 430,348 335,166 257,582
Unrealized losses on trading securities ............................... 79,809 3,125 --
Changes in:
Accrued investment income ............................................. 33,063 90,430 (63,196)
Premiums receivable, net .............................................. 958,667 (1,142,310) (224,272)
Reinsurance recoverable on paid losses ................................ 645,324 67,623 215,078
Reinsurance recoverable on unpaid losses .............................. 8,731,175 (7,669,454) 501,302
Deposit held by reinsurer ............................................. 154,000 (154,000) --
Income taxes recoverable .............................................. 521,953 (521,953) 171,676
Deferred tax asset .................................................... (167,081) (372,069) (174,161)
Deferred policy acquisition costs ..................................... 623,810 (888,694) --
Prepaid expenses and other assets ..................................... (261,977) (89,920) 50,539
Unpaid losses and loss adjustment expenses ............................ (11,822,323) 11,602,374 894,004
Unearned premiums ..................................................... (2,495,652) 3,021,521 37,879
Reinsurance funds held ................................................ 885,255 -- --
Reinsurance premiums payable .......................................... 367,176 59,270 (155,613)
Commissions payable ................................................... (241,241) 168,000 151,226
Income taxes payable .................................................. 91,421 (77,539) 77,539
Accounts payable and accrued expenses ................................. (115,198) 384,237 9,115
------------ ------------ ------------
Net cash provided (used)
by operating activities ................................. (1,400,884) 5,057,206 3,375,635
------------ ------------ ------------
Cash flows from financing activities:
Stock options exercised by officers and employees ....................... 6,006 29,718 59,500
Repurchase and retirement of common stock, net of brokerage fees ........ (49,500) -- (54,556)
Purchase of common stock, held as treasury stock ........................ -- (136) (64,079)
Payment of fractional shares on ten percent stock dividends ............. -- -- (12)
------------ ------------ ------------
Net cash provided (used)
by financing activities ................................. (43,494) 29,582 (59,147)
------------ ------------ ------------
Cash flows from investing activities:
Fixed maturities, available for sale:
Purchases ............................................................. $ (3,976,088) -- --
Sales ................................................................. 4,110,150 -- --
Maturities and calls .................................................. 1,285,248 -- --
Equity securities, available for sale:
Purchases ............................................................. (687,535) -- --
Sales ................................................................. 1,579,991 -- --
Fixed maturities:
Purchases ............................................................. -- (11,740,130) (5,673,564)
Sales ................................................................. -- 9,347,149 1,419,015
Maturities and calls .................................................. -- 1,540,000 765,000
Equity securities:
Purchases ............................................................. -- (28,675,898) (6,956,156)
Sales ................................................................. -- 25,257,683 7,161,923
Issuance of notes receivable from officers and directors ................ -- (20,758) (14,125)
Repayment of notes receivable from officers and directors ............... -- 63,919 15,000
Additions to furniture, equipment and improvements ...................... (593,916) (396,950) (450,242)
------------ ------------ ------------
Net cash provided (used) by investing activities ........... 1,717,850 (4,624,985) (3,733,149)
------------ ------------ ------------
Net increase (decrease) in cash and short-
term investments ........................................... 273,472 461,803 (416,661)
Cash and short-term investments, beginning of year ........................ 2,073,748 1,611,945 2,028,606
------------ ------------ ------------
Cash and short-term investments, end of year .............................. $ 2,347,220 2,073,748 1,611,945
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial
statements.
<PAGE>
CONDOR SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1994 and 1993
(1) Basis of Presentation and Summary of Significant Accounting Policies
Condor Services, Inc., through its insurance subsidiary, is primarily engaged in
the underwriting of non-standard commercial automobile insurance in the State of
California. The accompanying consolidated financial statements include the
accounts of Condor Services, Inc. (the "Company") and its wholly owned
subsidiaries, Condor Insurance Company ("Condor Insurance"), Raven Claims
Services, Inc. ("Raven Claims"), Falcon Re-Insurance Intermediaries, Inc.
("Falcon Re") and, through June 30, 1993, Interstate Program
Managers-Insurance-Managing General Agents ("Interstate Program Managers"). The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") which differ in some respects
from those followed in reports to insurance regulatory authorities. All material
intercompany transactions and balances have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year's financial
statement presentation.
Significant accounting policies are:
Revenue Recognition
Premium revenue is recognized ratably over the effective period of the policy
net of premiums ceded to reinsurers. A liability is established for unearned
insurance premiums for the unexpired portions of policies in force. Commissions
are recognized principally on the later of the effective date of the insurance
coverage or the billing date and are recorded net of amounts paid to brokers.
Fees for services rendered are recorded as they are earned.
Cash
Cash consists of all non-interest bearing deposits at financial institutions.
Short-term investments
Short-term investments include all interest bearing deposits at financial
institutions and all marketable debt securities with an original maturity of one
year or less. This asset category consists primarily of money market fund
balances used in conjunction with maintenance of the investment portfolio. All
short-term investments are carried at cost, which approximates fair market
value.
Investments
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115 ("FAS 115") "Accounting for Certain Investments in Debt and
Equity Securities" at December 31, 1993. Under FAS 115, the Company classifies
its debt and equity securities in one of three categories: trading,
available-for-sale or held-to-maturity. Securities classified as trading are
bought and held principally for the purpose of sale in the near term. Securities
classified as held-to-maturity are those securities which the Company has the
positive ability and intent to hold until maturity. All other securities, not
classified as trading or held-to-maturity, are classified as available-for-sale.
The Company had no securities classified as held-to-maturity at December 31,
1994. Securities classified as trading and available-for-sale are recorded at
fair value. Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized holding
gains or losses on trading securities are included in earnings. Unrealized
holding gains or losses on securities available-for-sale are excluded from
earnings and are reported as a separate component of stockholders' equity, net
of applicable income taxes, until realized. Transfers of securities between
categories are recorded at fair value at the date of transfer. Unrealized
holding gains and losses are recognized in earnings for transfers into trading
securities. Unrealized holding gains or losses associated with the transfers
into securities from held-to-maturity to available-for-sale are recorded as a
separate component of stockholders' equity. The unrealized holding gains or
losses in debt securities included in the separate component of equity
transferred from available-for-sale to held-to-maturity are maintained and
amortized into earnings over the remaining life of the security as an adjustment
to yield in a manner consistent with the amortization or accretion of premium or
discount on the associated security. There were no transfers between categories
in 1994. A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other than temporary
is charged to income resulting in the establishment of a new cost basis for the
security. No such adjustments were made in 1994, 1993 or 1992 for other than
temporary declines in investment values. Premiums and discounts of the related
held-to-maturity securities are amortized or accreted based on the effective
interest method. Dividend and interest income are recognized when earned. The
cost of securities sold and classified as held-to-maturity, available-for-sale
and trading are determined using the specific identification method. Fair market
value estimates of securities in the investment portfolio are drawn from third
party industry trade data sources for fixed maturities and closing market prices
of the securities market where listed for equities. Further, management believes
each security is sufficiently liquid in its securities market to warrant these
sources as providing the best estimate of fair value. In no case were any
valuations made by the Company's management.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("FAS 109") "Accounting for Income Taxes," under which
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying the applicable tax rate to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. The Company adopted
FAS 109 in 1991 and applied the provisions of FAS 109 retroactively to January
1, 1989. The adoption of FAS 109 on a retroactive basis had no impact on
previously reported earnings.
Net Income Per Share
Net income per share of common stock is based on the weighted average number of
outstanding shares of common stock. Primary and fully diluted net income per
share are the same for all periods presented.
Unpaid Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses is based on
estimates of reported losses, estimates of unreported losses based on the
Company's historical claims experience of Condor Insurance and industry data.
Management believes that the provisions for unpaid losses and loss adjustment
expenses are adequate to cover the cost of losses and loss adjustment expense
incurred to date. However, such liability is, by necessity, based upon estimates
and there can be no assurance that the ultimate liability will not exceed such
estimates.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. The Company adopted the provisions of
Statement of Financial Accounting Standards No. 113 ("FAS 113") "Accounting and
Reporting Reinsurance of Short-Duration and Long-Duration Contracts" on January
1, 1993. It requires reinsurance recoverable and prepaid reinsurance premiums to
be reported as assets. Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability associated with the reinsured policy.
