<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): SEPTEMBER 18, 1997
---------------
NATIONAL INSURANCE GROUP
(Exact name of Registrant as Specified in Its Charter)
California 0-16332 94-3031790
(State or Other Jurisdiction of (Commission (I.R.S. Employer
Incorporation or Organization) File Number) Identification Number)
395 Oyster Point Boulevard, Suite 500
South San Francisco, California 94080
(Address, including zip code,
of Principal Executive Offices)
Registrant's telephone number, including area code: (650) 872-6772
Item 7. Financial Statements and Exhibits.
Set forth on the following pages are the financial statements and
related pro forma financial information required by this Item 7 pertaining to
the acquisition (the "Acquisition") by Pinnacle American Realty Tax Services,
Inc., a Delaware corporation ("PARTS-VA"), and Pinnacle American Realty Tax
Services of New York, Inc., a Delaware corporation ("PARTS-NY"), of
substantially all of the assets and assumption of certain of the liabilities of
American Realty Tax Services, Inc., a Virginia corporation ("ARTS"), and
American Realty Tax Services of New York, Inc., a Virginia corporation
("ARTS-NY"). On October 1, 1997, PARTS-VA changed its name to Pinnacle Real
Estate Tax Services, Inc. ("PRETS-VA") and PARTS-NY changed its name to Pinnacle
Real Estate Tax Services of New York, Inc. ("PRETS-NY").
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Pinnacle Real Estate Tax Services, Inc. and
Pinnacle Real Estate Tax Services of New York, Inc.
We have audited the combined balance sheets of American Realty Tax
Services, Inc. and American Realty Tax Services of New York, Inc. (the
Companies) as of December 31, 1996 and 1995 and the related combined statements
of operations, shareholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Companies as of December 31, 1996 and 1995 and the combined results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Washington, D.C. /s/ Coopers & Lybrand L.L.P.
November 25, 1997
1
<PAGE> 3
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1996 1995
---------- -----------
<S> <C> <C>
Cash and cash equivalents $ 37,346 $ 306,564
Accounts receivable, less allowance of $49,782 in 1996
and $51,725 in 1995 755,241 791,121
Investments, available for sale, at fair value 1,278,699 3,823,312
Property and equipment, net of accumulated depreciation 457,480 668,124
Mortgage notes receivable from related parties 314,651 289,657
Other assets 159,605 106,644
---------- -----------
Total assets $3,003,022 $ 5,985,422
========== ===========
LIABILITIES
Accounts payable $ 425,966 $ 560,865
Deferred revenues 7,131,219 6,575,441
Accrued expenses and other liabilities 232,738 188,542
---------- -----------
Total liabilities $7,789,923 $ 7,324,848
---------- -----------
Commitments and contingencies (Notes 1, 2, 7 and 8)
SHAREHOLDERS' DEFICIT
Common stock $ 5,501 $ 5,501
Accumulated deficit (5,165,675) (1,767,251)
Unrealized holding gain on investments 373,273 422,324
---------- -----------
Total shareholders' deficit (4,786,901) (1,339,426)
---------- -----------
Total liabilities and shareholders' deficit $3,003,022 $ 5,985,422
========== ===========
</TABLE>
The accompanying notes are an integral part
of the financial statements
2
<PAGE> 4
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues $ 8,399,248 $ 7,239,516
Costs and expenses (7,380,010) (6,854,531)
Other income, net 488,793 87,883
----------- -----------
Net income $ 1,508,031 $ 472,868
=========== ===========
</TABLE>
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock
-----------------------------------------
ARTS ARTS-NY
------------------- -------------------- Unrealized
Shares Shares Combined holding gain Total
issued and $1 Par issued and $10 Par common (loss) on Accumulated shareholders'
outstanding Value outstanding Value stock investments deficit deficit
----------- ------ ----------- ------- ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1995 501 $501 500 $5,000 $5,501 $(235,352) $(1,694,619) $(1,924,470)
Change in unrealized
gain on investment -- -- -- -- -- 657,676 -- 657,676
Distributions to
shareholders -- -- -- -- -- -- (545,500) (545,500)
Net Income -- -- -- -- -- -- 472,868 472,868
--- ---- --- ------ ------ --------- ----------- -----------
Balance
December 31, 1995 501 $501 500 $5,000 $5,501 $ 422,324 $(1,767,251) $(1,339,426)
=== ==== === ====== ====== ========= =========== ===========
Change in unrealized
gain on investment -- -- -- -- -- $ (49,051) -- $ (49,051)
Distributions to
shareholders -- -- -- -- -- -- (4,906,455) (4,906,455)
Net Income -- -- -- -- -- -- 1,508,031 1,508,031
--- ---- --- ------ ------ --------- ----------- -----------
Balance,
December 31, 1996 501 $501 500 $5,000 $5,501 $ 373,273 $(5,165,675) $(4,786,901)
=== ==== === ====== ====== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
<PAGE> 5
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,508,031 $ 472,868
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation 258,756 254,035
