FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the year ended December 31, 1996.
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission File Number: 000-24366
GORAN CAPITAL INC.
(Exact name of registrant as specified in its charter)
CANADA Not Applicable
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
181 University Avenue, Suite 1101 M5H 3M7
Toronto, Ontario Canada
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (416) 594-1155 (Canada)
(317) 259-6300 (U.S.A.)
Securities registered pursuant to Section 12(b) of the Act: Common Shares
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
The aggregate market value of the Issuer's Common Stock held by nonaffiliates,
as of March 25, 1997 was $128,101,996 (US).
The number of shares of Common Stock of the Registrant, without par value,
outstanding as of March 25, 1997 was 5,569,652.
Documents Incorporated By Reference:
Portions of the Annual Report to Shareholders and the Proxy Statement for the
1997 Annual Meeting of Shareholders are incorporated into Parts II and III.
<PAGE>
Exchange Rate Information
The Company's accounts and financial statements are maintained in U.S. Dollars.
In this Report all dollar amounts are expressed in U.S. Dollars except where
otherwise indicated.
The following table sets forth, for each period indicated, the average exchange
rates for U.S. Dollars expressed in Canadian Dollars on the last day of each
month during such period, the high and the low exchange rate during that period
and the exchange rate at the end of such period, based upon the noon buying
rate in New York City for cable transfers in foreign currencies, as certified
for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate").
Foreign Exchange Rates
U.S. to Canadian Dollars
For The Years Ended December 31,
1996 1995 1994 1993 1992
Average .7339 .7287 .7322 .7733 .8342
Period End .7301 .7325 .7129 .7544 .7865
High .7472 .7465 .7642 .8046 .8757
Low .7270 .7099 .7097 .7439 .7761
Accounting Principles
The financial information contained in this document is stated in U.S. Dollars
and is expressed in accordance with Canadian Generally Accepted Accounting
Principles unless otherwise stated.
<PAGE>
GORAN CAPITAL INC.
ANNUAL REPORT ON FORM 10-K
December 31, 1996
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
SIGNATURES
<PAGE>
ITEM 1 - BUSINESS
(figures stated in U.S. dollars)
General
Goran Capital Inc. ("Goran" or the "Company") is a Canadian federally
incorporated holding company principally engaged in the business of
underwriting property and casualty insurance through its insurance sub-
sidiaries Pafco General Insurance Company ("Pafco"), Superior Insurance
Company ("Superior") and IGF Insurance Company ("IGF"), which maintain their
headquarters in Indianapolis, Indiana, Atlanta, Georgia and Des Moines, Iowa,
respectively. Goran owns 67% of a U.S. holding company, Symons International
Group, Inc. ("SIG"). SIG owns 100% of IGF and owns 52% of GGS Management
Holdings, Inc. ("GGS Holdings") and GGS Management, Inc. ("GGS") which are
the holding company and management company for Pafco and Superior. The
remaining 48% is owned by funds affiliated with Goldman Sachs & Co. Goran
sold 33% of SIG in an Initial Public Offering in November, 1996. The Company's
other subsidiaries include Granite Reinsurance Company Ltd. ("Granite Re"),
Granite Insurance Company ("Granite"), a Canadian federally licensed insurance
company and Symons International Group, Inc. - Florida ("SIGF"), a surplus
lines underwriter located in Florida.
The Company writes business in the U.S. exclusively through independent
agencies and seeks to distinguish itself by offering high quality, technology
based services for its agents and policyholders. The Company's nonstandard
automobile insurance business, with its principal offices in Indianapolis,
Indiana, Atlanta, Georgia, and Tampa, Florida, writes insurance through
approximately 4,500 independent agencies in 18 states. IGF with its
principal office in Des Moines, Iowa and regional offices in California,
Indiana, Kansas, Mississippi and North Dakota, writes MPCI and crop hail
insurance through approximately 1,200 independent agencies in 31 states.
Based on a Company analysis of gross premiums written in 1995 as reported by
A.M. Best, the Company believes that the combination of Pafco and Superior
makes the Company's nonstandard automotive group the sixteenth largest under-
writer of nonstandard automobile insurance in the United States. Based on
premium information compiled in 1995 by the Federal Crop Insurance Corporation
("FCIC") and National Crop Insurance Service, Inc. ("NCIS"), the Company
believes that IGF is the fifth largest underwriter of MPCI in the United
States.
Granite Re is a specialized reinsurance company that underwrites niche products
such as nonstandard automobile, crop, property casualty reinsurance and offers
(on a non-risk bearing, fee basis), rent-a-captive facilities for Bermudian,
Canadian and U.S. reinsurance companies.
Through a rent-a-captive program, Granite Re offers the use of its capital and
its underwriting facilities to write specific programs on behalf of its
clients, including certain programs ceded from IGF and Pafco. Granite Re
alleviates the need for its clients to establish their own insurance company
and also offers this facility in an offshore environment.
Granite sold its book of business in January 1990 to an affiliate which
subsequently sold to third parties in June 1990. Granite currently has
approximately 40 outstanding claims and maintains an investment portfolio
sufficient to support those claim liabilities which will likely be settled
between now and the year 2000.
On January 31, 1996, Goran, SIG, Fortis, Inc. and its wholly-owned subsidiary,
Interfinancial, Inc., a holding company for Superior entered into a Stock
Purchase Agreement (the "Superior Purchase Agreement") pursuant to which SIG
agreed to purchase Superior from Interfinancial, Inc. (the "Acquisition") for
a purchase price of approximately $66.6 million. Simultaneously with the
execution of the Superior Purchase Agreement, Goran, SIG, GGSH and GS Capital
Partners II, L.P. ("GS Funds"), a Delaware limited partnership, entered into
an agreement (the "GGS Agreement") to capitalize GGSH and to cause GGSH to
issue its capital stock to SIG and to the GS Funds, so as to give SIG
a 52% ownership interest and the GS Funds a 48% ownership interest (the
"Formation Transaction"). Pursuant to the GGS Agreement (a) SIG contributed
to GGSH (i) all the outstanding common stock of Pafco General Insurance
Company ("Pafco"), with a book value of $16.9 Million, (ii) its right to
acquire Superior pursuant to the Superior Purchase Agreement, and (iii)
certain fixed assets, including office furniture and equipment, having value
of approximately $350,000, and (b) the GS Funds contributed to GGSH $21.2
Million in cash. The Formation Transaction and the Acquisition were
completed on April 30, 1996.
Pursuant to the GGS Agreement, prior to the SIG's contribution of Pafco to
GGSH, Pafco transferred all of the outstanding capital stock of IGF Insurance
Company ("IGF") (the "Transfer") in order to improve the risk-based capital
rating of Pafco and to permit GGSH to focus exclusively on the nonstandard
automobile insurance business. Pafco accomplished the Transfer by forming a
wholly-owned subsidiary, IGF Holdings, Inc. ("IGF Holdings"), to which Pafco
contributed all of the outstanding shares of capital stock of IGF. Prior to
the distribution of the IGF Holdings capital stock to the SIG, IGF
Holdings paid to Pafco a dividend in the aggregate amount of approximately
$11.0 Million (the "Dividend"), consisting of $7.5 Million in cash and a
subordinated promissory note in the principal amount of approximately $3.5
Million (the "IGF Note"). Pafco then distributed the outstanding capital
stock of IGF Holdings to SIG. IGF Holdings funded the cash portion
of the Dividend with bank debt in the principal amount of $7.5 Million (the
"IGFH Bank Debt"). The IGFH Bank Debt and the IGF Note were repaid with a
portion of the proceeds from the Offering.
Prior to the Offering, the Company, through Symons International Group, Inc.
- - - - Florida ("SIGF"), its specialized surplus lines underwriting unit based in
Florida, provided certain commercial insurance products through retail
agencies, principally in the southeast United States. SIGF writes these
specialty products through a number of different insurers including Pafco,
United National Insurance Group, Munich American Reinsurance Corp. and
underwriters at Lloyd's of London. Effective January 1, 1996, SIG transferred
to Goran all of the issued and outstanding shares of capital stock of SIGF (the
"Distribution").
The following table sets forth the premiums written by line of business for the
periods indicated:
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands)
1994 1995 1996
Nonstandard Automobile<F1>
Gross Premiums Written $ 45,593 $49,005 $187,176
Net Premiums Written 28,114 37,302 186,579
Crop Hail<F2>
Gross Premiums Written $ 10,130 $16,966 $ 27,957
Net Premiums Written 4,565 11,608 23,013
MPCI<F3>
Gross Premiums Written $ 44,325 $53,408 $ 82,102
Net Premiums Written 0 0 0
Commercial
Gross Premiums Written $ 3,086 $ 5,255 $ 9,034
Net Premiums Written 2,460 4,537 9,034
Finite Reinsurance
Gross Premiums Written $ 23,844 $27,083 $ 1,365
Net Premiums Written 23,334 32,914 1,806
Total
Gross Premiums Written<F4> $126,978 $151,717 $307,634
Net Premiums Written $ 58,473 $ 86,361 $220,432
[FN]
<F1>
Does not reflect net premiums written for Superior for the years ended
December 31, 1994 and 1995 and for the four months ended April 30, 1996. For
the years ended December 31, 1994 and 1995, Superior and its subsidiaries had
gross premiums written of $112.9 million and $94.8 million, respectively, and
net premiums written of $112.5 million and $94.1 million, respectively. For
the four months ended April 30, 1996, Superior and its subsidiaries had gross
premiums written of $44.0 million and net premiums written of $43.6 million.
<F2>
Most crop hail insurance policies are sold in the second and third quarters
of the calendar year.
<F3>
For a discussion of the accounting treatment of MPCI premiums, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company".
<F4>
For additional financial segment information concerning the Company's
nonstandard automobile and crop insurance operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company".
Nonstandard Automobile Insurance
Industry Background
The Company, through its 52% owned subsidiaries, Pafco and Superior, is engaged
in the writing of insurance coverage on automobile physical damage and lia-
bility policies for "nonstandard risks". Nonstandard risks are those
individuals who are unable to obtain insurance through standard market carriers
due to factors such as poor premium payment history, driving experience, record
of prior accidents or driving violations, particular occupation or type of
vehicle. Premium rates for nonstandard risks are generally higher than for
standard risks. Total private passenger automobile insurance premiums written
by insurance carriers in the United States in 1995 have been estimated by A.M.
Best to be approximately $106 billion. Since it can be viewed as a residual
market, the size of the nonstandard private passenger automobile insurance
market changes with the insurance environment and grows when standard coverage
becomes more restrictive. Although this factor, as well as industry
differences in the criteria which distinguish standard from nonstandard
insurance, make it difficult to estimate the size of the nonstandard market,
management of the Company believes that the voluntary nonstandard market has
accounted for approximately 15% of total private passenger automobile insurance
premiums written in recent years. According to statistical information derived
from insurer annual statements compiled by A.M. Best, the nonstandard
automobile market accounted for $17.4 billion in annual premium volume for
1995.
Strategy
The Company has multiple strategies with respect to its nonstandard automobile
insurance operations, including:
1. Through GGS Holdings, the Company seeks to achieve profitability through a
combination of internal growth and the acquisition of other insurers and blocks
of business. The Company regularly evaluates acquisition opportunities. There
can be no assurance, however, that any suitable business opportunities will
arise.
2. The Company is committed to the use of integrated technologies which permit
it to rate, issue, bill and service policies in an efficient and cost effective
manner.
3. The Company competes primarily on the basis of underwriting criteria and
service to agents and insureds and generally does not match price decreases
implemented by competitors which are directed towards obtaining market share.
4. The Company encourages agencies to place a large share of their profitable
business with Pafco and Superior by offering, in addition to fixed commissions,
a contingent commission based on a combination of volume and profitability.
5. The Company promptly responds to claims in an effort to reduce the costs of
claims settlements by reducing the number of pending claims and uses computer
databases to verify repair and vehicle replacement costs and to increase
subrogation and salvage recoveries.
6. The Company will seek to expand the multi-tiered marketing approach
currently employed by Superior and its subsidiaries in Florida and other states
in order to offer to its independent agency network a broader range of products
with different premium and commission structures.