FAS 113 also establishes the conditions required for a contract with a reinsurer
to be accounted for as reinsurance and prescribes accounting and reporting
standards for those contracts. Contracts that do not result in the reasonable
possibility that the reinsurer may realize a significant loss from the insurance
risk assumed generally do not meet conditions for reinsurance accounting and are
to be accounted for as deposits.
Deferred Policy Acquisition Costs
Policy acquisition costs, consisting principally of commissions and premium
taxes incurred at the time a policy is issued, are deferred and amortized over
the period during which the related premiums are earned. Deferred policy
acquisition costs are limited to the estimated future profit, based on the
anticipated losses and loss adjustment expenses, maintenance costs and
investment income. Prior to 1993, the Company had not deferred policy
acquisition costs because it principally wrote only monthly policies. However,
in 1993, the Company began writing annual policies as well.
Furniture, Equipment and Improvements
Automobiles are depreciated on a straight-line basis over estimated useful lives
of three to seven years. Furniture and equipment, inclusive of computer
hardware, are depreciated on a straight-line basis over estimated useful lives
of three to five years. Computer software is amortized on a straight-line basis
over estimated useful lives of three to five years. Leasehold improvements are
amortized on a straight-line basis over the lesser of the term of the related
lease or the useful life of the asset. A summary of fixed assets is as follows:
1994 1993
---------- ----------
Automobiles ......................... $ 282,128 176,248
Furniture and equipment ............. 407,690 328,553
Computer hardware ................... 880,398 739,479
Computer software ................... 867,805 625,235
Leasehold improvements .............. 92,493 67,082
---------- ----------
Total fixed assets ................ 2,530,514 1,936,597
Less accumulated depreciation
and amortization .................. 1,353,941 958,873
---------- ----------
Net fixed assets .................. $1,176,573 977,724
========== ==========
While expenditures for betterments and major renewals are capitalized, ordinary
maintenance and repairs are expensed in the period incurred. Upon sale or
retirement, the cost and related accumulated depreciation or amortization are
removed from the accounts and the resulting gain or loss, if any, is reflected
in income.
Intangible Assets
Intangible assets consist of organization costs. Organization costs of Condor
Insurance and Falcon Re are being amortized over five-years.
Statement of Cash Flows
For purposes of the statement of cash flows, cash includes short-term
investments with original maturities of one year or less.
(2) Investments
Net investment income for the years ended December 31, 1994, 1993 and 1992 was
comprised of the following:
1994 1993 1992
---------- ---------- ----------
Fixed maturities ................ $1,540,959 1,581,909 1,571,727
Equity securities ............... 182,614 92,624 2,308
Short-term investments .......... 78,242 91,526 79,588
---------- ---------- ----------
Total investment income .. 1,801,815 1,766,059 1,653,623
Less investment expenses ........ 172,346 294,477 196,791
---------- ---------- ----------
Net investment income .... $1,629,469 1,471,582 1,456,832
========== ========== ==========
Changes in net unrealized losses on trading securities of $79,809 and $3,125 at
December 31, 1994 and 1993 were recognized in the respective years.
The following table summarizes the net realized gains:
1994 1993 1992
--------- --------- ---------
Fixed maturities .............. $ 227,238 805,527 90,650
Equity securities ............. 158,191 246,550 131,331
--------- --------- ---------
Total net realized gains $ 385,429 1,052,077 221,981
========= ========= =========
Condor Insurance classifies its debt and equity securities as
available-for-sale. Gross gains of $218,411, $818,027 and $84,650 and gross
losses of $10,410, $12,500 and $0 were realized on the sale of debt securities
in 1994, 1993 and 1992, respectively. Gross gains of $185,702 and gross losses
of $69,334 were realized on the sale of equity securities classified as
available-for-sale in 1994. Gross gains of $249,387 and gross losses of $207,563
were realized on the sale of equity securities classified as trading in 1994.
The table below presents costs and market values of equity securities classified
as available-for-sale as of December 31, 1994:
Gross Gross
Unrealized Unrealized Market
1994 Cost Gains Losses Value
- ----------------------------- ---------- ------- ---------- ----------
Preferred Stocks:
Public Utilities .......... $ 388,125 -- (73,125) 315,000
Industrial and
Miscellaneous ........... 656,113 -- (67,363) 588,750
Common Stocks:
Banks, Trust & Ins ........ 391,650 -- (52,563) 339,087
Industrial and
Miscellaneous .......... 1,417,998 160,163 (145,348) 1,432,813
---------- ------- ---------- ----------
$2,853,886 160,163 (338,399) 2,675,650
========== ======= ========== ==========
The table below presents amortized cost and market values of fixed maturities
classified as available-for-sale at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
Gross Gross
Amortized cost unrealized gains unrealized Market
1994 losses value
- ---------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 502,277 - (24,494) 477,783
Obligations of U.S. 2,606,266 - (225,888) 2,380,378
Government and agencies
Obligations of states 6,090,181 173,247 - 6,263,428
municipalities, and
political subdivisions
Corporate notes and bonds 14,507,458 - (1,201,628) 13,305,830
================= ================= ================= =================
$ 23,706,182 173,247 (1,452,010) 22,427,419
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized cost unrealized gains unrealized Market
1993 losses value
- ---------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 502,617 40,572 - 543,189
Obligations of U.S.
Government and agencies 1,102,513 50,671 - 1,153,184
Obligations of states,
municipalities. and
political subdivisions 10,008,411 947,986 - 10,956,397
Corporate notes and bonds 13,539,912 84,667 (82,386) 13,542,193
================= ================= ================= =================
$ 25,153,453 1,123,896 (82,386) 26,194,963
================= ================= ================= =================
</TABLE>
Contractual maturities of fixed maturities classified as available for sale at
December 31, 1994 are shown below. Expected maturities may differ from
contractual maturities due to borrowers having the right to call or prepay their
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Market Amortized
Contractual Maturity ......................... Value % Cost %
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
One year or less ....................................... $ 1,580,112 7.1 $ 1,600,000 6.7
Over one year to five years ............................ 9,654,087 43.0 10,021,621 42.3
Over five years to ten years ........................... 8,034,029 35.8 8,608,998 36.3
Over ten years ......................................... 3,159,191 14.1 3,475,563 14.7
----------- ------- ----------- -------
$22,427,419 100.0 $23,706,182 100.0
=========== ======= =========== =======
</TABLE>
All fixed maturities owned bear interest at fixed rates payable on a semiannual
basis in U.S. dollars. At December 31, 1994 and 1993, in excess of 98% of the
Company's fixed maturities were comprised of investment grade debt securities,
and during the three years ended December 31, 1994 no investment in the
Company's investment portfolio was classified as non-income producing. Further,
no single investment in an entity has exceeded ten percent of stockholders'
equity. Condor Insurance is required to maintain a deposit in the State of
Arizona as a condition of licensure. This deposit must consist of government
securities or Arizona government obligation bonds with a minimum par value of
$550,000 and a minimum market value of $500,000 or an equal amount of cash
and/or certificates of deposit. As of December 31, 1994 and 1993, the carrying
value of these deposits was $547,546 and $568,000, respectively. Management has
determined that the carrying value of these securities approximates fair market
value. These securities are reported in the balance sheet as fixed maturities,
available-for-sale.
(3) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1994, 1993, and
1992 consisted of:
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Current tax expense .................................... $ 154,922 148,415 473,081
Deferred tax benefit, exclusive of the change in
the valuation allowance .............................. (18,576) 87,236 (7,033)
--------- --------- ---------
Total income tax expense (benefit) ..................... $ (12,159) (223,654) 298,920
========= ========= =========
</TABLE>
A reconciliation of the corporate federal tax rate with the financial statement
effective rates for the years ended December 31, 1994, 1993 and 1992 are as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Expected tax at 34% .................................................. $ 149,885 6,034 654,791
State taxes on income of non-insurance entities, net of
Federal income tax benefits ........................................ 54,594 24,817 24,985
Nontaxable income .................................................... (175,769) (315,986) (439,257)
Nondeductible expenses ............................................... 9,567 4,612 71,179
Change in valuation allowance ........................................ (18,576) 87,236 (7,033)
Other ................................................................ (31,860) (30,367) (5,745)
--------- --------- ---------
Total income tax expense (benefit) .................................. $ (12,159) (223,654) 298,920
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities and the deferred tax assets at December 31, 1994
and 1993 are presented below.