Loss from the sale of property and
equipment 2,641 1,609
Loss on sale of investments - 117,186
Gain on transfer of investments (311,696) -
Change in assets and liabilities:
Decrease (increase) in
accounts receivable 35,880 (197,875)
Increase (decrease) in other assets (32,825) (25,549)
(Decrease) increase in
accounts payable (134,899) 345,240
Increase (decrease) in
accrued expenses and other
liabilities 44,196 (533,960)
Increase in deferred revenue 555,778 191,994
----------- ---------
Net cash provided by
operating activities 1,925,862 625,548
----------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of equipment (61,816) (89,027)
Proceeds from the sale
of property and equipment 11,063 6,382
Repayment of mortgage note
receivable 125,866 8,256
Issuances of mortgage note receivable (170,996) (89,400)
Purchases of investments (286,391) (393,605)
Proceeds from sale of investments - 632,135
----------- ---------
Net cash provided (used) by
investing activities (382,274) 74,741
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to shareholders (1,812,806) (545,500)
----------- ---------
Net cash used by financing
activities (1,812,806) (545,500)
----------- ---------
Net increase (decrease) in cash and
cash equivalents (269,218) 154,789
Cash and cash equivalents at
beginning of year 306,564 151,775
----------- ---------
Cash and cash equivalents at end
of year $ 37,346 $ 306,564
=========== =========
NON CASH TRANSACTIONS FROM
FINANCING ACTIVITIES:
Distribution of investments
to shareholders $ 3,093,649 $ -
=========== =========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
<PAGE> 6
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
American Realty Tax Services, Inc. and American Realty Tax Services of
New York, Inc., (collectively, the "Companies") operate in the same business and
are owned by common shareholders. The accompanying financial statements are
presented on a combined basis with all significant intercompany revenues,
expenses, receivables and payables eliminated.
The Companies provide various services to mortgage originators and
servicers throughout the United States related to processing real estate tax
bills. The Companies charge fees for these services that vary depending on such
factors as the frequency in which tax bills become due, the number of taxing
authorities in the state, and the ease of which information is obtainable from
the taxing authority, as well as market and competitive conditions. For new
customers, the Companies assume the responsibility of servicing the customers'
existing portfolio in return for the rights to service subsequent mortgages
issued by the originator.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies
adopted by the Companies in the accompanying financial statements:
REVENUE RECOGNITION
The Companies recognize fees as revenue over the period that
services are provided. The Companies offer two service fee
arrangements to customers: yearly renewable services and
life-of-loan. For the yearly renewable services, the Companies
charge an annual fee and recognize revenue ratably over the annual
period for which service is provided.
The Companies earn a substantial portion of their revenues
under life-of-loan servicing arrangements. For life-of-loan
servicing, a fee is charged upon the receipt of each new loan in
return for providing continued property tax servicing over the life
of the mortgage. The fees are recognized over the
Continued
6
<PAGE> 7
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
estimated service period, which reflects the estimated life of all
the underlying mortgages being serviced, based on the proportion of
total estimated costs incurred to service the loan.
Based upon a study of the efforts and costs to service
loans, it has been determined that a majority of the costs are
incurred in the first year in which the Companies input a loan into
their system and begin servicing the loan. Accordingly, the
Companies recognize revenue in the first year a loan is entered into
their system in proportion to the percentage of such initial costs
to total loan servicing costs incurred over the life of the loan as
determined in the study performed. The remaining revenue is
recognized over the estimated remaining life of the loan in a
pattern reflecting the estimated run-off of the Companies' loan
servicing portfolio. Currently, the Companies estimate the average
life or service period to be six years. Management periodically
reviews these estimates and any adjustments are recognized in
current operations.
All costs of servicing the loan portfolio are expensed as
incurred.
In conjunction with the services provided, the Companies
agree to reimburse mortgage originators and servicers for penalties,
loss of discount, and interest assessed by the taxing authority for
untimely or erroneous processing of real estate tax bills resulting
from the Companies' negligence. A provision for such costs is
recognized as expense by the Companies based on known and
anticipated reimbursements to the lenders.