Products
The Company offers both liability and physical damage coverage in the insurance
marketplace, with policies having terms of three to twelve months, with the
majority of policies having a term of six months. Most nonstandard automobile
insurance policyholders choose the basic limits of liability coverage which,
though varying from state to state, generally are $25,000 per person and
$50,000 per accident for bodily injury, and in the range of $10,000 to $20,000
for property damage. Of the approximately 228,000 combined policies of Pafco
and Superior in force on December 31, 1996, fewer than 9% had policy limits in
excess of these basic limits of coverage. Of the 63,000 policies of Pafco in
force on December 31, 1996, approximately 88% had policy periods of six months
or less. Of the approximately 165,000 policies of Superior in force as of
December 31, 1996, approximately 74% had policy periods of six months and
approximately 26% had policy periods of twelve months.
The Company offers several different policies which are directed toward
different classes of risk within the nonstandard market. The Superior Choice
policy covers insureds whose prior driving record, insurability and other
relevant characteristics indicate a lower risk profile than other risks in the
nonstandard marketplace. The Superior Standard policy is intended for risks
which do not qualify for Superior Choice but which nevertheless present a more
favorable risk profile than many other nonstandard risks. The Superior
Specialty policies cover risks which do not qualify for either the Superior
Choice or the Superior Standard. Pafco offers only a single nonstandard policy
which includes multiple discounts and surcharges designed to recognize proof of
prior insurance, driving violations, accident history and other factors
relevant to the level of risk insured. Superior offers a product similar to
the Pafco product in states in which it is not offering a multi-tiered product.
Marketing
The Company's nonstandard automobile insurance business is concentrated in the
states of Florida, California, Indiana, Missouri, Kentucky, Colorado, Texas and
Virginia, and the Company writes nonstandard automobile insurance in eleven
additional states. Management plans to continue to expand selectively into
additional states. GGS Holdings will select states for expansion based on a
number of criteria, including the size of the nonstandard automobile insurance
market, state-wide loss results, competition and the regulatory climate.
The following tables sets forth the geographic distribution of gross premiums
written for SIG and Superior, individually, and for SIG and Superior on a
combined basis for the periods indicated.
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
SIG Superior
1994 1995 1996 1994 1995 1996
State
Arkansas $ 1,619 $ 1,796 $ 2,004 $ 0 $ 0 $ 0
California 0 0 0 13,422 15,350 25,131
Colorado 5,629 9,257 10,262 0 0 0
Florida 0 0 0 55,282 54,535 97,659
Georgia 0 0 0 7,342 5,927 7,398
Illinois 0 80 1,380 3,894 2,403 1,614
Indiana 13,648 13,710 16,599 414 132 0
Iowa 3,769 3,832 5,818 0 0 0
Kentucky 9,573 7,840 11,065 0 0 0
Mississippi 0 0 0 4,411 2,721 2,250
Missouri 8,163 8,513 13,423 0 0 0
Nebraska 3,192 3,660 5,390 0 0 0
Ohio 0 0 0 4,325 3,164 3,643
Oklahoma 0 317 2,559 0 0 0
Tennessee 0 0 0 1,829 332 (2)
Texas 0 0 0 10,660 3,464 10,122
Virginia 0 0 0 7,500 5,035 14,733
Washington 0 0 0 3,827 1,693 106
Totals 45,593 49,005 68,500 112,906 94,756 162,654
<PAGE>
Goran Capital Inc. and
Superior Insurance Company (Combined)
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994 1995 1996
State
Arkansas $ 1,619 $ 1,796 $ 2,004
California 13,422 15,350 25,131
Colorado 5,629 9,257 10,262
Florida 55,282 54,535 97,659
Georgia 7,342 5,927 7,398
Illinois 3,894 2,483 2,944
Indiana 14,062 13,842 16,599
Iowa 3,769 3,832 5,818
Kentucky 9,573 7,840 11,065
Mississippi 4,411 2,721 2,250
Missouri 8,163 8,513 13,423
Nebraska 3,192 3,660 5,390
Ohio 4,325 3,164 3,643
Oklahoma 0 317 2,559
Tennessee 1,829 332 (2)
Texas 10,660 3,464 10,122
Virginia 7,500 5,035 14,733
Washington 3,827 1,693 106
Totals $158,499 $143,761 $231,154
SIG and Superior market their nonstandard products exclusively through
approximately 4,500 independent agencies and focus their marketing efforts in
rural areas and the peripheral areas of metropolitan centers. As part of its
strategy, management is continuing its efforts to establish the Company as a
low cost deliverer of nonstandard automobile insurance while maintaining a
commitment to provide quality service to both agents and insureds. This
element of the Company's strategy is being accomplished primarily through the
automation of certain marketing, underwriting and administrative functions.
In order to maintain and enhance its relationship with its agency base, the
Company has twenty-six territorial managers, each of whom resides in a specific
marketing region and has access to the technology and software necessary to
provide marketing, rating and administrative support to the agencies in his or
her region.
The Company attempts to foster strong service relationships with its agencies
and customers. The Company is currently developing computer software that will
provide on-line communication with its agency force. In addition, to
delivering prompt service while ensuring consistent underwriting, the Company
offers rating software to its agents in some states which permits them to
evaluate risks in their offices. The agent has the authority to sell and bind
insurance coverages in accordance with procedures established by the Company,
which is a common practice in the property and casualty insurance business.
The Company reviews all coverages bound by the agents promptly and generally
accepts all coverages which fall within its stated underwriting criteria. In
most jurisdictions, the Company has the right, within a specified time period,
to cancel any policy even if the risk falls within its underwriting criteria.
See "Business - Nonstandard Automobile Insurance - Underwriting".
Pafco and Superior compensate their agents on a commission basis based on a
percentage of premiums produced. Pafco also offers its agents a contingent
commission based on volume and profitability, thereby encouraging the agents to
enhance the placement of profitable business with the Company. Superior has
recently incorporated the contingent commission into the compensation package
for its agents.
The Company believes that the combination of Pafco with Superior and its two
Florida domiciled insurance subsidiaries will allow the Company the flexibility
to engage in multi-tiered marketing efforts in which specialized automobile
insurance products are directed toward specific segments of the market. Since
certain state insurance laws prohibit a single insurer from offering similar
products with different commission structures or, in some cases, premium rates,
it is necessary to have multiple licenses in certain states in order to obtain
the benefits of market segmentation. The Company is currently offering multi-
tiered products in Florida, Texas, Virginia, California and Missouri. The
Company intends to expand the marketing of its multi-tiered products into
other states and to obtain multiple licenses for its subsidiaries in these
states to permit maximum flexibility in designing commission structures.
Underwriting
The Company underwrites its nonstandard automobile business with the goal of
achieving adequate pricing. The Company seeks to classify risks into narrowly
defined segments through the utilization of all available underwriting
criteria. The Company maintains an extensive, proprietary database which
contains statistical records with respect to its insureds on driving and repair
experience by location, class of driver and type of automobile. Management
believes this database gives the Company the ability to be more precise in the
underwriting and pricing of its products. Further, the Company uses motor
vehicle accident reporting agencies to verify accident history information
included in applications.
The Company utilizes many factors in determining its rates. Some of the
characteristics used are type, age and location of the vehicle, number of
vehicles per policyholder, number and type of convictions or accidents, limits
of liability, deductibles, and, where allowed by law, age, sex and marital
status of the insured. The rate approval process varies from state to state;
some states, such as Indiana, Colorado, Kentucky and Missouri, allow filing and
use of rates, while others, such as Florida, Arkansas and California, require
approval of the insurance department prior to the use of the rates.
The Company has begun to integrate its automated underwriting process with the
functions performed by its agency force. For example, the Company has recently
introduced a rating software package for use by agents in some states. In many
instances, this software package, combined with agent access to the automated
retrieval of motor vehicle reports, ensures accurate underwriting and pricing
at the point of sale. The Company believes the automated rating and under-
writing system provides a significant competitive advantage because it (i)
improves efficiencies for the agent and the Company, further linking the agent
to the Company, (ii) makes more accurate and consistent underwriting decisions
possible, and (iii) can be changed easily to reflect new rates and underwriting
guidelines.
Underwriting results of insurance companies are frequently measured by their
combined ratios. However, investment income, federal income taxes and other
non-underwriting income or expense are not reflected in the combined ratio.
The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Underwriting
results are generally considered profitable when the combined ratio is under
100% and unprofitable when the combined ratio is over 100%. The following
table sets forth loss and LAE ratios, underwriting expense ratios and combined
ratios for the periods indicated for the nonstandard automobile insurance
business of the Company and Superior individually and on a combined basis.
The ratios shown in the table below are computed based upon GAAP, not SAP.
Goran Capital Inc.
For The Years Ended December 31,
Company Superior
1994 1995 1996 1994 1995 1996
Loss Ratio 62.3% 65.8% 61.8% 72.3% 64.2% 66.1%
LAE Ratio 9.8% 8.0% 8.6% 9.6% 9.9% 9.5%
Underwriting
Expense Ratio 34.3% 37.5% 33.3% 34.5% 33.5% 23.9%
Combined Ratio 106.4% 111.3% 103.7% 116.4% 107.6% 99.5%
Goran Capital Inc.
and Superior Insurance Company (Combined)<F1>
For The Years Ended December 31,
1994 1995 1996
Loss Ratio 70.5% 64.6% 65.1%
LAE Ratio 9.6% 9.4% 8.6%
Underwriting Expense Ratio 34.5% 34.8% 27.7%
Combined Ratio 114.6% 108.8% 101.4%
[FN]
<F1>
These ratios have not been computed on a pro-forma basis but rather have
been derived by adding the premiums, expenses, losses and LAE of each of the
Company and Superior through December 31, 1996.
<PAGE>
In an effort to maintain and improve underwriting profits, the territorial
managers regularly monitor loss ratios of the agencies in their regions and
meet periodically with the agencies in order to address any adverse trends in
loss ratios.
Claims
The Company's nonstandard automobile claims department handles claims on a
regional basis from its Indianapolis, Indiana; Atlanta, Georgia; Tampa, Florida
and Anaheim, California locations. Management believes that the employment of
salaried claims personnel, as opposed to independent adjusters, results in
reduced ultimate loss payments, lower LAE and improved customer service. The
Company's generally retains independent appraisers and adjusters on an as
needed basis for estimation of physical damage claims and limited elements of
investigation. The Company uses the Audapoint, Audatex and Certified
Collateral Corporation computer programs to verify, through a central database,
the cost to repair a vehicle and to eliminate duplicate or "overlap" costs from
body shops. Autotrak, which is a national database of vehicles, allows the
Company to locate vehicles nearly identical in model, color and mileage to the
vehicle damaged in an accident, thereby reducing the frequency of disagreements
with claimants as to the replacement value of damaged vehicles. In 1995, the
Company implemented new claims handling procedures designed to reduce the
number of pending claims.
Claims settlement authority levels are established for each adjuster or manager
based on the employee's ability and level of experience. Upon receipt, each
claim is reviewed and assigned to an adjuster based on the type and severity of
the claim. All claims-related litigation is monitored by a home office
supervisor or litigation manager. The claims policy of the Company emphasizes
prompt and fair settlement of meritorious claims, adequate reserving for claims
and controlling claims adjustment expenses.
Reinsurance
The Company follows the customary industry practice of reinsuring a portion of
its risks and paying for that protection based upon premiums received on all
policies subject to such reinsurance. Insurance is ceded principally to reduce
the Company's exposure on large individual risks and to provide protection
against large losses, including catastrophic losses. Although reinsurance does
not legally discharge the ceding insurer from its primary obligation to pay the
full amount of losses incurred under policies reinsured, it does render the
reinsurer liable to the insurer to the extent provided by the terms of the
reinsurance treaty. As part of its internal procedures, the Company evaluates
the financial condition of each prospective reinsurer before it cedes business
to that carrier. Based on the Company's review of its reinsurers' financial
health and reputation in the insurance marketplace, the Company believes its
reinsurers are financially sound and that they therefore can meet their
obligations to the Company under the terms of the reinsurance treaties.
Reserves for uncollectible reinsurance are provided as deemed necessary.
<PAGE>
In 1995, Pafco maintained a 25% quota share reinsurance treaty on its
nonstandard automobile insurance business, as well as an excess of loss treaty
covering 100% of losses on an individual occurrence basis in excess of $200,000
up to a maximum of $1,050,000. As of January 1, 1996, Pafco has terminated all
third party quota share reinsurance with respect to its nonstandard automobile
insurance business. Pafco has entered into a quota share reinsurance agreement
with Superior whereby Pafco shall cede 100% of its gross premiums written on or
after May 1, 1996 that are in excess of three times outstanding capital and
surplus. See "Certain Relationships and Related Transactions - Reinsurance
Arrangements". In 1996, Pafco continues to maintain an excess of loss treaty
on its nonstandard automobile insurance business covering 100% of losses on an
individual occurrence basis in excess of $200,000 up to a maximum of
$1,050,000. Of such reinsurers, those having A.M. Best ratings of A or better
provided 83% of such coverage. The following table provides information with
respect to material third party reinsurers on the foregoing Pafco nonstandard
automobile reinsurance treaties:
Goran Capital Inc.