December 31,
1994 1993
----------- -----------
Deferred tax assets:
Discounted loss reserves ....................... $ 954,447 1,101,819
Salvage and subrogation recoverable ............ 98,831 128,274
Unearned premiums, 20% add back ................ 66,615 236,320
Accounts payable, not currently deductible ..... 283,458 135,456
State income taxes paid ........................ 42,511 20,305
Alternative minimum taxes in excess
of regular tax ............................... 458,831 450,455
Net operating loss carry forwards .............. 75,057 --
----------- -----------
1,979,750 2,072,629
Deferred tax liabilities:
Deferred policy acquisition costs .............. (90,061) (302,156)
Deductibles receivable ......................... (53,465) --
Elimination of intercompany expenses ........... -- (46,920)
Other .......................................... (16,526) (52,360)
----------- -----------
1,819,698 1,671,193
Valuation allowance ............................ (395,950) (414,526)
----------- -----------
Net deferred tax asset ......................... $ 1,423,748 1,256,667
=========== ===========
FAS 109 requires the establishment of a valuation allowance for any portion of
the deferred tax asset that management does not believe that it is more likely
than not that it will be realized. Consideration must be given to those items of
taxable income available to offset future deductible amounts represented in the
deferred tax asset. Sources of taxable income available include taxable income
in carryback years, reversal of temporary differences, future taxable income and
tax planning strategies. The future deductibles will reverse over an estimated
12-year period during which the Company must have sufficient taxable income to
offset them. Although it is the opinion of management that it is more likely
than not that the Company will generate sufficient ordinary taxable income to
offset the future ordinary deductibles, a valuation allowance of 20% has been
established. The Company paid income taxes of $62,750, $712,500 and $360,000
during 1994, 1993 and 1992, respectively. The IRS is currently examining the
Company's 1991 income tax return. Any proposed adjustments are not expected to
have a material impact on the Company's financial condition or results of
operations.
(4) Reinsurance
Reinsurance is the transfer of risk, by contract, from one insurance company to
another for consideration (premium). The primary insurer remains liable if the
reinsurer is unable to fulfill its obligations and, therefore, Condor Insurance
has a contingent liability to the extent of any amounts ceded to another
company. Condor Insurance evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from similar economic
characteristics of the reinsurers to minimize its risk of significant losses
from reinsurer insolvencies. On the auto and general liability lines of
business, Condor Insurance had quota share, facultative and excess of loss
coverage prior to May 1, 1991. Condor Insurance retained 90% of loss and loss
adjustment expenses incurred on the first $100,000 of risk underwritten and
retained 10% of the risk on amounts up to $1,000,000 in excess of $100,000.
Since May 1, 1991, Condor Insurance has had excess of loss coverage for $800,000
in excess of $200,000 and on a facultative basis, $1,000,000 in excess of
$1,000,000 and $3,000,000 in excess of $2,000,000. On May 1, 1993, the contract
on the first layer was split into two layers of $300,000 in excess of $200,000
and $500,000 in excess of $500,000. Condor Insurance's liability excess of loss
reinsurance contracts from May 1, 1991 to April 30, 1995 have retrospective
provisions which could cause positive or negative premium adjustments based on
future loss development. Prior to 1994, ceded losses had not developed to the
point where retrospective ceded premium adjustments were necessary. In 1994,
retrospective ceded premium adjustments were $2,359,000 due to the further
development of ceded losses for accident years 1991 through 1994. Condor
Insurance does not expect future adjustments with respect to these contracts to
significantly impact earnings. Condor Insurance is in the process of commuting
its liability excess of loss contracts with its foreign and non-admitted
reinsurers, which represented 50% participation, for the reinsurance ceded
period of May 1, 1991 to April 30, 1993. The objective of the commutations is to
remove the statutory non-admitted liability and secure settlement from
outstanding claims and reduce credit risk. The commutations are based on results
as of April 30, 1994 on ceded unpaid losses and loss adjusting expenses less the
retrospective premium rate adjustment. The tentative cash settlement of $851,321
is included in reinsurance funds held in the consolidated balance sheet. On
physical damage lines , Condor Insurance retains 100% of the risk up to $200,000
and retains 5% of the risk on amounts up to $1,000,000 in excess of $200,000. As
of May 1, 1993, the contract changed to $600,000 in excess of $400,000. Condor
Insurance cedes 100% of physical damage risks underwritten in excess of
$1,000,000 up to a limit of $5,000,000. As of May 1, 1994, terms were changed to
$4,800,000 in excess of $200,000.
(5) Liability for Unpaid Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses for Condor
Insurance is based upon the accumulation of individual case reserves for losses
reported prior to the close of the accounting period plus estimates, based on
historical loss experience and industry data, for unreported losses and loss
adjustment expenses. There is a high level of uncertainty inherent in the
evaluation of loss and loss adjustment expense reserves. The long-tailed nature
of liability claims exacerbates that uncertainty. Management has selected target
loss and loss expense ratios that it believes are reasonable and reflective of
anticipated ultimate experience, based on quarterly actuarial developments.
However, loss and loss adjustment expense reserves necessarily are estimates and
ultimate liability may be greater or less than the reserves established. It is
necessary at times to adjust estimates of liability on a claim either upward or
downward between the time a claim is reported and the time of payment. The
ultimate costs of claims are dependent upon future events, the outcomes of which
are affected by many factors. Condor Insurance's claims reserving procedures and
settlement philosophy, current and future court rulings and jury attitudes, and
other economic and social factors all can have effects on the ultimate cost of
claims. Changes in company operations and management philosophy also may cause
actual developments to vary from the past. Any adjustments to reserves are
reflected in the operating results of the periods in which they are made.
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
1994 1993
------------ ------------
Balance at January 1 ........ $ 37,575,246 25,972,871
Less reinsurance recoverable 15,533,469 7,864,015
------------ ------------
Net balance at January 1 .... 22,041,777 18,108,856
------------ ------------
Incurred related to:
Current year ............... 16,282,358 17,972,070
Prior years ................ (783,756) (1,186,000)
------------ ------------
Total incurred .............. 15,498,602 16,786,070
------------ ------------
Paid related to:
Current year ............... 6,499,436 5,117,285
Prior years ................ 12,090,264 7,735,864
------------ ------------
Total paid .................. 18,589,750 12,853,149
------------ ------------
Net balance at December 31, . 18,950,629 22,041,777
Plus reinsurance recoverables 6,802,294 15,533,469
============ ============
Balance at December 31, ..... $ 25,752,923 37,575,246
============ ============
Condor Insurance settled twenty (20) of the twenty-eight (28) prior year claims
that were reinsured in excess of $200,000 during 1994, in addition to a large
portion of smaller claims as indicated by the total paid of $18,589,750 during
1994 compared to $12,853,149 during 1993. As a result, Condor Insurance's
reduction in case reserves and the number of remaining outstanding claims
greatly reduced the factor attributed to incurred but not reported claims
development.
(6) Related Party Transactions
The Company had no notes receivable from officers and directors at December 31,
1994 and 1993. The Company pays to or recovers from an outside director an
annual fee equal to twenty percent of net capital gains or losses on equity
securities in the Company's trading portfolio for which he is responsible. In
addition, Condor Insurance pays to this outside director for investment services
an annual fee equal to one-tenth of one percent of the value of the investments
made in debt securities. For 1994, his participation resulted in a net recovery
of $6,957 and was paid $49,123 and $27,868, for 1993 and 1992, respectively.
Condor Insurance pays Tocqueville Asset Management L.P., of which one of the
directors is a principal, a fee equal to one-half of one percent of the total
market value of the equity portfolio under its management, evaluated and paid on
a monthly basis. During 1994, 1993 and 1992, such fees amounted to $12,728,
$8,609, and $0, respectively. Condor Insurance, since the commencement of
insurance company operations in 1989, has offered its monthly commercial
automobile insurance policies to members of the Waste Industry Loss Prevention
and Safety Association (the "Association"). The Chairman and Chief Executive
Officer of the Company is an officer, director and shareholder of the
Association. In order to accept monthly commercial automobile coverage written
by Condor Insurance, an applicant must become a member of the Association. This
business constituted approximately 94%, 84% and 100% for 1994, 1993 and 1992,
respectively. of total premiums written by Condor Insurance. Since 1981, the
Company has had the exclusive right to provide insurance programs to the
Association pursuant to an agreement which may be terminated as of April 1 of
any year by either party by giving 15 months' notice of cancellation.