Continued
7
<PAGE> 8
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
For purposes of financial statement presentation, the
Companies consider all highly liquid investments purchased with a
maturity of three (3) months or less to be cash equivalents.
INVESTMENTS
The Companies classify their investments in common stocks
which are publicly traded and mutual funds as available-for-sale
securities. These investments are reported at fair value based upon
quoted market prices. Unrealized holding gains and losses on
available-for-sale securities are excluded from income and are
reported as a separate component of shareholders' deficit until
realized. Realized gains and losses are included in other income and
are determined generally using the average cost method for
ascertaining the cost of the securities sold.
FIXED ASSETS
Data processing equipment and purchased software and office
furniture and equipment are depreciated over five years, and
automobiles are depreciated over three to five years, all using the
straight-line method. Upon retirement or sale of an asset, the cost
and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in income or loss from
operations. Maintenance and repairs are charged to income as
incurred.
Continued
8
<PAGE> 9
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the
Companies to concentrations of credit risk consist principally of
investments and accounts receivable. Accounts receivable result
primarily from service contracts with banks and mortgage originators
and servicers. These contracts generally do not require collateral
or other arrangements. The Companies perform credit evaluations of
all customers.
ESTIMATES
The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the reported
amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and reported amounts of certain revenues and certain
expenses during the reporting period. Actual results could differ
from those estimates.
Continued
9
<PAGE> 10
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statements of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income. This Statement
establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. Comprehensive income includes all changes in equity from
nonowner sources; investments by and distributions to owners are
excluded. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Companies will include this new reporting
information in their 1998 combined financial statements as required.
3. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
As of December 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Computer equipment and software $ 875,694 $ 826,646
Furniture and fixtures 477,001 466,562
Automotive equipment 110,933 148,952
Leasehold improvements 97,244 94,914
----------- -----------
Total property and equipment 1,560,872 1,537,074
Less accumulated depreciation (1,103,392) (868,950)
----------- -----------
Net property and equipment $ 457,480 $ 668,124
----------- -----------
</TABLE>
Depreciation expense was $258,756 and $254,035 for 1996 and
1995, respectively.
Continued
10
<PAGE> 11
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
4. INCOME TAXES
The Companies have each elected to be taxed as an
S-Corporation pursuant to Internal Revenue Code ("IRC") Section
1361. Accordingly, the Companies' net earnings or losses are
prorated to each shareholder on the basis of their equity interests,
and these earnings or losses are incorporated into the shareholders'
individual income taxes. The financial statements do not include a
provision or a liability for federal income taxes.
5. INVESTMENTS
Investments as of December 31, 1996 and 1995 consisted of
the following:
<TABLE>
<CAPTION>
1996 1995
------------------------ --------------------------
Fair Value Cost Fair Value Cost
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Mutual funds $1,278,699 $905,426 $3,720,899 $3,338,291
Common stocks - - 102,413 62,697
---------- -------- ---------- ----------
Total investments $1,278,699 $905,426 $3,823,312 $3,400,988
---------- -------- ---------- ----------
</TABLE>
Gross unrealized holding gains of $373,273 and $446,197 in
1996 and 1995, respectively, and gross unrealized holding losses of
$0 and $23,873 in 1996 and 1995, respectively, were recorded as a
separate component of shareholders' deficit. Proceeds from sales of
investments were $0 and $632,135 in 1996 and 1995, respectively, and
net realized losses included in other income were $0 and $117,186 in
1996 and 1995, respectively.
Net investment income, excluding realized gains and losses,
of $145,761 and $164,101 in 1996 and 1995, respectively, is included
in other income, net.
Continued
11
<PAGE> 12
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
6. EMPLOYEE BENEFITS
The Companies sponsor a qualified profit sharing plan for
the benefit of their employees. The profit sharing plan calls for
discretionary contributions as authorized by the Board of Directors.
The Companies may contribute up to 15% of eligible employees'
compensation to the profit sharing plan. To become an eligible
participant, the employee must have attained age 21 and completed
one year of service. After one year of service, each participant
vests at 20% each year and is fully vested after six years. The
assets of the plan are for the benefit of eligible employees or
their beneficiaries. In 1996 and 1995, the Companies recognized
expense of $109,244 and $112,912, respectively, for employer
contributions to the Plan.