For The Year Ended December 31, 1996
(In Thousands of U.S. Dollars)
Reinsurers A.M. Best Rating Reinsurance Recoverables<F1>
Chartwell Reinsurance
Company A<F2> $ 290
Constitution Reinsurance
Corporation A+<F3> $1,210
[FN]
<F1>
Only recoverables greater than $200 are shown. Total nonstandard automobile
reinsurance recoverables as of December 31, 1996 were approximately $2,565.
<F2>
An A.M. Best rating of "A" is the third highest of 15 ratings.
<F3>
An A.M. Best rating of "A+" is the second highest of 15 ratings.
In 1995, Superior maintained both automobile casualty and property catastrophe
excess reinsurance. Superior's casualty excess of loss treaties covered losses
in excess of $100,000 up to a maximum of $2 million. Superior's first casualty
excess layer contained limits of $200,000 excess of $100,000, its second
casualty excess layer contained limits of $700,000 excess of $300,000 and its
third casualty excess layer had a limit of $1 million excess of $1 million.
Superior's first layer of property catastrophe excess reinsurance covered 95%
of $500,000 excess of $500,000 with an annual limit of $1 million and its
second layer of property catastrophe excess reinsurance covered 95% of $2
million excess of $1 million with an annual limit of $4 million. In 1996,
Superior maintained the same levels of coverage, except as follows: (i) as to
its third casualty excess layer, the limit was increased to $4 million, and
(ii) Superior added a third layer of property catastrophe excess reinsurance
covering 95% of $2 million excess of $3 million with an annual limit of $4
million. Superior had no quota share reinsurance on its nonstandard automobile
business in either 1995 or 1996.
In 1995, Superior placed all of its reinsurance with Prudential Reinsurance
Company (now Everest Reinsurance Company). In 1996, Superior placed all of its
reinsurance with Everest Reinsurance Company, except for its third layer
casualty excess of loss treaty, which was placed as follows: Zurich
Reinsurance Centre, Inc., 50%; Skandia America Reinsurance Corporation, 15%;
Transatlantic Reinsurance Company, 15%; SOREMA North American Reinsurance
Company, 10%; and Winterthur Reinsurance Corporation of America, 10%. The
foregoing reinsurers have the following A.M. Best ratings: Everest Reinsurance
Company - "A"; Skandia America Reinsurance Corporation - "A-" (the fourth
highest of 15 ratings); SOREMA North American Reinsurance Company - "A-";
Transatlantic Reinsurance Company - "A+"; Winterthur Reinsurance Company of
America - "A"; and Zurich Reinsurance Centre, Inc. - "A". For the year ended
December 31, 1996, Superior had $737,000 of ceded premiums to unaffiliated
reinsurers.
On April 29, 1996, Pafco retroactively ceded all of its commercial business
relating to 1995 and previous years to Granite Reinsurance Company Ltd.
("Granite Re"), an affiliate, with an effective date of January 1, 1996. On
this date, Pafco also entered into a 100% quote share reinsurance agreement
with Granite Re, whereby all of Pafco's commercial business from 1996 and
forward was ceded to Granite Re effective January 1, 1996. Pafco has a
reinsurance recoverable at December 31, 1996 from Granite Re for $9,230,000,
of which $770,000 is uncollateralized.
Neither Pafco nor Superior has any facultative reinsurance with respect to its
nonstandard automobile insurance business.
Competition
The Company competes with both large national writers and smaller regional
companies in each state in which it operates. The Company's competitors
include other companies which, like the Company, serve the agency market, as
well as companies which sell insurance directly to customers. Direct writers
may have certain competitive advantages over agency writers, including
increased name recognition, increased loyalty of their customer base and,
potentially, reduced acquisition costs. The Company's primary competitors are
Progressive Casualty Insurance Company, Guaranty National Insurance Company,
Integon Corporation Group, Deerbrook Insurance Company (a member of the
Allstate Insurance Group) and the companies of the American Financial Group.
Generally, these competitors are larger and have greater financial resources
than the Company. The nonstandard automobile insurance business is price
sensitive and certain competitors of the Company have, from time to time,
decreased their prices in an apparent attempt to gain market share. Although
the Company's pricing is inevitably influenced to some degree by that of its
competitors, management of the Company believes that it is generally not in the
Company's best interest to match such price decreases, choosing instead to
compete on the basis of underwriting criteria and superior service to its
agents and insureds.
Crop Insurance
Industry Background
The two principal components of the Company's crop insurance business are
MPCI and private named peril, primarily crop hail insurance. Crop insurance
is purchased by farmers to reduce the risk of crop loss from adverse weather
and other uncontrollable events. Farms are subject to drought, floods and
other natural disasters that can cause widespread crop losses and, in severe
cases, force farmers out of business. Because many farmers rely on credit
to finance their purchases of such agricultural inputs as seed, fertilizer,
machinery and fuel, the loss of a crop to a natural disaster can reduce their
ability to repay these loans and to find sources of funding for the following
year's operating expenses.
MPCI was initiated by the federal government in the 1930s to help protect
farmers against loss of their crops as a result of drought, floods and other
natural disasters. In addition to MPCI, farmers whose crops are lost as a
result of natural disasters have, in the past, sometimes been supported by the
federal government in the form of ad hoc relief bills providing low interest
agricultural loans and direct payments. Prior to 1980, MPCI was available
only on major crops in major producing areas. In 1980, Congress expanded the
scope and coverage of the MPCI program. In addition, the delivery system for
MPCI was expanded to permit private insurance companies and licensed agents and
brokers to sell MPCI policies, and the FCIC was authorized to reimburse parti-
cipating companies for their administrative expenses and to provide federal
reinsurance for the majority of the risk assumed by such private companies.
Although expansion of the federal crop insurance program in 1980 was expected
to make crop insurance the farmer's primary risk management tool, participation
in the MPCI program was only 32% of eligible acreage in the 1993 crop year.
Due in part to low participation in the MPCI program, Congress provided an
average of $1.5 billion per year in ad hoc disaster payments over the six years
prior to 1994. In view of the combination of low participation rates in the
MPCI program and large federal payments on both crop insurance (with an average
loss ratio of 147%) and ad hoc disaster payments since 1980, Congress has,
since 1990, considered major reform of its crop insurance and disaster
assistance policies. The Federal Crop Insurance Reform Act of 1994 (the "1994
Reform Act") was enacted in order to increase participation in the MPCI
program and eliminate the need for ad hoc federal disaster relief payments to
farmers.
The 1994 Reform Act required farmers for the first time to purchase at least
CAT Coverage (i.e., the minimum available level of MPCI providing coverage for
50% of farmers' historic yield at 60% of the price per unit for such crop set
by the FCIC) in order to be eligible for other federally sponsored farm
benefits, including, but not limited to, low interest loans and crop price
supports. The 1994 Reform Act also authorized the marketing and selling of CAT
Coverage by the local United States Department of Agriculture ("USDA") offices.
The Federal Agriculture Improvement and Reform Act of 1996 (the "1996 Reform
Act"), signed into law by President Clinton in April, 1996, limits the role of
the USDA offices in the delivery of MPCI coverage beginning in July, 1996,
which is the commencement of the 1997 crop year, and also eliminates the
linkage between CAT Coverage and qualification for certain federal farm
program benefits. This limitation should provide the Company with the
opportunity to realize increased revenues from the distribution and servicing
of its MPCI product. In accordance with the 1996 Reform Act, the USDA
announced in July, 1996, the following fourteen states in which CAT Coverage
will no longer be available through USDA offices but rather will be solely
available through private agencies: Arizona, Colorado, Illinois, Indiana,
Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina, North Dakota, South
Dakota, Washington and Wyoming. The FCIC has transferred to the Company
approximately 8,900 insureds for CAT Coverage who previously purchased such
coverage from USDA field offices. The Company believes that any future
potential negative impact of the delinkage mandated by the 1996 Reform Act will
be mitigated by, among other factors, the likelihood that farmers will continue
to purchase MPCI to provide basic protection against natural disasters since
ad hoc federal disaster relief programs have been reduced or eliminated. In
addition, the Company believes that (i) lending institutions will likely
continue to require this coverage as a condition to crop lending; and (ii)
many of the farmers who entered the MPCI program as a result of the 1994
Reform Act have come to appreciate the reasonable price of the protection
afforded by CAT Coverage and will remain with the program regardless of
delinkage. There can, however, be no assurance as to the ultimate effect which
the 1996 Reform Act may have on the business or operations of the Company.
Strategy
The Company has multiple strategies for its crop insurance operations,
including the following:
1. The Company will seek to enhance underwriting profits and reduce the
volatility of its crop insurance business through geographic diversification
and the appropriate allocation of risks among the federal reinsurance pools and
the effective use of federal and third-party catastrophic reinsurance
arrangements.
2. The Company also limits the risks associated with crop insurance through
selective underwriting of crops based on its historical loss experience
database.
3. The Company continues to develop and maintain a proprietary knowledge-based
underwriting system which utilizes a database of Company-specific underwriting
rules.
4. The Company has further strengthened its independent agency network by
using technology to provide fast, efficient service to its agencies and
providing application documentation designed for simplicity and convenience.
5. Unlike many of its competitors, the Company employs a number of full-time
claims adjusters in order to reduce the losses experienced by IGF.
6. The Company stops selling its crop hail policies after the date on which
the plant growth emerges from the ground in order to prevent farmers from
adversely selecting against IGF when a storm is forecast or hail damage has
already occurred.
7. The Company continues to explore growth opportunities and product
diversification through new specialty coverages, including crop revenue
coverage and named peril insurance.
8. The Company continues to explore new opportunities for advances in
administrative efficiencies and product underwriting presented by advances in
Precision Farming software, Global Positioning System (GPS) software and
Geographical Information System (GIS) technology, all of which continue to be
adopted by insureds in their farming practices.
Products
Description of MPCI Insurance Program
MPCI is a federally-subsidized program which is designed to provide parti-
cipating farmers who suffer insured crop damage with funds needed to continue
operating and plant crops for the next growing season. All of the material
terms of the MPCI program and of the participation of private insurers, such as
the Company, in the program are set by the FCIC under applicable law. MPCI
provides coverage for insured crops against substantially all natural perils.
Purchasing an MPCI policy permits a farmer to insure against the risk that his
crop yield for any growing season will be less than 50% to 75% (as selected by
the farmer at the time of policy application or renewal) of his historic crop
yield. If a farmer's crop yield for the year is greater than the yield
coverage he selected, no payment is made to the farmer under the MPCI program.
However, if a farmer's crop yield for the year is less than the yield coverage
selected, MPCI entitles the farmer to a payment equal to the yield shortfall
multiplied by 60% to 100% of the price for such crop (as selected by the farmer
at the time of policy application or renewal) for that season as set by the
FCIC.
In order to encourage farmers to participate in the MPCI program and thereby
reduce dependence on traditional disaster relief measures, the 1994 Reform Act
established CAT Coverage as a new minimum level of MPCI coverage, which farmers
may purchase upon payment of a fixed administrative fee of $50 per policy
instead of any premium. CAT Coverage insures 50% of historic crop yield at 60%
of the FCIC-set crop price for the applicable commodities standard unit of
measure, i.e., bushel, pound, etc. CAT Coverage can be obtained from private
insurers such as the Company or, in certain states, from USDA field offices.
In addition to CAT Coverage, MPCI policies which provide a greater level of
protection than the CAT Coverage level are also offered ("Buy-up Coverage").
Most farmers purchasing MPCI have historically purchased at Buy-up Coverage
levels, with the most frequently sold policy providing coverage for 65% of
historic crop yield at 100% of the FCIC-set crop price per bushel. Buy-up
Coverages require payment of a premium in an amount determined by a formula set
by the FCIC. Buy-up Coverage can only be purchased from private insurers.
The Company focuses its marketing efforts on Buy-up Coverages, which have
higher premiums and which the Company believes will continue to appeal to
farmers who desire, or whose lenders encourage or require, revenue protection.
The number of MPCI Buy-up Coverage policies written has historically tended to
increase after a year in which a major natural disaster adversely affecting
crops occurs, and to decrease following a year in which favorable weather
conditions prevail.