(7) Operating Lease
The Company leases office space under an operating lease which expires on
February 29, 1996 with two one-year options to renew. The lease provides for
annual adjustments to rent based on changes in the consumer price index. The
following table shows minimum non-cancelable rental commitments for leases in
effect at December 31, 1994:
Minimum
Year payable rentals
---------------------------- -------------
1995 $ 245,683
1996 40,948
1997 and thereafter -
-------------
Total $ 286,631
=============
Total rent expense under the Company's operating leases for 1994, 1993 and 1992
was $245,683, $245,683 and $143,864, respectively. The rent expense for 1992 was
exceptionally low due to leasing considerations. In addition, monthly parking,
excess electricity and after-hours air conditioning expenses were paid to the
lessor under the operating lease commencing December 11, 1992.
(8) Stock Options
In January 1989, the Company adopted a qualified stock incentive plan whereby
the Company may grant to employees determined by the Company's Compensation
Committee either options to purchase or appreciation rights with respect to the
Company's common stock and may sell restricted shares of the Company's common
stock. A maximum of 220,000 shares of the Company's common stock is available
for issuance under this plan. On May 28, 1992, the Company adopted the 1992
Non-Employee Director Stock Option Plan. Under this plan, each of the
non-employee directors annually are automatically granted 3,300 shares of common
stock effective on the twelfth business day following the release by the Company
of its annual summary statement of sales and earnings relating to its most
recently completed fiscal year, at an exercise price equal to the fair market
value of the stock on that day and exercisable over a five-year period. A
maximum of 88,000 shares of the Company's common stock is available for issuance
under this plan. On January 6, 1989 and April 1, 1991, the Company granted
10,000 and 9,000 options to certain officers and directors outside of the stock
plans. As of December 31, 1994, 14,300 options were outstanding outside of the
stock plans. Transactions in stock options are summarized as follows:
Shares
under
option Price range
------- --------------
Outstanding at December 31, 1991 67,300 2.000 - 5.500
Granted ........................ 35,500 3.375 - 3.750
Exercised ...................... 25,000 2.000 - 3.3750
Effect of 10% stock dividend ... 6,180 --
Canceled ....................... 16,000 2.000 -5.500
------- --------------
Outstanding at December 31, 1992 67,980 1.820 - 4.550
Granted ........................ 29,200 6.375 - 7.010
Exercised ...................... 9,250 1.820 - 4.550
------- --------------
Outstanding at December 31, 1993 87,930 1.820 - 6.370
Granted ........................ 33,200 5.250 - 5.775
Exercised ...................... 3,300 1.820
Canceled ....................... 5,020 3.070 - 6.375
------- --------------
Outstanding at December 31, 1994 112,810
=======
The Company has granted all stock options to date at the fair market value on
the date of grant. In certain circumstances, outstanding options have been
canceled and reissued at the fair market value at the date of reissue. A summary
of stock options expirations for options outstanding as of December 31, 1994 is
as follows:
Number of Exercise
Shares Price
-------------- ----------------------
April 1, 1996 12,650 $ 1.820
May 28, 1997 9,900 3.410
August 18, 1997 18,250 3.070 - 3.410
May 21, 1998 27,700 6.375 - 7.010
March 30, 1999 33,200 5.250 - 5.775
December 21, 1999 11,110 4.550
--------------
112,810
==============
The number of shares of common stock reserved for granting future options was
169,640, 197,820, and 227,020, December 31, 1994, 1993 and 1992, respectively.
(9) Treasury Stock
As of December 31, 1994, 1993 and 1992, the Company held 0, 744 and 16,223
shares of common stock in treasury with a cost and carrying basis of $0, $3,028
and $65,454, respectively. In 1994, 1993 and 1992, 16,500, 0 and 39,700 shares
of common stock were purchased in the open market. In addition, 0, 21 and 10
shares were purchased in 1994, 1993 and 1992, respectively, from former
employees at market value on the date of purchase.
(10) Employee's Profit Sharing Plan
The Company maintains a noncontributory employees' profit sharing plan for the
purpose of providing a qualified pension plan. The plan provides for
contributions by the Company of a discretionary sum not to exceed 15% of the
total covered employees' compensation. Contributions by the Company to the plan
amounted to $80,826, $0 and $254,976 for the years ended December 31, 1994, 1993
and 1992, respectively.
(11) Government Regulation
Many aspects of the Company's operations are subject to government regulation.
As an insurance holding company domiciled in California, the Company is subject
to regulation by the California Department of Insurance. Under applicable
California law, Condor Insurance is restricted from paying dividends to the
greater of net income for the preceding year or 10% of policyholder surplus as
of December 31 of the preceding year without obtaining prior regulatory
approval. Condor Insurance is domiciled in the state of California and prepares
its financial statements in accordance with statutory accounting practices
prescribed or permitted by the California Department of Insurance. Prescribed
statutory accounting practices include a variety of publications of the National
Association of Insurance Commissioners, as well as state laws, regulations and
general administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. During 1993, the California
Insurance Department completed its triennial examination of Condor Insurance.
The Department classified certain investments amounting to $723,504 as
non-admitted and excluded them from their calculation of statutory surplus as
these investments were held outside of the State of California. Subsequent to
the exam, Condor Insurance transferred these assets back to the State of
California. The Department's report contained certain other findings, none of
which have an impact on statutory surplus. A reconciliation of stockholders'
equity and net income for Condor Insurance, as filed with regulatory authorities
on the basis of statutory accounting practices to that reported in the
accompanying consolidated financial statements, based on generally accepted
accounting principles, is shown as follows:
Statutory Surplus and Stockholders' Equity
1994 1993
------------ ------------
Condor Insurance's statutory surplus ......... $ 6,463,479 6,306,890
Nonadmitted assets ........................... 190,518 180,018
Allowance for doubtful accounts .............. (114,311) (108,000)
Deductibles receivable ....................... 157,250 109,456
Deferred income taxes ........................ 1,218,409 1,256,667
Unrealized gain (loss) on securities available
for-sale ................................... (804,634) 1,041,510
Equity of non-insurance companies ............ 3,783,829 3,520,243
Other ........................................ (731,555) (342,387)
------------ ------------
Consolidated GAAP stockholders' equity ....... $ 10,162,985 11,964,397
============ ============
<TABLE>
<CAPTION>
Net Income
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Condor Insurance's statutory net income $ 297,072 (1,046,030) 1,361,509
Allowance for doubtful accounts ....... (6,311) 11,000 (59,000)
Deductibles receivable ................ 47,794 57,020 (9,774)
Deferred income taxes ................. 370,914 247,460 174,161
Deferred policy acquisition costs ..... (623,810) 888,694 --
Net income of non-insurance companies . 633,592 249,337 164,899
----------- ----------- -----------
Other ................................. (266,255) (166,082) (4,858)
----------- ----------- -----------
Consolidated GAAP net income .......... $ 452,996 241,399 1,626,937
=========== =========== ===========
</TABLE>
The National Association of Insurance Commissioners ("NAIC"), in response to
growing concerns about the financial health of insurance companies, adopted the
"Solvency Policing Agenda for 1990" which outlined several areas for
strengthening state regulation in order to discourage federal regulation. One of
the areas addressed by the NAIC in the agenda was the development of a model for
the insurance industry for determining the risk based capitalization
requirements ("RBC"). The RBC model has proven to be a complex and far reaching,
as well as controversial, element of the NAIC's agenda. The controversy revolves
around the application of a standard RBC model to all property and casualty
companies having diverse underwriting risks. The RBC model for property and
casualty insurance companies was adopted in December 1993. The RBC model
provides for the calculation of an "RBC Charge after Covariance Adjustment," 80
percent of which determines the "Company Action Level." The RBC model sets the
first level of regulatory supervision if a company's statutory surplus falls
below the "Company Action Level." Condor Insurance has calculated the Company
Action Level using the 1994 statutory annual statement to be $4,458,657 and
Condor Insurance's statutory surplus at December 31, 1994 was $6,463,479.
(12) Disposition of Subsidiary
Effective July 1, 1993, the Company divested itself of Interstate Program
Managers, a separate and wholly owned subsidiary. Interstate Program Managers
operated as a non-exclusive general agent which placed excess and surplus lines
of insurance. The sale resulted in an insignificant gain to the Company.