The Companies also sponsor a qualified 401(k) defined
contribution pension plan. Employees are eligible to participate
ninety days after the date of employment. Employees may contribute
up to the maximum percentage available under IRC Sections 401(k),
404 and 415. Employer contributions are discretionary. Beginning one
year after initial participation, the employer contributions are
vested at 20% each year and become fully vested after 6 years. The
Companies did not recognize any cost related to this plan during
1996 or 1995.
7. COMMITMENTS
The Companies have entered into various operating leases,
primarily for office space and automobiles. Certain office space
leases provide for adjustments related to changes in other operating
expenses. Lease terms generally cover periods up to five years.
Continued
12
<PAGE> 13
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
Rental expense under the operating leases was $603,349 and
$519,600 in 1996 and 1995, respectively. Future minimum lease
payments due under noncancelable leasing arrangements lease as of
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 544,661
1998 427,701
1999 369,651
2000 350,823
2001 154,273
Thereafter 8,583
----------
Total minimum payments $1,855,692
==========
</TABLE>
8. MAJOR CUSTOMERS
The Companies contract exclusively with mortgage originators
and servicers, primarily banks and financial institutions.
Acquisitions in the financial services industry have the potential
to impact the Companies operations, both by obtaining additional
mortgages to service through an existing client's acquisition or the
loss of mortgages through the purchase of an existing client's
operations by a financial institution which is not a client of the
Companies. During 1996 and 1995, the Companies derived 30% and 21%
of total revenues from one customer, respectively.
9. RELATED PARTY TRANSACTION
The Companies hold fully collateralized mortgage notes of
certain members of management and members of management's immediate
families. The balance outstanding on these mortgages at December 31,
1996 and 1995 was $314,651 and $289,657, respectively, due in
monthly and bi-weekly installments through 2008.
The interest rate on the mortgage loans is 6%. Interest
income of $14,278 and $18,579 earned in 1996 and 1995, respectively,
are included in other income in the accompanying combined statements
of operations.
Continued
13
<PAGE> 14
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
The two primary shareholders are officers of the Companies
and were paid compensation and benefits, not including
distributions, of $733,244 and $392,863 for the years ended December
31, 1996 and 1995, respectively.
Distributions of investments of $3,093,649 in 1996 to
shareholders were recorded at fair value and resulted in a realized
gain of $311,696, which is included in other income, net.
10. SUBSEQUENT EVENT
On September 18, 1997 substantially all the assets and
certain liabilities of the Companies were acquired by Pinnacle Real
Estate Tax Services, Inc. and Pinnacle Real Estate Tax Services of
New York, Inc., subsidiaries of National Insurance Group
("National"), in an asset purchase transaction. The Companies ceased
to be in the real estate tax service business as of that date.
Generally, all cash and cash equivalents of the Companies were
retained by the Companies. Following the Acquisition the names of
American Realty Tax Services, Inc. and American Realty Tax Services
of New York, Inc. were changed to JMD Group, Inc. and JMD Group of
New York, Inc., respectively.
14
<PAGE> 15
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
ASSETS As of June 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 77,209 $ 128,544
Accounts receivable, less allowance of $63,767 in 1997
and $66,217 in 1996 762,443 779,569
Investments, available for sale, at fair value 590,631 1,094,738
Property and equipment, net of accumulated depreciation 382,144 538,746
Mortgage notes receivable from related parties 151,625 168,520
Other assets 169,325 121,497
----------- -----------
Total assets $ 2,133,377 $ 2,831,614
=========== ===========
LIABILITIES
Accounts payable $ 462,048 $ 352,421
Deferred revenues 7,015,105 7,115,441
Accrued expenses and other liabilities 174,493 77,751
----------- -----------
Total liabilities $ 7,651,646 $ 7,545,613
----------- -----------
SHAREHOLDERS' DEFICIT
Common stock $ 5,501 $ 5,501
Accumulated deficit (5,722,331) (4,948,161)
Unrealized holding gain or investments 198,561 228,661
----------- -----------
Total shareholders' deficit (5,518,269) (4,713,999)
----------- -----------
Total liabilities and shareholders' deficit $ 2,133,377 $ 2,831,614
=========== ===========
</TABLE>
<PAGE> 16
AMERICAN REALTY TAX SERVICES, INC.
AND
AMERICAN REALTY TAX SERVICES OF NEW YORK, INC.