The Company, like other private insurers participating in the MPCI program,
generates revenues from the MPCI program in two ways. First, it markets,
issues and administers policies, for which it receives administrative fees; and
second, it participates in a profit-sharing arrangement in which it receives
from the government a portion of the aggregate profit, or pays a portion of the
aggregate loss, in respect of the business it writes.
The Company's share of profit or loss on the MPCI business it writes is
determined under a complex profit sharing formula established by the FCIC.
Under this formula, the primary factors that determine the Company's MPCI
profit or loss share are (i) the gross premiums the Company is credited with
having written; (ii) the amount of such credited premiums retained by the
Company after ceding premiums to certain federal reinsurance pools; and (iii)
the loss experience of the Company's insureds. The following discussion
provides more detail about the implementation of this profit sharing formula.
Gross Premiums
For each year, the FCIC sets the formulas for determining premiums for
different levels of Buy-up Coverage. Premiums are based on the type of crop,
acreage planted, farm location, price per bushel for the insured crop as set by
the FCIC for that year, and other factors. The federal government will
generally subsidize a portion of the total premium set by the FCIC and require
farmers to pay the remainder. Cash premiums are received by the Company from
farmers only after the end of a growing season and are then promptly remitted
to the federal government. Although applicable federal subsidies change from
year to year, such subsidies will range up to approximately 40% of the Buy-up
Coverage premium for 1996 depending on the crop insured and the level of
Buy-up Coverage purchased, if any. Federal premium subsidies are recorded on
the Company's behalf by the government. For purposes of the profit sharing
formula, the Company is credited with having written the full amount of
premiums paid by farmers for Buy-up Coverages, plus the amount of any related
federal premium subsidies (such total amount, its "MPCI Premium").
As previously noted, farmers pay an administrative fee of $50 per policy but
are not required to pay any premium for CAT Coverage. However, for purposes of
the profit sharing formula, the Company is credited with an imputed premium
(its "MPCI Imputed Premium") for all CAT Coverages it sells. The amount of
such MPCI Imputed Premium credited is determined by formula. In general, such
MPCI Imputed Premium will be less than 50% of the premium that would be payable
for a Buy-up Coverage policy that insured 65% of historic crop yield at 100% of
the FCIC-set crop price per standard unit of measure for the commodity,
historically the most frequently sold Buy-up Coverage. For income statement
purposes under GAAP, the Company's gross premiums written for MPCI consist only
of its MPCI Premiums and do not include MPCI Imputed Premiums.
Reinsurance Pools
Under the MPCI program, the Company must allocate its MPCI Premium or MPCI
Imputed Premium in respect of a farm to one of three federal reinsurance pools,
at its discretion. These pools provide private insurers with different levels
of reinsurance protection from the FCIC on the business they have written. For
insured farms allocated to the "Commercial Pool", the Company, at its election,
generally retains 50% to 100% of the risk and the FCIC assumes 0% - 50% of the
risk; for those allocated to the "Developmental Pool", the Company generally
retains 35% of the risk and the FCIC assumes 65%; and for those allocated to
the "Assigned Risk Pool", the Company retains 20% of the risk and the FCIC
assumes 80%. The MPCI Retention is protected by private third party stop loss
treaties.
Although the Company in general must agree to insure any eligible farm, it is
not restricted in its decision to allocate a risk to any of the three pools,
subject to a minimum aggregate retention of 35% of its MPCI Premiums and MPCI
Imputed Premiums written. The Company uses a sophisticated methodology derived
from a comprehensive historical data base to allocate MPCI risks to the federal
reinsurance pools in an effort to enhance the underwriting profits realized
from this business. The Company has crop yield history information with
respect to over 100,000 farms in the United States. Generally, farms or crops
which, based on historical experience, location and other factors, appear to
have a favorable net loss ratio and to be less likely to suffer an insured
loss, are placed in the Commercial Pool. Farms or crops which appear to be
more likely to suffer a loss are placed in the Developmental Pool or Assigned
Risk Pool. The Company has historically allocated the bulk of its insured
risks to the Commercial Pool.
The Company's share of profit or loss depends on the aggregate amount of MPCI
Premium and MPCI Imputed Premium on which the Company retains risk after
allocating farms to the foregoing pools (its "MPCI Retention"). As previously
described, the Company purchases reinsurance from third parties other than the
FCIC to further reduce its MPCI loss exposure.
Loss Experience of Insureds
Under the MPCI program the Company pays losses to farmers through a federally
funded escrow account as they are incurred during the growing season. The
Company requests funding of the escrow account when a claim is settled, and the
escrow account is funded by the federal government within three business days.
After a growing season ends, the aggregate loss experience of the Company's
insureds in each state for risks allocated to each of the three reinsurance
pools is determined. If, for all risks allocated to a particular pool in a
particular state, the Company's share of losses incurred is less than its
aggregate MPCI Retention, the Company shares in the gross amount of such profit
according to a schedule set by the FCIC for each year. The profit and loss
sharing percentages are different for risks allocated to each of the three
reinsurance pools, and private insurers will receive or pay the greatest
percentage of profit or loss for risks allocated to the Commercial Pool.
The percentage split between private insurers and the federal government of any
profit or loss which emerges from an MPCI Retention is set by the FCIC and
generally is adjusted from year to year. For 1995, 1996 and 1997 crop years,
the FCIC increased the maximum potential profit share of private insurers for
risks allocated to the Commercial Pool above the maximum potential profit share
set for 1994, without increasing the maximum potential share of loss for risks
allocated to that pool for 1995. This change increased the potential profit-
ability of risks allocated to the Commercial Pool by private insurers.
The following table presents MPCI Premiums, MPCI Imputed Premiums, and
underwriting gains or losses of IGF for the periods indicated:
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994 1995 1996
MPCI Premiums $44,325 $53,408 $82,102
MPCI Imputed Premiums 2,171 19,552 29,744
Gross Underwriting Gain 4,344 10,870 15,801
Net Private Third-Party
Reinsurance Expense
And Other (1,087) (1,217) (3,524)
Net Underwriting Gain 3,257 9,653 12,277
MPCI Fees and Reimbursement Payments
The Company receives Buy-up Expense Reimbursement Payments from the FCIC for
writing and administering Buy-up Coverage policies. These payments provide
funds to compensate the Company for its expenses, including agents' commissions
and the costs of administering policies and adjusting claims. In 1994, the
Buy-up Expense Reimbursement Payments were set at 31% of the MPCI Premium. In
1995 and 1996, this payment has also been set at 31% of the MPCI Premium, but
it is scheduled to be reduced to 29% in 1997, 28% in 1998, and 27.5% in 1999.
Although the 1994 Reform Act directs the FCIC to alter program procedures and
administrative requirements so that the administrative and operating costs of
private insurance companies participating in the MPCI program will be reduced
in an amount that corresponds to the reduction in the expense reimbursement
rate, there can be no assurance that the Company's actual costs will not exceed
the expense reimbursement rate.
Farmers are required to pay a fixed administrative fee of $50 per policy in
order to obtain CAT Coverage. This fee is retained by the Company to defray
the cost of administration and policy acquisition. The Company also receives,
from the FCIC, a separate CAT LAE Reimbursement Payment equal to approximately
13.0% of MPCI Imputed Premiums in respect of each CAT Coverage policy it
writes and a small MPCI Excess LAE Reimbursement Payment. In general, fees and
payments received by the Company in respect of CAT Coverage are significantly
lower than those received for Buy-up Coverage.
In addition to premium revenues, the Company received the following fees and
commissions from its crop insurance segment for the periods indicated:
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994 1995 1996
CAT Coverage Fees $ 74 $ 1,298 $ 1,181
Buy-up Expense Reimbursement
Payments 13,845 16,366 24,971
CAT LAE Reimbursement Payments
and MPCI Excess LAE
Reimbursement Payments 107 3,427 5,753
Total $14,026 $21,091 $31,905
Crop Revenue Coverage
The Company has recently introduced a new product in its crop insurance
business called Crop Revenue Coverage ("CRC"). In contrast to standard MPCI
coverage, which features a yield guarantee or coverage for the loss of pro-
duction, CRC provides the insured with a guaranteed revenue stream by combining
both yield and price variability protection. CRC protects against a grower's
loss of revenue resulting from fluctuating crop prices and/or low yields by
providing coverage when any combination of crop yield and price results in
revenue that is less than the revenue guarantee provided by the policy. CRC
was approved by the FCIC as a pilot program for revenue insurance coverage
plans for the 1996 crop year, and has been available for corn and soybeans in
all counties in Iowa and Nebraska beginning with such crop year. CRC policies
represent approximately 30% of the combined corn policies written by IGF in
Iowa and Nebraska for the 1996 crop year. In July, 1996, the FCIC announced
that CRC will be made available in the fall of 1996 for winter wheat in the
entire states of Kansas, Michigan, Nebraska, South Dakota, Texas and Washington
and in parts of Montana.
Revenue insurance coverage plans such as CRC are the result of the 1994 Reform
Act, which directed the FCIC to develop a pilot crop insurance program
providing coverage against loss of gross income as a result of reduced yield
and/or price. CRC was developed by a private insurance company other than the
Company under the auspices of this pilot program, which authorizes private
companies to design alternative revenue coverage plans and to submit them for
review, approval and endorsement by the FCIC. As a result, although CRC is
administered and reinsured by the FCIC and risks are allocated to the federal
reinsurance pools, CRC remains partially influenced by the private sector,
particularly with respect to changes in its rating structure.
CRC plans to use the policy terms and conditions of the Actual Production
History ("APH") plan of MPCI as the basic provisions for coverage. The APH
provides the yield component by utilizing the insured's historic yield records.
The CRC revenue guarantee is the producer's approved APH times the coverage
level, times the higher of the spring futures price or harvest futures price
(in each case, for post-harvest delivery) of the insured crop for each unit of
farmland. The coverage levels and exclusions in a CRC policy are similar to
those in a standard MPCI policy. As with MPCI policies, the Company receives
from the FCIC an expense reimbursement payment equal to 31% of gross premiums
written in respect of each CRC policy it writes. See " - MPCI Fees and
Reimbursement Payments". This expense reimbursement payment is scheduled to
be reduced to 29% in 1997, 28% in 1998 and 27.5% in 1999.
CRC protects revenues by extending crop insurance protection based on APH to
include price as well as yield variability. Unlike MPCI, in which the crop
price component of the coverage is set by the FCIC prior to the growing season
and generally does not reflect actual crop prices, CRC uses the commodity
futures market as the basis for its pricing component. Pricing occurs twice in
the CRC plan. The spring futures price is used to establish the initial policy
revenue guarantee and premium, and the harvest futures price is used to
establish the crop value to count against the revenue guarantee and to
recompute the revenue guarantee (and resulting indemnity payments) when the
harvest price is higher than the spring price.
The industry (including the Company) and the FCIC are reviewing the current
rating structure supporting the CRC product. The Company is studying this
issue and other factors as part of its MPCI underwriting and risk allocation
plan, although the Company currently expects to offer CRC in the regions where
it can be sold for winter wheat in 1996 because of high interest in the product
among farmers. Based on crop performance to date in the regions where it has
written CRC for spring planted crops, the Company does not believe that any
potential underpricing of CRC policies it has written for such crops will
adversely affect its results of operations.
Crop Hail
In addition to MPCI, the Company offers stand alone crop hail insurance, which
insures growing crops against damage resulting from hail storms and which
involves no federal participation, as well as its proprietary HAILPLUS product
which combines the application and underwriting process for MPCI and hail
coverages. The HAILPLUS product tends to produce less volatile loss ratios
than the stand alone produce since the combined product generally insures a
greater number of acres, thereby spreading the risk of damage over a larger
insured area. Approximately 50% of IGF's hail policies are written in
combination with MPCI. Although both crop hail and MPCI provide insurance
against hail damage, under crop hail coverages farmers can receive payments for
hail damage which would not be severe enough to require a payment under an MPCI
policy. The Company believes that offering crop hail insurance enables it to
sell more MPCI policies than it otherwise would.
Named Peril
In addition to crop hail insurance, the Company also sells a small volume of
insurance against crop damage from other specific named perils. These products
cover specific crops, including hybrid seed corn, cranberries, cotton, tomatoes
and onions, and are generally written on terms that are specific to the kind of
crop and farming practice involved and the amount of actuarial data available.
The Company plans to seek potential growth opportunities in this niche market
by developing basic policies on a diverse number of named crops grown in a
variety of geographic areas, and to offer these polices primarily to large
producers through certain select agents. The Company's experienced product
development team will develop the underwriting criteria and actuarial rates for
the named peril coverages. As with the Company's other crop insurance
products, loss adjustment procedures for named peril policies are handled by
full-time professional claims adjusters who have specific agronomy training
with respect to the crop and farming practice involved in the coverage.