(13) Commitments and Contingencies
On October 31, 1991, Consolidated Disposal Service, Inc. and John Telesio
initiated Los Angeles Superior Court Case No. BC041196 against Guy A. Main &
Company; Interstate Program Managers, Inc., Condor Services, Inc.; and Does
1-100, Inclusive. On June 22, 1993, an adverse jury verdict was awarded against
the Company in the amount of $620,000 comprised of $500,000 in damages plus
$120,000 in interest. The case involved placement of insurance in 1985 by the
Company's predecessor insurance brokerage operation, which placed a $1,000,000
liability insurance policy for the plaintiff with an admitted insurance company
which became insolvent approximately three years later. An accident occurred in
September 1985 resulting in a judgment of $1.7 million in favor of the
plaintiff. The California Insurance Guarantee Association paid $500,000, the
excess insurance carrier paid $700,000 and the jury held the Company liable for
the remaining $500,000. On September 14, 1993, the Court granted the Company's
motion for an order for judgment notwithstanding the verdict, which overturned
the jury verdict. The ruling is in the process of appeal. The Company does not
anticipate that this litigation will have a material impact on the Company. In
1993, Condor Insurance filed suit against a former agent L. W. Gaskill Company,
Inc., which represented Condor in its Arizona private passenger automobile
program, and an individual who represented that agent alleging misappropriation
of premium funds in the amount of approximately $1,870,000 from the program.
(Condor Insurance Company v. L.W. Gaskill, Nicholas Neu, Norwest Bank Arizona,
et. al., No. CV33-25238). On July 14, 1994, Condor Insurance was awarded a
judgment in the Superior Court of Arizona for approximately $1,947,000 against
L.W. Gaskill and Nicholas Neu. The judgment covered approximately $1,870,000 in
premium monies which were not paid over to Condor Insurance with related
expenses, and is subject to 10% interest from July 14, 1994. Although Condor
Insurance is attempting to collect on this judgment, it has not yet been
successful and no assurance can be given that Condor Insurance will be
successful in recovering any funds. Nicholas Neu, the individual against whom
Condor Insurance has a judgment, filed for bankruptcy in Las Vegas in December
1994. The Company has challenged this filing and the case is still active. In
1993, Condor Insurance wrote off $1,870,000 for the misappropriation of premium
funds. Condor Insurance filed a legal action in U.S. District Court for the
Southern District of New York against a financial institution alleging that the
financial institution improperly deposited misappropriated checks from the
Arizona program totaling approximately $2.8 million into accounts unrelated to
the Company in (Condor Insurance v. Citibank, N.A.). Discovery has commenced in
this case and the Company intends to vigorously prosecute the action. On or
about November 30, 1994, Michael Cruise filed a "Class Action Complaint" in
Federal District Court in Arizona against the Company and Mr. Main, the
Company's Chief Executive Officer (Michael Cruise v. Condor Services, Inc. and
Guy A. Main, No. 94-832 TUC RMB). The complaint seeks damages in an unspecified
amount, and asserts claims for alleged violations of Sections 10(b) and 20 of
the Securities Exchange Act of 1934 and Rule 10(b)5 thereunder, and for
negligent misrepresentation, related to the Company's Arizona private passenger
automobile program and misappropriation of premium funds in 1993. The claims in
the lawsuit relate to the Arizona automobile program and misappropriation of
premiums by Gaskill during 1993 in Arizona. The complaint alleges that between
August 3, 1993 and August 2, 1994, the Company's public announcements and
filings with the Securities and Exchange Commission were inadequate and
misleading in that they allegedly failed to disclose the extent of the problems
relating to the Arizona automobile program and the misappropriation of premiums
by Gaskill. The complaint further alleges that during the year in question the
timing of the Company's public announcements and filings with the Securities and
Exchange Commission manipulated the market for the Company's stock, and that as
a result during that year the Company's stock traded at artificially inflated
prices which purportedly damaged the plaintiff and other investors. While formal
discovery has not yet commenced, the Company believes that it has meritorious
defenses to the claims asserted and it intends to vigorously defend its
position. Management believes that resolution of this litigation is not expected
to have a significant impact on the financial position of the Company. Condor
Insurance is involved in various other litigation relating to losses arising
from insurance contracts in the normal course of business which are provided for
under "unpaid losses and loss adjustment expenses." The Company also is involved
in other litigation pertaining to general corporate matters. While litigation is
by nature uncertain, management, based in part on advice of counsel, believes
that the ultimate outcome of these actions will not have a material adverse
effect on the consolidated financial condition of the Company.
<PAGE>
CONDOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available-for-sale, at fair market value (amortized cost
$21,807,480 and $23,706,182) .................................................... $ 21,878,503 $ 22,427,419
Equity securities, trading, at fair market value (cost $482,500 and
$ 397,409)....................................................................... 472,938 314,475
Equity securities, available-for-sale, at fair market value
(cost $3,161,413 and $2,853,885) ................................................ 3,554,900 2,675,650
Short-term investments .............................................................. 217,394 2,264,324
------------ ------------
26,123,735 27,681,868
Cash .................................................................................... 85,359 82,896
Accrued investment income ............................................................... 331,738 449,167
Premiums receivable, net ................................................................ 1,161,125 853,899
Reinsurance recoverable on paid losses .................................................. 204,873 141,217
Reinsurance recoverable on unpaid losses ................................................ 5,767,511 6,802,294
Deferred policy acquisition costs ....................................................... 296,102 264,884
Furniture, equipment and improvements, net of accumulated depreciation of
$1,359,438 and $1,353,941 ........................................................... 854,780 1,176,573
Income taxes recoverable ................................................................ 144,845 --
Deferred tax asset ...................................................................... 1,228,880 1,423,748
Deferred tax asset on holding losses
on fixed maturities and equity securities ........................................... -- 495,379
Intangible assets, net of accumulated amortization of $59,420
and $38,980 ......................................................................... 8,490 28,930
Prepaid expenses and other assets ....................................................... 915,695 631,439
------------ ------------
Total assets ................................................................ $ 37,123,133 $ 40,032,294
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses .............................................. $ 20,814,099 $ 25,752,923
Unearned premiums ....................................................................... 1,187,565 979,638
Reinsurance funds held .................................................................. 106,484 885,255
Reinsurance premiums payable ............................................................ 1,793,049 1,087,390
Commissions payable ..................................................................... 280,380 262,221
Income taxes payable .................................................................... -- 91,421
Deferred tax liability on holding gains on fixed maturities and
equity securities ..................................................................... 157,933 --
Accounts payable and accrued expenses ................................................... 656,568 810,461
------------ ------------
Total liabilities ........................................................... 24,996,078 29,869,309
------------ ------------
Stockholders' equity:
Preferred stock, par value $.01 per share;
Authorized 200,000 shares; none outstanding ..................................... -- --
Common stock, par value $.01 per share;
Authorized 3,800,000 shares; 1,949,806 and 1,969,806 shares outstanding ......... 19,498 19,698
Additional paid-in capital .............................................................. 7,809,822 7,899,622
Unrealized gains (losses) on investments, ............................................... 306,577 (961,619)
Retained earnings ....................................................................... 3,991,158 3,205,284
------------ ------------
Total stockholders' equity .................................................. 12,127,055 10,162,985
Less: Shares held in treasury ........................................................... -- --
------------ ------------
Net stockholders' equity .................................................... 12,127,055 10,162,985
Commitments and contingencies
------------ ------------
Total liabilities and stockholders' equity .................................. $ 37,123,133 $ 40,032,294
============ ============
</TABLE>
See accompanying notes to consolidated
financial statements.