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
________
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
----------------------------
1997 1996
----------- ------------
<S> <C> <C>
Revenues $ 3,561,935 $ 4,247,013
Costs and expenses (3,330,616) (3,620,760)
Other income, net 147,925 433,167
----------- -----------
Net income $ 379,244 $ 1,059,420
=========== ===========
</TABLE>
2
<PAGE> 17
PRO FORMA COMBINED FINANCIAL STATEMENTS
National's 1996 and 1997 unaudited pro forma combined financial statements (the
"Financials") give effect to the Acquisition as if it had occurred on December
31, 1996, for balance sheet purposes. For purposes of the statements of
operations, the Financials reflect the Acquisition as if it had been made on
January 1, 1996.
PRO FORMA COMBINED BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED; FIGURES IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------------------------
Historical Pro Forma
---------------------- -------------------------
Adjust-
The ment for
National Companies Acquisition Combined
-------- --------- ----------- --------
<S> <C> <C> <C> <C>
Investments (note 1) $ 30,594 $ 1,279 $ (1,279) $ 30,594
-------- -------- -------- --------
Cash and cash equivalents (note 1) 3,183 37 (650) 2,570
Accounts receivable (note 2) 5,181 755 - 5,936
Property plant & equipment-NET (note 3) 3,484 457 - 3,941
Goodwill (note 4) - - 12,754 12,754
Other assets (note 5) 4,670 475 2,924 8,069
-------- -------- -------- --------
Total assets $ 47,112 $ 3,003 $ 13,749 $ 63,864
======== ======== ======== ========
Reserve for losses and unearned revenue $ 6,951 $ - $ - $ 6,951
Accrued expenses and accounts payable 5,126 426 - 5,552
Notes payable (note 6) 1,333 - 8,962 10,295
Deferred revenue 500 7,131 - 7,631
Other liabilities 4,650 233 - 4,883
-------- -------- -------- --------
Total liabilities 18,560 7,790 8,962 35,312
======== ======== ======== ========
Shareholders' equity 28,552 (4,787) 4,787 28,552
-------- -------- -------- --------
Total liabilities and shareholders' equity $ 47,112 $ 3,003 $ 13,749 $ 63,864
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements.
<PAGE> 18
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997
(unaudited; figures in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------
Historical Pro Forma
------------------------- ---------------------------
The Adjust-
National Companies ments Combined
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net premiums written $ 12,636 $ -- $ -- $ 12,636
Change in unearned premiums 949 -- -- 949
----------- ---------- --------- ----------
Net premiums earned 13,585 -- -- 13,585
Flood inquiry fees 18,499 -- -- 18,499
Tracking fees 5,479 -- -- 5,479
Real estate tax services (note 7) -- 8,399 -- 8,399
Net commission income 1,145 -- -- 1,145
Net investment income 1,975 -- -- 1,975
----------- ---------- --------- ----------
Total revenues 40,683 8,399 -- 49,082
----------- ---------- --------- ----------
Loss and LAE 4,002 -- -- 4,002
Commissions paid to nonaffiliates 1,954 -- -- 1,954
Personnel expenses 18,948 -- -- 18,948
Other expense (income) (note 8) 14,221 6,891 2,013 23,125
----------- ---------- --------- ----------
Total expenses 39,125 6,891 2,013 48,029
----------- ---------- --------- ----------
Income (loss) before taxes 1,558 1,508 (2,013) 1,053
Income tax provision (benefit)
(note 9) 284 -- (207) 77
----------- ---------- --------- ----------
Net income (loss) $ 1,274 $ 1,508 $ (1,806) $ 976
=========== ========== ========= ==========
Weighted average common shares
outstanding 3,917,000 3,917,000
Net income (loss) per share $ 0.33 $ 0.25
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
----------------------------------------------------------
Historical Pro Forma
------------------------- ---------------------------
The Adjust-
National Companies ments Combined
----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Net premiums written $ 9,714 $ -- $ -- $ 9,714
Change in unearned premiums (1,066) -- -- (1,066)
----------- ---------- ---------- -----------
Net premiums earned 8,648 -- -- 8,648
Flood inquiry fees 9,979 -- -- 9,979
Tracking fees 3,594 -- -- 3,594
Real estate tax services (note 7) 3,562 3,562
Net commission income 388 -- -- 388
Net investment income 899 -- -- 899
----------- ---------- ---------- -----------
Total revenues 23,508 3,562 -- 27,070
----------- ---------- ---------- -----------
Loss and LAE 2,886 -- -- 2,886
Commissions paid to nonaffiliates 1,101 -- -- 1,101
Personnel expenses 10,572 -- -- 10,572
Other expense (income) (note 8) 6,434 3,183 675 10,292
----------- ---------- ---------- -----------
Total expenses 20,993 3,183 675 24,851
----------- ---------- ---------- -----------
Income (loss) before taxes 2,515 379 (675) 2,219
Income tax provision (benefit)
(note 9) 875 -- (121) 754
----------- ---------- ----------- -----------
Net income (loss) $ 1,640 $ 379 $ (554) $ 1,465
=========== ========== =========== ===========
Weighted average common shares
outstanding 3,989,660 3,989,660
Net income (loss) per share $ 0.41 $ 0.37
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
pro forma combined financial statements.