Third Party Reinsurance In Effect For 1996
In order to reduce the Company's potential loss exposure under the MPCI
program, the Company purchases stop loss reinsurance from other private
insurers in addition to reinsurance obtained from the FCIC. In addition, since
the FCIC and state regulatory authorities require IGF to limit its aggregate
writings of MPCI Premiums and MPCI Imputed Premiums to no more than 900% of
capital, and retain a net loss exposure of not in excess of 50% of capital, IGF
may also obtain reinsurance from private insurers in order to permit it to
increase its premium writings. Such private reinsurance would not eliminate
the Company's potential liability in the event a reinsurer was unable to pay or
losses exceeded the limits of the stop loss coverage. For crop hail insurance,
the Company has in effect quota share reinsurance of 10% of premiums, although
the reinsurer is only liable to participate in losses of the Company up to a
150% pure loss ratio. The Company also has stop loss treaties for its crop
hail business which reinsure approximately 45% of losses in excess of an 80%
pure loss ratio up to a 100% pure loss ratio and 95% of losses in excess of a
100% pure loss ratio up to a 140% pure loss ratio. With respect to its MPCI
business, the Company has stop loss treaties which reinsure 93.75% of the
underwriting losses experienced by the Company to the extent that aggregate
losses of its insureds nationwide are in excess of 100% of the Company's
MPCI Retention up to 125% of MPCI Retention. The Company also has an
additional layer of MPCI stop loss reinsurance which covers 95% of the
underwriting losses experienced by the Company to the extent that aggregate
losses of its insureds nationwide are in excess of 125% of MPCI Retention up
to 150% of MPCI Retention.
Based on a review of the reinsurers' financial health and reputation in the
insurance marketplace, the Company believes that the reinsurers for its crop
insurance business are financially sound and that they therefore can meet their
obligations to the Company under the terms of the reinsurance treaties.
Reserves for uncollectible reinsurance are provided as deemed necessary. The
following table provides information with respect to all reinsurers on the
aforementioned IGF reinsurance agreements:
Goran Capital Inc.
For The Year Ended December 31, 1996<F1>
(In Thousands of U.S. Dollars)
Reinsurers A.M. Best Rating Ceded Premiums
Folksam International
Insurance Co. Ltd. A-<F2> $ 587
Frankona
Ruckversicherungs AG A<F3> $ 400
Granite Re NR<F4> $1,609
Insurance Corporation
Of Hannover A- $1,159
Liberty Mutual Insurance
Co. (UK) Ltd A $ 364
Partner Reinsurance
Company Ltd. A $1,587
R & V Versicherung AG NR<F5> $ 852
Scandinavian Reinsurance
Company Ltd. A+<F6> $1,393
[FN]
<F1>
For the year ended December 31, 1996, total ceded premiums were $86,393.
<F2>
An A.M. Best rating of "A-" is the fourth highest of 15 ratings.
<F3>
An A.M. Best rating of "A" is the third highest of 15 ratings.
<F4>
Granite Re, a subsidiary of the Company, is an insurer domiciled in
Barbados which has never applied for or requested such a rating.
<F5>
R + V Versicherung AG is an insurer domiciled outside of the United States
and, as such, does not have a rating from A.M. Best.
<F6>
An A.M. Best rating of "A+" is the second highest of 15 ratings.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 31 states
through approximately 2,500 agents associated with approximately 1,200
independent insurance agencies, with its primary geographic concentration in
the states of Iowa, Texas, Illinois, Kansas and Minnesota. The Company has,
however, begun to diversify outside of the Midwest and Texas in order to reduce
the risk associated with geographic concentration. IGF is licensed in 20
states and markets its products in additional states through a fronting
agreement with a third party insurance company. IGF has a stable agency base
and it experienced negligible turnover in its agencies in 1996. Through its
agencies, IGF targets farmers with an acreage base of at least 1,000 acres.
Such larger farms typically have a lower risk exposure since they tend to
utilize better farming practices and to have noncontiguous acreage, thereby
making it less likely that the entire farm will be affected by a particular
occurrence. Many farmers with large farms tend to buy or rent acreage which is
increasingly distant from the central farm location. Accordingly, the like-
lihood of a major storm (wind, rain or hail) or a freeze affecting all of a
particular farmer's acreage decreases.
The following table presents MPCI Premiums written by IGF by state for the
years ended December 31, 1994, 1995 and 1996.
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994 1995 1996
State
Texas $ 6,751 $11,075 $12,361
Iowa 8,506 9,296 15,205
Illinois 7,302 7,305 11,228
Kansas 2,003 3,476 5,249
Minnesota 1,965 2,026 2,244
Nebraska 1,536 1,992 3,206
Indiana 1,486 1,875 3,870
Colorado 1,526 1,771 3,334
Missouri 1,785 1,718 2,427
North Dakota 1,153 1,638 2,796
All Other 10,312 11,236 20,182
Total $44,325 $53,408 $82,102
The following table presents gross premiums written by IGF by state for crop
hail coverages for the years ended December 31, 1994, 1995 and 1996.
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994 1995 1996
State
Iowa $ 3,954 $ 4,667 $6,590
Minnesota 318 2,162 2,300
Colorado 964 1,775 1,651
Nebraska 1,022 1,477 1,567
Montana 239 1,355 5,632
North Dakota 1,087 1,283 2,294
Kansas 765 846 661
South Dakota 124 756 1,457
Wisconsin 315 458 370
Mississippi 277 400 482
All Other 1,065 1,787 4,953
Total $10,130 $16,966 $27,957
The Company seeks to maintain and develop its agency relationships by providing
agencies with faster, more efficient service as well as marketing support. IGF
owns an IBM AS400 along with all peripheral and networking equipment and has
developed its own proprietary software package, Aplus, which allows agencies to
quote and examine various levels of coverage on their own personal computers.
The Company has seven regional managers who are responsible for the Company's
field operations within an assigned geographic territory, including maintaining
and enhancing relationships with agencies in those territories. IGF also uses
application documentation which is designed for simplicity and convenience.
The Company believes that IGF is the only crop insurer which has created a
single application for MPCI and hail coverage.
IGF generally compensates its agents based on a percentage of premiums produced
and, in the case of CAT Coverage and crop hail insurance, a percentage of
underwriting gain realized with respect to business produced. This
compensation structure is designed to encourage agents to place profitable
business with IGF (which tends to be insurance coverages for larger farms with
respect to which the risk of loss is spread over larger, frequently
noncontiguous insured areas).
Underwriting Management
Because of the highly regulated nature of the MPCI program and the fact that
rates are established by the FCIC, the primary underwriting functions performed
by the Company's personnel with respect to MPCI coverage are (i) selecting of
marketing territories for MPCI based on the type of crops being grown in the
area, typical weather patterns and loss experience of both agencies and
farmers within a particular area, (ii) recruiting agencies within those
marketing territories which service larger farms and other more desirable
risks, and (iii) ensuring that policies are underwritten in accordance with the
FCIC rules.
With respect to its hail coverage, IGF seeks to minimize its underwriting
losses by maintaining an adequate geographic spread of risk by rate group.
In addition, IGF establishes sales closing dates after which hail policies
will not be sold. These dates are dependent on planting schedules, vary by
geographic location and range from May 15 in Texas to July 15 in North Dakota.
Prior to these dates, crops are either seeds in the ground or young growth
newly emerged from the ground and hail damage to crops in either of these
stages of growth is minimal. The cut-off dates prevent farmers from adversely
selecting against IGF by waiting to purchase hail coverage until a storm is
forecast or damage has occurred. For its hail coverage, IGF also sets limits
by policy ($400,000 each) and by township ($2.0 million per township). The
Company also uses a daily report entitled "Severe Weather Digest" which
shows the time and geographic location of all extraordinary weather events to
check incoming policy applications against possible previous damage.
Claims/Loss Adjustments
In contrast to most of its competitors who retain independent adjusters on a
part-time basis for loss adjusting services, IGF employs full-time professional
claims adjusters who are agronomy trained as well as part-time adjusters.
Management believes that the professionalism of the IGF full-time claims staff
coupled with their exclusive commitment to IGF helps to ensure that claims are
handled in a manner so as to reduce overpayment of losses experienced by IGF.
The adjusters are located throughout IGF's marketing territories. In order to
promote a rapid claims response, the Company has deployed several small four
wheel drive vehicles for use by its adjusters. The adjusters report to a field
service representative in their territory who manages adjusters' assignments,
assures that all preliminary estimates for loss reserves are accurately
reported and assists in loss adjustment. Within 72 hours of reported
damage, a loss notice is reviewed by an IGF service office claims manager and
a preliminary loss reserve is determined which is based on the representative's
and/or adjuster's knowledge of the area or the particular storm which caused
the loss. Generally, within approximately two weeks, hail and MPCI claims are
examined and reviewed on site by an adjuster and the insured signs a proof of
loss form containing a final release. As part of the adjustment process,
IGF's adjusters use Global Positioning System Units, which are hand held
devices using navigation satellites to determine the precise location where a
claimed loss has occurred. IGF has a team of catastrophic claims specialists
who are available on 48 hours notice to travel to any of IGF's six regional
service offices to assist in heavy claim work load situations.
Competition
The crop insurance industry is highly competitive. The Company competes
against other private companies and, with respect to CAT Coverage, USDA field
service offices in certain areas. However, under the 1996 Reform Act,
effective for the 1997 crop year, USDA field service offices may offer CAT
Coverage in a state only if the Secretary of Agriculture determines that there
is an insufficient number of approved insurance providers operating in the
state to provide CAT Coverage to producers adequately.
Many of the Company's competitors have substantially greater financial and
other resources than the Company, and there can be no assurance that the
Company will be able to compete effectively against such competitors in the
future. The Company competes on the basis of the commissions paid to agents,
the speed with which claims are paid, the quality and extent of services
offered, the reputation and experience of its agency network and, in the case
of private insurance, policy rates. Because the FCIC establishes the rates
that may be offered for MPCI policies, the Company believes that quality of
service and level of commissions offered to agents are the principal factors on
which it competes in the area of MPCI. The Company believes that the crop hail
and other named peril crop insurance industry is extremely rate-sensitive
and the ability to offer competitive rate structures to agents is a critical
factor in the agent's ability to write crop hail and other named peril
premiums. Because of the varying state laws regarding the ability of agents to
write crop hail and other named peril premiums prior to completion of rate and
form filings (and, in some cases, state approval of such filings), a company
may not be able to write its expected premium volume if its rates are not
competitive.
The crop insurance industry has become increasingly consolidated. From the
1985 crop year to the 1996 crop year, the number of insurance companies having
agreements with the FCIC to sell and service MPCI policies has declined from 50
to 16. The Company believes that IGF is the fifth largest MPCI crop insurer in
the U.S. based on premium information compiled in 1995 by the FCIC and NCIS.
The Company's primary competitors are Rain & Hail Insurance Service, Inc.
(affiliated with Cigna Insurance Company), Rural Community Insurance Services,
Inc. (which is owned by Norwest Corporation), American Growers Insurance
Company (Redland), Crop Growers Insurance, Inc., Great American Insurance
Company, Blakely Crop Hail (an affiliate of Farmers Alliance Mutual Insurance
Company) and North Central Crop Insurance, Inc. The Company believes that in
order to compete successfully in the crop insurance business it will have to
market and service a volume of premiums sufficiently large to enable the
Company to continue to realize operating efficiencies in conducting its
business. No assurance can be given that the Company will be able to compete
successfully if this market further consolidates.
Reserves for Losses and Loss Adjustment Expenses
Loss reserves are estimates, established at a given point in time based on
facts then known, of what an insurer predicts its exposure to be in connection
with incurred losses. LAE reserves are estimates of the ultimate liability
associated with the expense of settling all claims, including investigation and
litigation costs resulting from such claims. The actual liability of an
insurer for its losses and LAE reserves at any point in time will be greater
or less than these estimates.
The Company maintains reserves for the eventual payment of losses and LAE with
respect to both reported and unreported claims. Nonstandard automobile
reserves for reported claims are established on a case-by-case basis. The
reserving process takes into account the type of claim, policy provisions
relating to the type of loss and historical paid loss and LAE for similar
claims. Reported crop insurance claims are reserved based upon preliminary
notice to the Company and investigation of the loss in the field. The ultimate
settlement of a crop loss is based upon either the value or the yield of the
crop.