<PAGE>
CONDOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Gross premiums earned ...................... $ 5,787,936 $ 6,996,222 $ 17,340,723 $ 20,951,139
Less: Earned premiums ceded to reinsurers . 1,402,512 1,828,991 4,112,008 5,085,785
------------ ------------ ------------ ------------
Net premiums earned ..................... 4,385,424 5,167,231 13,228,715 15,865,354
Commission and fees ........................ 141,252 278,452 453,461 772,470
Net Investment income ...................... 404,615 431,946 1,210,953 1,208,241
Net unrealized gains (losses) on trading
securities ............................... (1,147) 8,507 73,372 (30,439)
Net realized gains ......................... 61,236 93,324 14,194 365,900
Recovery on misappropriation of funds ...... -- -- 890,000 --
Other revenue (expense) .................... (16,285) 20,033 (6,865) 31,427
------------ ------------ ------------ ------------
4,975,095 5,999,493 15,863,830 18,212,953
------------ ------------ ------------ ------------
Expenses:
Gross losses and loss adjustment expense ... 4,900,591 4,498,291 14,643,935 14,497,522
Ceded losses and loss adjustment expenses .. 1,228,303 545,995 5,276,274 2,026,585
------------ ------------ ------------ ------------
Net losses and loss adjustment expenses .... 3,672,288 3,952,296 9,367,661 12,470,937
Underwriting and acquisition costs ......... 1,083,727 1,332,402 3,392,097 3,859,204
General and administrative ................. 624,411 658,829 2,098,755 2,188,133
------------ ------------ ------------ ------------
5,380,426 5,943,527 14,858,513 18,518,274
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes (405,331) 55,966 1,005,317 (305,321)
Provision (benefit) for income tax expense .... (149,448) 30,551 219,443 (284,507)
------------ ------------ ------------ ------------
Net Income (loss) ....................... $ (255,883) $ 25,415 $ 785,874 $ (20,814)
============ ============ ============ ============
Net Income (loss) per common share ............ $ (.13) $ .01 $ .40 $ (.01)
============ ============ ============ ============
Weighted average number of common shares
outstanding during the periods .......... 1,962,415 1,984,333 1,967,315 1,983,453
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated
financial statements.
<PAGE>
CONDOR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 785,874 $ (20,814)
Equity securities, trading:
Purchases ........................................................... (17,423,813) (10,522,391)
Sales ............................................................... 17,338,722 10,072,062
Add items not affecting cash:
Depreciation and amortization ....................................... 327,224 318,760
Unrealized (gains) losses on trading securities ..................... (73,372) 30,439
------------ ------------
954,635 (121,944)
Changes in:
Accrued investment income ........................................... 117,429 133,607
Premiums receivable, net ............................................ (307,226) 129,102
Reinsurance recoverable on paid losses .............................. (63,656) (927,201)
Reinsurance recoverable on unpaid losses ............................ 1,034,783 2,522,710
Deposit held by reinsurer ........................................... -- 154,000
Deferred policy acquisition costs ................................... (31,218) 617,303
Income taxes recoverable ............................................ (144,845) 521,953
Deferred tax asset .................................................. 194,868 (343,809)
Prepaid expenses and other assets ................................... (284,256) (218,191)
Unpaid losses and loss adjustment expenses .......................... (4,938,824) (3,403,245)
Unearned premiums ................................................... 207,927 (2,518,568)
Reinsurance funds held .............................................. (778,771) --
Reinsurance premiums payable ........................................ 705,659 1,240,916
Commissions payable ................................................. 18,159 (51,622)
Income taxes payable ................................................ (91,421) 26,848
Accounts payable and accrued expenses ............................... (153,893) (277,952)
------------ ------------
Net cash provided (used) by operating activities ....... (3,560,650)) (2,516,093)
------------ ------------
Cash flows from financing activities:
Exercise of options by employees ....................................... -- 6,006
Repurchase and retirement of common stock .............................. (90,000)
------------ ------------
Net cash provided (used) by financing activities ....... (90,000) 6,006
------------ ------------
Cash flows from investing activities: Fixed maturities, available for sale:
Purchases ........................................................... (6,538,913) (3,976,088)
Sales ............................................................... 6,986,143 4,110,150
Maturities and calls ................................................ 1,427,672 1,240,248
Equity securities, available for sale:
Purchases ........................................................... (1,231,037) (586,014)
Sales ............................................................... 923,509 966,278
Additions to furniture, equipment and improvements, net ................ (126,340) (427,845)
Disposal of furniture, equipment and improvements, net ................. 165,149 --
------------ ------------
Net cash provided by investing activities .............. 1,606,183 1,326,729
------------ ------------
Net increase (decrease) in cash and
short term investments ................................. (2,044,467) (1,183,358)
Cash and short term investments, beginning of period .................... 2,347,220 2,073,748
------------ ------------
Cash and short term investments, end of period .......................... $ 302,753 $ 890,390
============ ============
</TABLE>
See accompanying notes to consolidated financial
statements.
<PAGE>
Notes to Interim Consolidated Financial Statements
(1) Basis of Presentation
Condor Services, Inc., through its insurance subsidiary, is primarily
engaged in the underwriting of non-standard commercial automobile insurance in
the State of California and, to a lesser extent, non-standard commercial and
private passenger automobile insurance in the State of Arizona.
The accompanying consolidated financial statements include the
accounts of Condor Services, Inc. (the "Company") and its wholly-owned
subsidiaries, Condor Insurance Company ("Condor Insurance"), Raven Claims
Services, Inc. ("Raven Claims") and Falcon Re-Insurance Intermediaries, Inc.
("Falcon Re"). The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") which differ
in some respects from those followed in reports to insurance regulatory
authorities. All material intercompany transactions and balances have been
eliminated.
The interim consolidated financial statements presented herein are
unaudited. In the opinion of management, such unaudited information includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for such periods. The results for
the interim periods are not necessarily indicative of the results for the full
year. These interim consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1994.
(2) Income Taxes
The Company files a consolidated income tax return with its
subsidiaries for federal income tax purposes. For California franchise tax
purposes, the Company files a combined return with Raven Claims and Falcon Re.
In lieu of the franchise tax, both California and Arizona impose a tax on
insurance companies based on direct premiums written. Thus, Condor Insurance is
taxed separately in California and Arizona based on the amount of its direct
premiums written for those states.
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("FAS 109") "Accounting for Income Taxes," under
which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying the applicable tax rate to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date of the
change.
Income taxes for interim periods are based on the estimated effective
tax rate for the year.
(3) Reinsurance
In the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance enterprises or reinsurers.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 113 ("FAS 113") "Accounting and Reporting Reinsurance of
Short-Duration and Long-Duration Contracts" on January 1, 1993. It requires
reinsurance recoverable and prepaid reinsurance premiums to be reported as
assets. Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy.
FAS 113 also establishes the conditions required for a contract with a
reinsurer to be accounted for as reinsurance and prescribes accounting and
reporting standards for those contracts. Contracts that do not result in the
reasonable possibility that the reinsurer may realize a significant loss from
the insurance risk assumed generally do not meet conditions for reinsurance
accounting and are to be accounted for as deposits.
(4) Investments
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115 ("FAS 115"), "Accounting for Certain Investments in Debt and
Equity Securities" at December 31, 1993. FAS 115 established new standards for
accounting for certain investments in debt and equity securities, requiring
classification of securities and specific accounting treatments for each
classification. Under FAS 115, debt and equity securities are classified as
either held-to-maturity, trading or available-for-sale. The Company has
classified the entire portfolio of debt and equity securities of its insurance
subsidiary as available-for-sale, and accordingly, these securities have been
reported at fair value, recording an unrealized gain or loss, net of applicable
income taxes, in the equity section of the balance sheet. The portfolio of
equity securities of the holding company has been classified as trading, and
accordingly, these securities have been reported at fair value, recording an
unrealized gain or loss on the Consolidated Statements of Income.
(5) Stockholders' Equity
In 1995, the Company purchased 34,500 shares of its common stock in the
open market at the current market price. As of November 13, 1995, 20,000 of
these shares have been retired, and the remaining 14,500 shares have been
retained by the Company as treasury stock.
<PAGE>
(b) The following pro forma financial information is
being furnished pursuant to Article 11 of Regulation
S-X and are being filed within 60-days of the
Registrant's Report on Form 8-K dated November 30,
1995.
1. Unaudited Pro Forma Combined Balance Sheet as of
September 30, 1995.
2. Unaudited Pro Forma Combined Statements of
Income for the nine months ended September 30,
1995 and 1994.
3. Unaudited Pro Forma Combined Statements of
Income for the years ended December 31, 1994,
1993 and 1992.
4. Notes to Unaudited Pro Forma Combined Financial
Statements.