<PAGE> 19
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Cash and investments. Investments and cash balances of the Companies were
excluded from the Acquisition. The pro forma adjustments for the balance
sheets reflect $613,000 of transaction expenses incurred by National, which
were capitalized as part of the purchase price.
2. Accounts receivable. Billed and unbilled accounts receivable of $1.2 million
was acquired as part of Acquisition, net of allowances for doubtful
accounts. Had the Acquisition occurred on December 31, 1996, the accounts
receivable acquired would have been $755,000. The Companies' allowance for
doubtful accounts was $49,782 at December 31, 1996.
3. Property, plant and equipment. Property, plant and equipment acquired
included data processing equipment, automobiles and other assets. The net
book value of the equipment as of the date of the Acquisition approximated
the fair market value of the equipment. The equipment is depreciated on a
straightline basis over three to five years.
4. Goodwill. The purchase price of the Companies was $9.268 million, exclusive
of acquisition expenses. Goodwill of $12.7 million was recorded as of the
date of the Acquisition. Goodwill, as recorded at the date of Acquisition,
includes the effect of $613,000 of acquisition expenses, fair market value
of assets of $4.4 million (primarily a deferred tax asset) and fair market
value of liabilities of $7.3 million (primarily deferred revenue on the
Companies' mortgage servicing portfolio). Goodwill is amortized over a 25
year period in recognition of the Companies' long standing relationship with
municipal taxing authorities in the eastern U.S. Pursuant to the Assets
Purchase Agreement dated August 15, 1997, as amended (the "Acquisition
Agreement"), National is required to pay up to an additional $4 million to
the sellers of the Companies if certain revenue targets are met as of the
twelve month period ended April 30, 1998. National is presently unable to
assess the likelihood or amount of this contingency payment. If and when
such payment is made, National will record additional goodwill in the amount
of the payment.
5. Other assets. This includes approximately $2.9 million for a deferred tax
asset, recognized in connection with the temporary timing differences from
the Companies' deferred revenue.
6. Notes payable. In connection with the Acquisition, National incurred $9.3
million of debt from its existing commercial lender pursuant to a term loan
facility (the "Term Facility"). Had the Company effected the Acquisition on
December 31, 1996, the required borrowing under the Term Facility would have
been $8.9 million. The difference between the pro forma notes payable and
actual notes payable results from the difference in fair market value of
assets purchased and liabilities assumed on the respective dates.
7. Revenue. Revenue of the Companies consists primarily of life-of-loan tax
service fees. Please refer to the notes to the audited financial statements
contained elsewhere in this report.
<PAGE> 20
8. Other expense (income). This expense includes primarily general,
administrative and personnel costs. The pro forma adjustments include the
effect of interest expense of $868,000 for the year ended December 31, 1996,
and $409,000 for the six months ended June 30, 1997. The pro forma
adjustments also include the impact of no interest or investment income or
gain on the Companies' investments and cash balances, which were not
purchased. The effect of this adjustment is $635,000 and $11,000 for the
year ended December 31, 1996, and the six months ended June 30, 1997,
respectively. In addition, the pro forma adjustments include the impact of
goodwill amortization expense in the amount of $510,000 and $255,000 for the
year ended December 31, 1996, and the six months ended June 30, 1997,
respectively.
9. Income tax provision (benefit). Prior to the Acquisition, the Companies each
elected to be taxed as an S-Corporation pursuant to IRC Section 1361.
Accordingly, the historical financial statements of the Companies do not
include an income tax provision. The pro forma adjustment for taxes reflects
the tax provision or benefit of the Companies' pro forma income before taxes
at National's statutory tax rate of 41%.
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NATIONAL INSURANCE GROUP
Date: November 26, 1997 By: /s/ Robert P. Barbarowicz
------------------------------------
Robert P. Barbarowicz,
Executive Vice President,
General Counsel and Secretary