Under the second method, loss and LAE reserves for claims that have been
incurred but not reported are estimated based on many variables including
historical and statistical information, inflation, legal developments, economic
conditions, trends in claim severity and frequency and other factors that could
affect the adequacy of loss reserves.
The following loss reserve development tables illustrate the change over time
of reserves established for claims and claims expense at the end of various
calendar years for the nonstandard automobile segment of the Company (not
including Superior), and for Superior separately. The first three line items
show the reserves as originally reported at the end of the stated year. The
table also includes the cumulative amounts paid as of the end of successive
years with respect to that reserve liability. The "liabilities reestimated"
section indicates reestimates of the original recorded reserve as of the end of
each successive year based on additional information pertaining to such
liabilities. The last portion of the table compares the latest reestimated
reserve to the reserve amount as originally established and indicates whether
or not the original recorded amount was adequate or inadequate to cover the
estimated costs of unsettled claims.
The reserve for claims and claims expense is an accumulation of the estimated
amounts necessary to settle all outstanding claims as of the date for which the
reserve is stated. The reserve and payment data shown below have been reduced
for estimated subrogation and salvage recoveries. The reserve estimates are
based upon the factors in each case and experience with similar cases. No
attempt is made to isolate explicitly the impact of inflation from the multi-
tude of factors influencing the reserve estimates though inflation is
implicitly included in the estimates. Pafco and Superior regularly
update their reserve forecasts by type of claim as new facts become known and
events occur which affect unsettled claims. Pafco and Superior do not
discount their reserves for unpaid claims and claims expense.
The following loss reserve development tables are cumulative and, therefore,
ending balances should not be added since the amount at the end of each calen-
dar year includes activity for both the current and prior years. Conditions
and trends that have affected the development of liability in the past may not
necessarily reoccur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies from the table.
<PAGE>
<TABLE>
Goran Capital Inc.
Nonstandard Automobile Insurance Only
(Not Including Superior)
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Reserves For
Unpaid Losses And
LAE $29,125 $26,819 $30,844 $27,145
Deduct: Reinsurance
Recoverable 12,581 10,927 9,921 8.124
Reserve For Unpaid
Losses And LAE,
Net Of Reinsurance $4,748 $10,775 $14,346 $17,083 $17,449 $18,706 $16,544 $16,522 $20,923 $19,021
Paid Cumulative
As Of:
One Year Later 2,517 6,159 7,606 7,475 8,781 10,312 9,204 9,059 8.082
Two Years Later 4,318 7,510 10,388 10,930 12,723 14,934 12,966 8,806
Three Years Later 4,433 7,875 12,107 12,497 14,461 16,845 13,142
Four Years Later 4,146 8,225 12,863 13,271 15,071 16,641
Five Years Later 4,154 8,513 13,147 13,503 14,903
Six Years Later 4,297 8,546 13,237 13,500
Seven Years Later 4,297 8,561 13,238
Eight Years Later 4,295 8,561
Nine Years Later 4,295
Liabilities
Reestimated As Of:
One Year Later 3,434 11,208 15,060 15,103 16,797 18,872 16,747 17,000 21,748
Two Years Later 4,588 11,413 14,178 14,745 16,943 19,599 17,023 17,443
Three Years Later 4,702 10,923 14,236 14,993 16,914 19,662 17,009
Four Years Later 4,311 10,791 14,479 14,809 16,750 19,651
Five Years Later 4,234 10,877 14,436 14,659 16,746
Six Years Later 4,320 10,825 14,468 14,659
Seven Years Later 4,278 10,922 14,468
Eight Years Later 4,309 10,921
Nine Years Later 4,309
Net Cumulative
(Deficiency) Or
Redundancy 439 (146) (22) 2,424 695 (945) (465) (921) (825)
Expressed As A
Percentage Of
Unpaid Losses And
LAE 9.2% (1.4%) (0.0%) 14.2% 4.0% (5.1%) (2.8%) (5.6%) (3.9%)
</TABLE>
<PAGE>
Net reserves for the nonstandard automobile business of Pafco increased
substantially in 1988, 1989, 1990 and 1995. Such changes were due entirely to
changes in the premium volume of the nonstandard automobile business for those
years. In general, Pafco's nonstandard automobile segment has not
developed significant redundancies or deficiencies as compared to original
reserves. A deficiency of $956,000, or 5.1%, of original reserves developed
with respect to loss reserves at December 31, 1992 due to an unexpected
increase in loss severity and average claim cost.
<PAGE>
<TABLE>
Superior Insurance Company
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Reserves For
Unpaid Losses And
LAE $54,577 $47,112 $52,413
Deduct: Reinsurance
Recoverable 68 1,099 987
Reserve For Unpaid
Losses And LAE,
Net Of Reinsurance $26,245 $37,851 $56,424 $60,118 $60,224 $56,803 $52,542 $53,487 $46,125 $52,413
Paid Cumulative
As Of:
One Year Later 18,202 23,265 31,544 33,275 31,484 30,689 32,313 28,227 25,454
Two Years Later 25,526 34,122 43,547 44,128 40,513 41,231 38,908 35,141
Three Years Later 29,670 39,524 48,037 47,442 44,183 43,198 41,107
Four Years Later 32,545 41,257 49,064 49,256 44,708 44,010
Five Years Later 33,242 41,492 49,522 49,365 45,196
Six Years Later 33,395 41,716 49,327 49,476
Seven Years Later 33,535 41,576 49,425
Eight Years Later 33,469 41,621
Nine Years Later 33,408
Liabilities
Reestimated As Of:
One Year Later 31,911 48,376 54,858 58,148 53,515 50,086 53,856 48,564 37,933
Two Years Later 37,118 49,327 53,715 56,626 50,520 50,474 50,006 42,989
Three Years Later 37,932 49,051 53,022 55,147 51,854 46,624 46,710
Four Years Later 38,424 49,436 52,644 57,720 49,739 44,823
Five Years Later 38,580 49,297 54,030 56,824 48,592
Six Years Later 38,584 50,701 53,697 55,770
Seven Years Later 39,965 50,515 53,683
Eight Years Later 39,861 50,521
Nine Years Later 39,998
Net Cumulative
(Deficiency) Or
Redundancy (13,553)(12,670) 2,741 4,348 11,980 5,832 10,489 8,193 8,192
Expressed As A
Percentage Of
Unpaid Losses And
LAE (51.6%) (33.5%) 4.9% 7.2% 19.9% 10.3% 20.0% 15.3% 17.8%
</TABLE>
<PAGE>
Net reserves for Superior increased substantially through 1990 before de-
creasing in 1992. Such changes were due to changes in premium volume and
reduction of reserve redundancies. The decrease in 1995 reflects Superior's
curtailment of marketing efforts and writings in Illinois, Mississippi,
Tennessee, Texas and Washington resulting from more restrictive underwriting
criteria, inadequately priced business in these states and other unfavorable
marketing conditions. Significant deficiencies developed in reserves estab-
lished as of December 31 of each of 1986 through 1988 which were substantially
offset by reserve additions in 1989 due to changes in reserve methodology.
With respect to reserves established as of December 31, 1991 and 1992, Superior
developed significant redundancies due to conservative levels of case basis and
IBNR reserves. Beginning in 1993, Superior began to adjust its reserving
methodology to reduce its redundancies and to take steps to close older claim
files which still carried redundant reserves.
Pafco and Superior employ an independent actuary to annually evaluate and
certify the adequacy of their loss and LAE reserves.
Investments
Insurance company investments must comply with applicable laws and regulations
which prescribe the kind, quality and concentration of investments. In
general, these laws and regulations permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common securities, real estate
mortgages and real estate.
The Company's investment policies are determined by the Company's Board of
Directors and are reviewed on a regular basis. The Company's investment
strategy is to maximize the after-tax yield of the portfolio while emphasizing
the stability and preservation of the Company's capital base. Further, the
portfolio is invested in types of securities and in an aggregate duration which
reflect the nature of the Company's liabilities and expected liquidity needs.
The investment portfolios of the Company are managed by third party
professional administrators, including Goldman Sachs & Co., in accordance with
pre-established investment policy guidelines established by the Company. The
investment portfolios of the Company at December 31, 1996 consisted of the
following:
Goran Capital Inc.
For The Year Ended December 31, 1996
(In Thousands of U.S. Dollars)
Amortized Estimated
Type of Investment Cost Market Value
Fixed Maturities:
U.S. and Canadian Treasury
Securities and Obligations of
U.S. and Canadian Government
Corporation and Agencies $ 57,804 $ 57,826
Obligations of States, Provinces
and Political Subdivisions 3,587 3,651
Corporate Securities 76,421 76,906
Total Fixed Maturities $137,812 $138,383
Equity Securities:
Preferred stocks
Common Stocks 28,075 28,729
Short Term Investments 29,052<F1> 29,052
Real Estate 4,548 4,548
Mortgage Loans 2,430 2,430
Other Loans 75 75
Total Investments $201,992 $203,217
[FN]
<F1>
Due to the nature of crop insurance, the Company must maintain short-term
investments to fund amounts due under the MPCI program.
The following table sets forth, as of December 31, 1995 and 1996 the compo-
sition of the fixed maturity securities portfolio of the Company by time to
maturity.
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1995 1996
Market Percent Total Market Percent Total
Time to Maturity Value Market Value Value Market Value
1 Year or Less $ 8,797 31.3% $ 9,169 6.6%
More Than 1 Year
Through 5 Years 15,546 55.4% 79,042 57.1%
More Than 5 Years
Through 10 Years 3,737 13.3% 43,404 31.4%
More Than 10 Years - - - - - - 6,768 4.9%
Total $28,080 100.0% $138,383 100.0%
The investment results of the Company for the periods indicated are set forth
below:
Goran Capital Inc.
For The Years Ended December 31,
(In Thousands of U.S. dollars)
1994 1995 1996
Net Investment Income<F1> $ 3,372 $ 3,530 $ 7,877
Average Investment Portfolio<F2> $48,712 $50,347 $130,519
Pre-tax Return On Average
Investment Portfolio 6.9% 7.0% 6.0%
Net Realized Gains (Losses) $ (358) $ (198) $ (637)
[FN]
<F1>
Includes dividend income received in respect of holdings of common stock.
<F2>
Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio.
Ratings
A.M. Best has currently assigned a B+ rating to Superior and a B- rating to
Pafco. Pafco's rating has been confirmed by A.M. Best at a B- rating sub-
sequent to the Acquisition. Superior's rating was reduced from A- to B+ as
a result of the leverage of GGS Holdings resulting from indebtedness assumed
in connection with the Acquisition. IGF recently received an "NA-2" rating (a
"rating not assigned" category for companies that do not meet A.M. Best's
minimum size requirement) from A.M. Best but intends to seek a revised rating
after the infusion of capital from the proceeds of the Offering, although
there can be no assurance that a revised rating will be obtained or as to the
level of any such rating.
A.M. Best's ratings are based upon a comprehensive review of a company's
financial performance, which is supplemented by certain data, including
responses to A.M. Best's questionnaires, phone calls and other correspondence
between A.M. Best analysts and company management, quarterly NAIC filings,
state insurance department examination reports, loss reserve reports, annual
reports, company business plans and other reports filed with state insurance
departments.
A.M. Best undertakes a quantitative evaluation, based upon profitability,
leverage and liquidity, and a qualitative evaluation, based upon the compo-
sition of a company's book of business or spread of risk, the amount, appropri-
ateness and soundness of reinsurance, the quality, diversification and
estimated market value of its assets, the adequacy of its loss reserves and
policyholders' surplus, the soundness of a company's capital structure, the
extent of a company's market presence, and the experience and competence of its
management. A.M. Best's ratings represent an independent opinion of a
company's financial strength and ability to meet its obligations to policy-
holders. A.M. Best's ratings are not a measure of protection afforded
investors. "B+" and "B-" ratings are A.M. Best's sixth and eighth highest
rating classifications, respectively, out of 15 ratings. A "B+" rating is
awarded to insurers which, in A.M. Best's opinion, "have demonstrated very
good overall performance when compared to the standards established by the
A.M. Best Company" and "have a good ability to meet their obligations to
policyholders over a long period of time." A "B-" rating is awarded to
insurers which, in A.M. Best's opinion, "have demonstrated adequate overall
performance when compared to the standards established by the A.M. Best
Company" and "generally have an adequate ability to meet their obligations
to policyholders, but their financial strength is vulnerable to unfavorable
changes in underwriting or economic conditions". There can be no assurance
that such ratings or changes therein will not in the future adversely affect
the Company's competitive position.