<PAGE>
Unaudited Pro Forma Combined Balance Sheet
As of September 30, 1995
(In thousands)
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Amwest Condor Adjustments Combined
ASSETS
Investments:
Fixed maturities, held to maturity, at amortized cost $ 15,473 $ 15,473
Fixed maturities, available for sale, at market value 82,165 21,879 104,044
Equity securities, available for sale, at market value 7,439 3,555 (414) 10,580
Equity securities, trading, at market value 473 473
Other invested assets 333 333
Short-term investments 1,059 217 1,276
---------- ------ ---- ---------
Total investments 106,469 26,124 (414) 132,179
Cash and cash equivalents 5,028 85 5,113
Accrued investment income 1,267 332 1,599
Agents balances and premiums receivable 9,311 1,161 10,472
Reinsurance recoverable:
Paid loss and loss adjustment expenses 1,078 205 1,283
Unpaid loss and loss adjustment expenses 768 5,768 6,536
Ceded unearned premiums 2,959 2,959
Deferred policy acquisition costs 14,393 296 14,689
Furniture, equipment and improvements, net 2,324 855 3,179
Current Federal income taxes 668 145 813
Deferred Federal income taxes 1,229 1,229
Other assets 6,496 923 7,419
---------- ------ ---- ---------
Total assets $ 150,761 37,123 (414) $ 187,470
========== ====== ==== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 10,207 20,814 $ 31,021
Unearned premiums 34,431 1,188 35,619
Funds held as collateral 41,435 41,435
Commissions payable 280 280
Reinsurance funds held 106 106
Amounts due to reinsurers 345 1,793 2,138
Bank indebtedness 12,500 12,500
Current Federal income taxes 0
Deferred Federal income taxes 4,010 (288) 3,722
Deferred tax liability on holding gains on fixed
maturities and equity securities 158 158
Other liabilities 5,831 657 692 7,180
---------- ------ ---- ---------
Total liabilities 108,759 24,996 404 134,159
Stockholders' equity:
Preferred stock, $.01 par value
Common stock, $.01 par value 24 19 (10) 33
Additional paid-in capital 9,358 7,810 10 17,178
Net unrealized appreciation (depreciation) of
investments carried at market, net of income taxes 1,554 307 (164) 1,697
Retained earnings 31,066 3,991 (654) 34,403
---------- ------ ---- ---------
Total stockholders equity 42,002 12,127 (818) 53,311
---------- ------ ---- ---------
Total liabilities and stockholders'equity $ 150,761 37,123 (414) $ 187,470
========== ====== ==== =========
</TABLE>
See accompanying notes to pro forma combined financial statements.
<PAGE>
Unaudited Pro Forma Combined Statement of Income
For the nine months ended September 30, 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------- ----------------------------
Amwest Condor Adjustments Combined
<S> <C> <C> <C> <C>
Underwriting revenues:
Net premiums written $ 49,928 13,229 $ 63,157
Net change in unearned premiums 550 550
-------- ------ ---------
Net premiums earned 50,478 13,229 63,707
Underwriting expenses:
Net losses and loss adjustment expenses 16,440 9,368 25,808
Policy acquisition costs 25,302 3,392 28,694
General operating costs 8,927 2,099 11,026
-------- ------ ---------
Total underwriting expenses 50,669 14,859 65,528
-------- ------ ---------
Underwriting income (loss) (191) (1,630) (1,821)
Net investment income 4,787 1,211 5,998
Net unrealized gains (losses) on trading securities 73 73
Net realized investment gains (losses) 1,229 14 1,243
Interest expense (805) (805)
Collateral interest expense (1,305) (1,305)
Recovery on misappropriation of funds 890 890
Commissions and fees 453 453
Other revenue (6) (6)
-------- ------ ---------
Income before provision for income taxes 3,715 1,005 4,720
Provision for income taxes 778 219 997
-------- ------ ---------
Net income from continuing operations $ 2,937 786 $ 3,723
======== ====== =========
Earnings per common share, primary:
Net income from continuing operations $ 1.22 0.40 $ 1.12
======== ====== =========
Weighted average number of
common shares outstanding 2,402 1,967 3,337
======== ====== =========
Earnings per common share, assuming full dilution:
Net income from continuing operations $ 1.22 0.40 $ 1.11
======== ====== =========
Weighted average number of
common shares outstanding 2,405 1,967 3,340
======== ====== =========
</TABLE>
See accompanying notes to pro forma combined financial statements.
<PAGE>
Unaudited Pro Forma Combined Statement of Income
For the nine months ended September 30, 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------- --------------------------
Amwest Condor Adjustments Combined
<S> <C> <C> <C> <C>
Underwriting revenues:
Net premiums written $ 51,507 15,865 $ 67,372
Net change in unearned premiums (7,433) (7,433)
---------- ------ ----------
Net premiums earned 44,074 15,865 59,939
Underwriting expenses:
Net losses and loss adjustment expenses 11,023 12,471 23,494
Policy acquisition costs 23,120 3,859 26,979
General operating costs 9,452 2,188 11,640
---------- ------ ----------
Total underwriting expenses 43,595 18,518 62,113
---------- ------ ----------
Underwriting income (loss) 479 (2,653) (2,174)
Net investment income 4,104 1,208 5,312
Net unrealized gains (losses) on trading securities (30) (30)
Net realized investment gains (losses) (214) 366 152
Interest expense (597) (597)
Collateral interest expense (1,507) (1,507)
Commissions and fees 772 772
Other revenue 31 31
---------- ------ ----------
Income before provision for income taxes 2,265 (306) 1,959
Provision for income taxes 431 (285) 146
---------- ------ ----------
Net income from continuing operations $ 1,834 (21) $ 1,813
========== ====== ==========
Earnings per common share, primary:
Net income from continuing operations $ 0.76 (0.01) $ 0.54
========== ====== ==========
Weighted average number of
common shares outstanding 2,411 1,983 3,354
========== ====== ==========
Earnings per common share, assuming full dilution:
Net income from continuing operations $ 0.76 (0.01) $ 0.54
========== ====== ==========
Weighted average number of
common shares outstanding 2,411 1,983 3,354
========== ====== ==========
</TABLE>
See accompanying notes to pro forma combined financial statements.
<PAGE>
Unaudited Pro Forma Combined Statement of Income
For the year ended December 31, 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------- ----------------------------
Amwest Condor Adjustments Combined
<S> <C> <C> <C> <C>
Underwriting revenues:
Net premiums written $ 66,975 19,460 $ 86,435
Net change in unearned premiums (5,146) (5,146)
--------- ------ ---------
Net premiums earned 61,829 19,460 81,289
Underwriting expenses:
Net losses and loss adjustment expenses 14,095 14,633 28,728
Policy acquisition costs 31,755 4,709 36,464
General operating costs 12,734 3,034 15,768
--------- ------ ---------
Total underwriting expenses 58,584 22,376 80,960
--------- ------ ---------
Underwriting income (loss) 3,245 (2,916) 329
Net investment income 5,737 1,629 7,366
Net unrealized gains (losses) on trading securities (80) (80)
Net realized investment gains (losses) (269) 385 116
Interest expense (840) (840)
Collateral interest expense (1,921) (1,921)
Commissions and fees 1,379 1,379
Other revenue 44 44
--------- ------ ---------
Income before income taxes 5,952 441 6,393
Provision for income taxes 1,364 (12) 1,352
--------- ------ ---------
Net income from continuing operations $ 4,588 453 $ 5,041
========= ====== =========
Earnings per common share, primary:
Net income from continuing operations $ 1.91 0.23 $ 1.50
========= ====== =========
Weighted average number of
common shares outstanding 2,408 1,981 3,350
========= ====== =========
Earnings per common share, assuming full dilution:
Net income from continuing operations $ 1.91 0.23 $ 1.50
========= ====== =========
Weighted average number of
common shares outstanding 2,408 1,981 3,350
========= ====== =========
</TABLE>
See accompanying notes to pro forma combined financial statements.
<PAGE>
Unaudited Pro Forma Combined Statement of Income
For the year ended December 31, 1993
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ --------------------------
Amwest Condor Adjustments Combined
<S> <C> <C> <C> <C>
Underwriting revenues:
Net premiums written $ 54,331 21,995 $ 76,326
Net change in unearned premiums (4,241) (4,241)
--------- ------ --------
Net premiums earned 50,090 21,995 72,085
Underwriting expenses:
Net losses and loss adjustment expenses 11,909 16,456 28,365
Policy acquisition costs 25,077 4,176 29,253
General operating costs 11,387 2,838 14,225
Loss on broker misappropriation of funds 1,870 1,870
--------- ------ --------
Total underwriting expenses 48,373 25,340 73,713
--------- ------ --------
Underwriting income (loss) 1,717 (3,345) (1,628)
Net investment income 4,989 1,471 6,460
Net unrealized gains (losses) on trading securities (3) (3)
Net realized investment gains (losses) 1,810 1,052 (508) 2,354
Interest expense (1,050) (1,050)
Collateral interest expense (2,027) (2,027)
Commissions and fees 815 815
Other revenue 27 27
--------- ------ --------
Income before income taxes 5,439 17 (508) 4,948
Provision for income taxes 1,398 (224) (173) 1,001
--------- ------ --------
Net income from continuing operations $ 4,041 241 (335) $ 3,947
========= ====== ========
Earnings per common share, primary:
Net income from continuing operations $ 1.70 0.12 $ 1.20
========= ====== ========
Weighted average number of
common shares outstanding 2,375 1,978 3,299
========= ====== ========
Earnings per common share, assuming full dilution:
Net income from continuing operations $ 1.70 0.12 $ 1.20
========= ====== ========
Weighted average number of
common shares outstanding 2,376 1,978 3,300
========= ====== ========
</TABLE>
See accompanying notes to pro forma combined financial statements.