Regulation
General
As a general rule, an insurance company must be licensed to transact insurance
business in each jurisdiction in which it operates, and almost all significant
operations of a licensed insurer are subject to regulatory scrutiny. Licensed
insurance companies are generally known as "admitted" insurers. Most states
provide a limited exemption from licensing for insurers issuing insurance
coverages that generally are not available from admitted insurers. These
coverages are referred to as "surplus lines" insurance and these insurers as
"surplus lines" or "non-admitted" companies.
The Company's admitted insurance businesses are subject to comprehensive,
detailed regulation throughout the United States, under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the
state and whether it is an admitted or non-admitted insurer, such authority
may extend to such things as (i) periodic reporting of the insurer's financial
condition; (ii) periodic financial examination; (iii) approval of rates and
policy forms; (iv) loss reserve adequacy; (v) insurer solvency; (vi) the
licensing of insurers and their agents; (vii) restrictions on the payment of
dividends and other distributions; (viii) approval of changes in control;
and (ix) the type and amount of permitted investments.
Pafco, IGF and Superior are subject to triennial examinations by state
insurance regulators. Such examinations were last conducted for Pafco as of
June 30, 1992 (covering the period to that date from September 30, 1990), for
IGF as of March 31, 1992 (covering the period to that date from December 31,
1987), and Superior as of December 31, 1993 (covering the period to that
date from January 1, 1991). The two subsidiaries of Superior, Superior
American Insurance Company and Superior Guaranty Insurance Company, had
examinations conducted as of October 31, 1996 (covering the period to that
date from the subsidiaries' inception on December 9, 1994). Pafco will have
a triennial examination in 1997. Superior and IGF have not been notified of
the dates of their next examination.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding companies in
Florida and Indiana, where they are domiciled. These laws, among other
things, (i) require the Company to file periodic information with state
regulatory authorities including information concerning its capital structure,
ownership, financial condition and general business operations; (ii) regulate
certain transactions between the Company, its affiliates and IGF, Pafco and
Superior (the "Insurers"), including the amount of dividends and other
distributions and the terms of surplus notes; and (iii) restrict the ability of
any one person to acquire certain levels of the Company's voting securities
without prior regulatory approval.
Any purchaser of 10% or more of the outstanding shares of Common Stock of SIG
would be presumed to have acquired control of IGF unless the Indiana
Commissioner, upon application, has determined otherwise. In addition, any
purchaser of approximately 10% or more of the outstanding shares of Common
Stock of the Company will be presumed to have acquired control of Pafco and
Superior unless the Commissioner of Insurance of the State of Indiana
(the "Indiana Commissioner") and the Commissioner of Insurance of the State of
Florida (the "Florida Commissioner"), upon application, have determined
otherwise.
Indiana law defines as "extraordinary" any dividend or distribution which,
together with all other dividends and distributions to shareholders within the
preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus
as regards policyholders as of the end of the preceding year, or (ii) the prior
year's net income. Dividends which are not "extraordinary" may be paid ten
days after the Indiana Department of Insurance receives notice of their
declaration. "Extraordinary" dividends and distributions may not be paid
without prior approval of the Indiana Commissioner or until the Indiana
Commissioner has been given thirty days prior notice and has not disapproved
within that period. The Indiana Department of Insurance must receive notice
of all dividends, whether "extraordinary" or not, within five business days
after they are declared. Notwithstanding the foregoing limit, a domestic
insurer may not declare or pay a dividend of funds other than earned surplus
without the prior approval of the Indiana Department of Insurance. "Earned
surplus" is defined as the amount of unassigned funds set forth in the
insurer's most recent annual statement, less surplus attributable to
unrealized capital gains or reevaluation of assets. As of December 31 1996,
IGF and Pafco had earned surplus of $29,412,000 and $18,112,000, respectively.
Further, no Indiana domiciled insurer may make payments in the form of
dividends or otherwise to shareholders as such unless it possesses assets in
the amount of such payment in excess of the sum of its liabilities and the
aggregate amount of the par value of all shares of its capital stock;
provided, that in no instance shall such dividend reduce the total of (i)
gross paid-in and contributed surplus, plus (ii) special surplus funds, plus
(iii) unassigned funds, minus (iv) treasury stock at cost, below an amount
equal to 50% of the aggregate amount of the par value of all shares of the
insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or distribute
cash or other property to its stockholders except out of that part of its
available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may not make dividend payments or distributions to stock-
holders without prior approval of the Florida Department of Insurance if the
dividend or distribution does not exceed the larger of (i) the lesser of (a)
10% of surplus, or (b) net income, not including realized capital gains, plus
a 2-year carryforward, (ii) 10% of surplus with dividends payable constrained
to unassigned funds minus 25% of unrealized capital gains, or (iii) the lesser
of (a) 10% of surplus or (b) net investment income plus a 3-year carryforward
with dividends payable constrained to unassigned funds minus 25% of unrealized
capital gains. Alternatively, a Florida domestic insurer may pay a dividend
or distribution without the prior written approval of the Florida Department of
Insurance if (1) the dividend is equal to or less than the greater of (i) 10%
of the insurer's surplus as regards policyholders derived from realized net
operating profits on its business and net realized capital gains, or (ii) the
insurer's entire net operating profits (including unrealized gains or losses)
and realized net capital gains derived during the immediately preceding
calendar year; (2) the insurer will have policyholder surplus equal to or
exceeding 115% of the minimum required statutory surplus after the dividend
or distribution; (3) the insurer files a notice of the dividend or distri-
bution with the department at least ten business days prior to the dividend
payment or distribution; and (4) the notice includes a certification by an
officer of the insurer attesting that, after the payment of the dividend or
distribution, the insurer will have at least 115% of required statutory
surplus as to policyholders. Except as provided above, a Florida domiciled
insurer may only pay a dividend or make a distribution (i) subject to prior
approval by the Florida Department of Insurance, or (ii) 30 days after the
Florida Department of Insurance has received notice of such dividend or
distribution and has not disapproved it within such time. In the Consent
Order approving the Acquisition, the Florida Department of Insurance has
prohibited Superior from paying any dividends (whether extraordinary or not)
for four years without the prior written approval of the Florida Department of
Insurance.
Under these laws, the maximum aggregate amounts of dividends to SIG in
1997 by IGF and Pafco without prior regulatory approval is $12,122,000 and
$561,000, respectively, none of which has been paid. Although SIG
believes that amounts required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company - Liquidity and Capital Resources". Further,
there can be no assurance that, if requested, the Indiana Department of
Insurance will approve any request for extraordinary dividends from Pafco or
IGF or that the Florida Department of Insurance will allow any dividends to
be paid by Superior during the four year period described above.
The maximum dividends permitted by state law are not necessarily indicative of
an insurer's actual ability to pay dividends or other distributions to a parent
company, which also may be constrained by business and regulatory consider-
ations, such as the impact of dividends on surplus, which could affect an
insurer's competitive position, the amount of premiums that can be written and
the ability to pay future dividends. Further, state insurance laws and
regulations require that the statutory surplus of an insurance company
following any dividend or distribution by such company be reasonable in
relation to its outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries are not subject directly to the
dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the Insurers for services (e.g., management fees and
commissions). These regulations may affect the amount of management fees which
may be paid by Pafco and Superior to GGS Holdings. See "The Company -
Formation of GGS Holdings; Acquisition of Superior". The management agreement
formerly in place between SIG and Pafco which provides for an annual
management fee equal to 15% of gross premiums has been assigned to GGS
Management, Inc. ("GGS Management"), a wholly-owned subsidiary of GGS Holdings.
A similar management agreement with a management fee of 17% of gross premiums
has been entered into between GGS Management and Superior. Employees of the
Company relating to the nonstandard automobile insurance business and all
Superior employees became employees of GGS Management effective April 30, 1996.
As part of the approval of the Formation Transaction, the Indiana Department
of Insurance has required Pafco to resubmit its management agreement for
review by the Indiana Department of Insurance no later than May 1, 1997 (the
first anniversary of the Formation Transaction), together with supporting
evidence that management fees charged to Pafco are fair and reasonable in
comparison to fees charged between unrelated parties for similar services.
In the Consent Order approving the Acquisition, the Florida Department of
Insurance has reserved, for three years, the right to reevaluate the
reasonableness of fees provided for in the Superior management agreement at
the end of each calendar year and to require Superior to make adjustments in
the management fees based on the Florida Department of Insurance's consid-
eration of the performance and operating percentages of Superior and other
pertinent data. There can be no assurance that either the Indiana Department
of Insurance or the Florida Department of Insurance will not in the future
require a reduction in these management fees.
Federal Regulation
The Company's MPCI program is federally regulated and supported by the federal
government by means of premium subsidies to farmers, expense reimbursement and
federal reinsurance pools for private insurers. Consequently, the MPCI program
is subject to oversight by the legislative and executive branches of the
federal government, including the FCIC. The MPCI program regulations generally
require compliance with federal guidelines with respect to underwriting, rating
and claims administration. The Company is required to perform continuous
internal audit procedures and is subject to audit by several federal government
agencies.
The MPCI program has historically been subject to change by the federal
government at least annually since its establishment in 1980, some of which
changes have been significant. The most recent significant changes to the MPCI
program came as a result of the passage by Congress of the 1994 Reform Act and
the 1996 Reform Act.
Certain provisions of the 1994 Reform Act, when implemented by the FCIC, may
increase competition among private insurers in the pricing of Buy-up Coverage.
The 1994 Reform Act authorizes the FCIC to implement regulations permitting
insurance companies to pass on to farmers in the form of reduced premiums
certain cost efficiencies related to any excess expense reimbursement over the
insurer's actual cost to administer the program, which could result in
increased price competition. To date, the FCIC has not enacted regulations
implementing these provisions but is currently collecting information from the
private sector regarding how to implement these provisions.
The 1994 Reform Act required farmers for the first time to purchase at least
CAT Coverage in order to be eligible for other federally sponsored farm
benefits, including but not limited to low interest loans and crop price
supports. The 1994 Reform Act also authorized for the first time the marketing
and selling of CAT Coverage by the local USDA offices. Partly as a result of
the increase in the size of the MPCI market resulting from the 1994 Reform Act,
the Company's MPCI Premium increased to $53.4 million in 1995 from $44.3
million in 1994. However, the 1996 Reform Act, signed into law by President
Clinton in April, 1996, eliminates the linkage between CAT Coverage and quali-
fication for certain federal farm program benefits and also limits the role of
the USDA offices in the delivery of MPCI coverage. In accordance with the 1996
Reform Act, the USDA announced in July, 1996, 14 states where CAT Coverage will
no longer be available through USDA offices but rather would solely be
available through private agencies: Arizona, Colorado, Illinois, Indiana,
Iowa, Kansas, Minnesota, Montana, Nebraska, North Carolina, North Dakota, South
Dakota, Washington and Wyoming. The limitation of the USDA's role in the
delivery system for MPCI should provide the Company with the opportunity to
realize increased revenues from the distribution and servicing of its MPCI
product. The Company has not experienced any material negative impact in 1996
from the delinkage mandated by the 1996 Reform Act. In addition, the FCIC has
transferred to the Company approximately 8,900 insureds for CAT Coverage who
previously purchased such coverage from USDA field offices. The Company
believes that any future potential negative impact of the delinkage mandated by
the 1996 Reform Act will be mitigated by, among other factors, the likelihood
that farmers will continue to purchase MPCI to provide basic protection against
natural disasters since ad hoc federal disaster relief programs have been
reduced or eliminated. In addition, the Company believes that (i) lending
institutions will likely continue to require this coverage as a condition to
crop lending, and (ii) many of the farmers who entered the MPCI program as a
result of the 1994 Reform Act have come to appreciate the reasonable price of
the protection afforded by CAT Coverage and will remain with the program
regardless of delinkage. There can, however, be no assurance as to the
ultimate effect which the 1996 Reform Act may have on the business or
operations of the Company.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative bodies have
adopted or proposed new laws or regulations to deal with the cyclical nature of
the insurance industry, catastrophic events and insurance capacity and pricing.
These regulations include (i) the creation of "market assistance plans" under
which insurers are induced to provide certain coverages, (ii) restrictions on
the ability of insurers to rescind or otherwise cancel certain policies in mid-
term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals, and (iv) limitations upon or decreases in rates permitted
to be charged.