<PAGE>
Unaudited Pro Forma Combined Statement of Income
For the year ended December 31, 1992
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------- --------------------------
Amwest Condor Adjustments Combined
<S> <C> <C> <C> <C>
Underwriting revenues:
Net premiums written $ 46,697 15,289 $ 61,986
Net change in unearned premiums 1,557 1,557
---------- ------ ----------
Net premiums earned 48,254 15,289 63,543
Underwriting expenses:
Net losses and loss adjustment expenses 10,955 9,923 20,878
Policy acquisition costs 25,016 2,889 27,905
General operating costs 10,871 3,012 13,883
---------- ------ ----------
Total underwriting expenses 46,842 15,824 62,666
---------- ------ ----------
Underwriting income (loss) 1,412 (535) 877
Net investment income 5,607 1,456 7,063
Net unrealized gains (losses) on trading securities 0
Net realized investment gains (losses) 728 222 950
Interest expense (1,359) (1,359)
Collateral interest expense (1,992) (1,992)
Commissions and fees 585 585
Other revenue 198 198
---------- ------ ----------
Income before income taxes 4,396 1,926 6,322
Provision for income taxes 998 299 1,297
---------- ------ ----------
Net income from continuing operations $ 3,398 1,627 $ 5,025
========== ====== ==========
Earnings per common share, primary:
Net income from continuing operations $ 1.44 0.82 $ 1.55
========== ====== ==========
Weighted average number of
common shares outstanding 2,360 1,976 3,242
========== ====== ==========
Earnings per common share, assuming full dilution:
Net income from continuing operations $ 1.44 0.82 $ 1.55
========== ====== ==========
Weighted average number of
common shares outstanding 2,361 1,976 3,243
========== ====== ==========
</TABLE>
See accompanying notes to pro forma combined financial statements.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited pro forma combined financial statements are presented for
illustrative purposes only, giving effect to the Merger of Amwest Insurance
Group, Inc. and Condor Services, Inc. as accounted for by the "pooling of
interests" method. In accordance with Commission reporting rules, the pro forma
combined statements of income, and the historical statements from which they are
derived, present only income from continuing operations and, therefore, do not
include discontinued operations, extraordinary items, and the cumulative effects
of accounting changes.
Because the transaction has not been completed and transition plans are
currently being developed, transaction costs of the Merger and nonrecurring
costs and expenses expected to be incurred in connection with the integration of
the companies' business operations can only be estimated at this time. The pro
forma combined statements of income excludes investment banking, legal and
miscellaneous transaction costs and expenses of the Merger, currently estimated
to be $600,000. However, the pro forma combined balance sheet as of September
30, 1995 includes the adjustment, net of related taxes, of $396,000, for the
above estimated amount of transaction costs related to the Merger.
2. Pro Forma Adjustments
Pro Forma Combined Balance Sheet
Equity securities, available for sale, at market value; deferred Federal income
taxes
Amwest Surety Insurance Company, a wholly owned subsidiary of
Amwest, currently owns 97,350 shares of Condor which is classified as an
equity investment in the historical balances for Amwest. These shares will
be retired pursuant to the Merger Agreement. Based on the market value of
this investment at September 30, 1995, a decrease of $414,000 is reflected
in the pro forma combined balance sheet as of September 30, 1995.
Deferred Federal Income Taxes
The pro forma balance sheet at September 30, 1995 reflects an
adjustment of $288,000 which is attributed to the deferred taxes associated with
the gross unrealized gain of $247,000 on the equity investment in Condor (as
explained above), or $84,000 coupled with the deferred taxes associated with the
$600,000 estimate for transaction costs, or $204,000.
Other Liabilities
The pro forma balance sheet at September 30, 1995 reflects an
adjustment of $692,000 which is attributed to the $600,000 estimate for
transaction costs coupled with an increase in the cash dividend accrual
associated with the assumed issuance of approximately 919,000 shares as further
explained under Stockholder's Equity below. Amwest declared a cash dividend of
$.10 per share payable to stockholders of record as of September 30, 1995.
Stockholders' Equity
Stockholders' equity as of September 30, 1995 has been adjusted to
reflect the following:
Common Stock, $.01 par value, has been adjusted to reflect
the assumed issuance of approximately 919,000 shares of Amwest
Insurance Group, Inc. Common Stock, $.01 par value, in
exchange for 1,837,956 (net of 14,500 shares held by Condor in
treasury) shares of Condor Services, Inc. Common Stock issued
and outstanding as of November 30, 1995, utilizing the
exchange rate of 0.5 share of Amwest for each share of Condor
(and assuming that the 97,350 shares of Condor Common Stock
indirectly owned by Amwest will be retired). The number of
shares of Amwest Common Stock to be issued at consummation of
the Merger will be based upon the actual number of shares of
Condor Common Stock outstanding at that time.
Paid in capital is adjusted for the effects of the
aforementioned issuance of approximately 919,000 shares of
Amwest Common Stock having a par value of $.01 per share in
exchange for Condor Common Stock.
Net unrealized appreciation (depreciation) of investments
carried at market, net of income taxes is adjusted for the net
unrealized gain of $164,000 associated with the equity
investment of 97,350 shares of appreciated Condor Common Stock
owned by a wholly-owned subsidiary of Amwest.
The net decrease in retained earnings is attributed to the
pro forma adjustments made to retire the 97,350 shares of
Condor Common Stock owned by a wholly-owned subsidiary of
Amwest, the increased dividend accrual associated with the
assumed issuance of approximately 919,000 shares and the
$396,000 after-tax effect for the estimate for transaction
costs associated with the Merger.
Pro Forma Combined Statements of Income
Net realized investment gains
The pro forma results for net realized investment gains were adjusted
for the year ended December 31, 1993 pursuant to sale transactions of Condor
Common Stock made by a wholly-owned subsidiary of Amwest. For the year ended
December 31, 1993, the investment in Condor Common Stock was reduced from
212,850 shares at January 1, 1993 to 97,350 shares at December 31, 1993
resulting in realized investment gains, net of income taxes of $335,000.
Earnings per common share
To arrive at pro forma combined net income, adjustments have been made
as necessary to reflect such income on both a primary and fully diluted basis.
Pro forma weighted average number of common shares outstanding for the nine
month periods ended September 30, 1995 and 1994 and for the years ended December
31, 1994, 1993 and 1992 are based upon Amwest's and Condor's combined historical
weighted average shares, after adjustment of Condor's historical number of
shares by the Conversion Number and excluding any Condor shares held in treasury
or owned by Amwest.
3. Proposition 103
On December 14, 1995, the Supreme Court of the State of California
affirmed the decision of the Second District Court of Appeal overturning
Insurance Code Section 1861.135 which exempted the surety insurance industry
from major provisions of Proposition 103. Accordingly, the surety insurance
industry will no longer be exempted from the rate rollback and prior approval
provisions contained in Proposition 103.
To date, Amwest has not received any calculations from the California
Department of Insurance regarding Amwest's Proposition 103 rollback amount.
Amwest anticipates that it will accrue during the fourth quarter of 1995 its
estimated rollback obligation pursuant to Proposition 103, the amount of which
has not yet been determined. However, as previously disclosed in Amwest's Annual
Report on Form 10-K and subsequent filings on Form 10-Q, Amwest believes that
the ultimate rollback amount will have a significant impact on the Company's
1995 earnings, but is not expected to materially adversely impact Amwest's
financial position.
<PAGE>
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.
AMWEST INSURANCE GROUP, INC.
Dated: January 30, 1996 By:/s/ STEVEN R. KAY
-----------------------
Steven R. Kay
Senior Vice President
Chief Financial Officer