Insurance Regulatory Information System
The NAIC Insurance Regulatory Information System ("IRIS") was developed
primarily to assist state insurance departments in executing their statutory
mandate to oversee the financial condition of insurance companies. Insurance
companies submit data on an annual basis to the NAIC, which analyzes the data
using ratios concerning various categories of financial data. IRIS ratios
consist of 12 ratios with defined acceptable ranges. They are used as an
initial screening process for identifying companies that may be in need of
special attention. Companies that have several ratios that fall outside of the
acceptable range are selected for closer review by the NAIC. If the NAIC
determines that more attention may be warranted, one of several priority
designations is assigned, and the insurance department of the state of domicile
is then responsible for follow-up action.
During 1996 Pafco had a net premiums to surplus ratio of 3.03 to 1 which was in
excess of the high end range of 3.0 to 1. The excess was not material and
Pafco has the ability to cede business to Superior to maintain compliance with
this ratio. Pafco's change in net writings was 61% compared to 33% at the high
end of the range. This result was expected given growth in gross premiums and
elimination of quota share reinsurance. Pafco also had positive surplus growth
of 64% outside the high end of the range at 50%. Pafco planned for higher
premium volume given the more profitable results than in prior years. During
1996, Pafco's investment yield as calculated under the IRIS tests was 3.8%
which was below the low end of the range at 4.5%. However, this IRIS test is a
simple average of beginning and end of year investments. Pafco's value fell
below the range due to the following: (i) inclusion of investment in IGF prior
to the Transfer during the first four months of the year when no investment
income was received; (ii) growth in the portfolio in the latter part of the
year not taken into account by the IRIS test; (iii) change during the course
of the year to reduce ratio of equities to total investments in favor of fixed
income securities; (iv) contribution to surplus of $3.7 million at the end of
1996 included in the IRIS test; and (v) inclusion of the home office building
in the investment base. If a weighted average was calculated using monthly
balances and excluding the IGF investment and real estate from the calcu-
lation, Pafco's return would have been 5.7%. Based on current investment
levels and mix it is expected that this test will be met in 1997. During 1996,
Pafco's ratio of reserve deficiency to surplus was 62% which exceeds the upper
range of 25%. This IRIS test calculates the average of claims liability to
premiums for the preceding two years and compares the resultant percentage to
the current year's percentage with a corresponding analysis to surplus. During
1994 and 1995, Pafco's claims liability to premiums ratio was approximately 55%
and decreased to approximately 35% in 1996, resulting in the unusual IRIS
result. This situation was a result of commercial claims liabilities in
1994 and 1996 that have now been ceded to an affiliate. Thus, claims
liability at December 31, 1996 is entirely for nonstandard automobile.
The reserves for the commercial liability business were at a much higher
ratio of premiums and are paid at a much slower rate than nonstandard auto-
mobile claims. Thus, although premiums grew in 1996, the increase in non-
standard automobile claims liability was offset by ceded commercial claims.
As this IRIS test uses a two year average of claims liabilities to premiums,
it is likely that Pafco may exceed the normal ratio in 1997. It should be
noted that Pafco did not have unusual IRIS values for the one and two year
reserve development to surplus tests.
During 1996 IGF had unusual values for three IRIS tests. IGF's surplus
increased by 237% which exceeded the high end of the range of 50%.
However, this is a very positive development due to growth in profits and
the capital infusion from the proceeds of the Offering. IGF continued to
have unusual values in the liabilities to liquid assets and agents balances to
surplus tests. IGF generally has an unusual value in these tests due to the
reinsurance program mandated by the FCIC for the distribution of the MPCI
program and the fact that agents' balances at December 31 are usually not
settled until late February.
During 1996 Superior had a ratio of net premiums written to surplus of 3.07 to
1 compared to the IRIS test upper limit of 3.0 to 1. During 1996, Superior's
net premium writings increased by 116% which exceeded the upper limit of the
IRIS range of 33%. Superior had a reserve deficiency to surplus ratio of 29%
which was in excess of the upper IRIS limit of 25%. All these matters were a
function of the strong growth of Superior. Such results may continue in the
future if growth continues. See Management's Discussion and Analysis for
further discussion on impact of premium writings to surplus ratio.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has adopted a
formula and model law to implement risk-based capital ("RBC") requirements for
property and casualty insurance companies designed to assess minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. Indiana and Florida have substantially
adopted the NAIC model law, and Indiana has directly, and Florida has
indirectly, adopted the NAIC model formula. The RBC formula for property and
casualty insurance companies measures four major areas of risk facing property
and casualty insurers: (i) underwriting, which encompasses the risk of adverse
loss developments and inadequate pricing; (ii) declines in asset values arising
from credit risk; (iii) declines in asset values arising from investment risks;
and (iv) off-balance sheet risk arising from adverse experience from non-
controlled assets, guarantees for affiliates, contingent liabilities and
reserve and premium growth. Pursuant to the model law, insurers having less
statutory surplus than that required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy.
The RBC model law provides for four levels of regulatory action. The extent of
regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing corrective
actions and requires the relevant insurance commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) gives the relevant insurance commissioner the option either to take the
aforementioned actions or to rehabilitate or liquidate the insurer if surplus
falls below 100% of the RBC amount. The fourth action level is the Mandatory
Control Level (as defined by the NAIC) which requires the relevant insurance
commissioner to rehabilitate or liquidate the insurer if surplus falls below
70% of the RBC amount. Based on the foregoing formulae, as of December 31,
1996, the RBC ratios of the Insurers were in excess of the Company Action
Level, the first trigger level that would require regulatory action.
Guaranty Funds
The Insurers also may be required under the solvency or guaranty laws of most
states in which they do business to pay assessments (up to certain prescribed
limits) to fund policyholder losses or liabilities of insolvent or rehabil-
itated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength
and, in certain instances, may be offset against future premium taxes. Some
state laws and regulations further require participation by the Insurers in
pools or funds to provide some types of insurance coverages which they would
not ordinarily accept. The Company recognizes its obligations for guaranty
fund assessments when it receives notice that an amount is payable to the fund.
The ultimate amount of these assessments may differ from that which has already
been assessed.
It is not possible to predict the future impact of changing state and federal
regulation on the Company's operations, and there can be no assurance that laws
and regulations enacted in the future will not be more restrictive than
existing laws.
Stockholder Agreement with GS Funds
The Stockholder Agreement among the Company, GS Funds, SIG and GGS
Holdings provides that the Board of Directors of GGS Holdings consists of five
members, of whom three shall be designated by the Company and two shall be
designated by GS Funds. However, in the event that (x) at any time the
Company and its affiliates shall own less than 25% of the issued and
outstanding common stock of GGS Holdings by reason of the issuance of shares of
common stock to GS Funds in satisfaction of the indemnification obligations
of the Company or SIG pursuant to the GGS Agreement (the "Indemnity Date") or
(y) at any time (i) SIG, Goran or GGS Holdings is in violation of any
term of the Stockholder Agreement, or (ii) GGS Holdings or GGS Management shall
remain in violation of any covenant with respect to indebtedness incurred by
GGSH to partially fund the Acquisition (the "GGS Senior Credit Facility")
(whether or not such violation is waived) after the expiration of any
applicable cure period or there shall occur an event of default under the GGS
Senior Credit Facility (whether or not waived), the size of the Board shall be
reduced to four members (a "Board Reduction"). At December 31, 1996, GS
Funds waived their right to this Board Reduction for the covenants violations
of the GGSH Senior Credit Facility. The covenants contained in the GGS Senior
Credit Facility are customary commercial loan covenants relating to the
maintenance of financial ratios and restrictions on dividends, significant
corporate transactions and other matters. In such event, so long as the
Indemnity Date has not occurred, SIG shall be entitled to designate
only two directors and GS Funds shall be entitled to designate two directors.
After the occurrence of the Indemnity Date, SIG shall be entitled to
designate one director and GS Funds shall be entitled to designate three
directors.
Prior to a Board Reduction, action may be taken by the Board only with the
approval of a majority of the members of the Board. After a Board Reduction,
prior to the Indemnity Date, action may only be taken with the approval of at
least one GS Funds designee and one SIG designee. After the Indemnity Date
following a Board Reduction, action may only be taken by the Board with the
approval of a majority of the entire Board. Prior to a Board Reduction, GGS
Holdings may not take the following actions, among others, without first
obtaining approval by the Board and at least one GS Funds designee: (i)
consolidate or merge with any person, (ii) purchase the capital stock or
substantially all of the assets of any person, (iii) enter into any joint
venture or partnership or establish any non-wholly owned subsidiaries in which
the consideration paid by or invested by GGS Holdings is in excess of $1
million, (iv) voluntarily liquidate or dissolve, (v) offer any type of
insurance other than nonstandard automobile insurance (other than certain
policies issued on behalf of IGF or SIGF), (vi) sell, lease or transfer assets
for an aggregate consideration in excess of $1 million, (vii) subject to
certain exceptions, enter into any contract with a director or officer of Goran
(or any relative or affiliate of such person) or with any affiliate of Goran,
(viii) create or suffer to exist any indebtedness for borrowed money in an
aggregate amount in excess of $1 million excluding certain existing indebted-
ness, (ix) mortgage or encumber its assets in an amount in excess of $1
million, (x) make or commit to make any capital expenditure in an amount in
excess of $1 million, (xi) redeem or repurchase its outstanding capital stock,
(xii) issue or sell any shares of capital stock of GGS Holdings or its subsid-
iaries, (xiii) enter into, adopt or amend any employment agreement or benefit
plan, (xiv) amend its Certificate of Incorporation or Bylaws, (xv) amend or
waive any provision of the Stockholder Agreement or the GGS Agreement, (xvi)
change its independent certified accountants or actuaries, (xvii) register any
securities under the Securities Act, (xviii) enter into one or more agreements
to reinsure a substantial portion of the liability of GGS Holdings or any of
its subsidiaries, or (xix) adopt or change the reserve policy or the investment
policy of GGS Holdings or any of its subsidiaries.
The Company's representatives on the Board of Directors of GGS Holdings are G.
Gordon Symons, Chairman of the Board of the Company, Alan G. Symons, Chief
Executive Officer of the Company and Douglas H. Symons, President and Chief
Operating Officer of the Company. Pursuant to their power under the Stock-
holder Agreement to designate the Chairman of the Board of GGS Holdings, GS
Funds has named G. Gordon Symons as Chairman of the Board of GGS Holdings.
The Stockholder Agreement designates Alan G. Symons as the Chief Executive
Officer of GGS Holdings and gives him the right to designate and determine the
compensation for all management personnel, provided that the designation of,
removal of, and determination of compensation for, any person earning $100,000
or more per annum is subject to the prior approval of the board. GS Funds
has the right at any time to designate a chief operating officer for GGS
Holdings but have currently not elected to exercise this right. Upon request,
GS Funds has the right to appoint one designee to each of the committees
of the Board of Directors of GGS Holdings. The Stockholder Agreement does not
give GS Funds the right to appoint any designees to the board of directors
of any of the subsidiaries of GGS Holdings.
Certain Rights Of The GS Funds To Cause A Sale of GGS Holdings
Events Which Trigger the Rights of the GS Funds to Cause A Sale of GGS
Holdings.
The Stockholder Agreement establishes certain rights of GS Funds to cause a
sale of GGS Holdings upon the occurrence of certain triggering events,
including (i) the failure to consummate a registered initial public offering of
GGS Holdings stock representing, on a fully diluted basis, at least 20% of all
such stock issued and outstanding, and generating at least $25 million in net
proceeds to the sellers of such securities, by April 30, 2001, (ii) the third
separate occasion, during the term of the Stockholder Agreement, on which an
equity financing or acquisition transaction proposed by GS Funds is rejected
by the GGS Holdings Board of Directors, (iii) the loss of voting control of
Goran or SIG (defined, with respect to Goran, as being direct or indirect
ownership of more than 40% of the outstanding voting stock of Goran if any
other holder or group holds in excess of 10% of the outstanding voting stock
of Goran, and otherwise 25% thereof; and defined, with respect to SIG, as
requiring both (a) direct ownership by Goran in excess of 50% of SIG's
voting stock and (b) retention by Alan G. Symons and his family members of
voting control of Goran) by Alan G. Symons or his family members or
affiliates, or (iv) the cessation of Alan G. Symons' employment as CEO of
GGS Holdings for any reason.
Upon the occurrence of any of such events, and at any time or from time to time
thereafter, GS Funds may, by notifying SIG in writing, initiate the
process of seeking to effect a sale of GGS Holdings on terms and conditions
which are acceptable to GS Funds. However, within thirty days after SIG
receives notice of GS Funds' intention to initiate the sale of GGS
Holdings, SIG may provide written notice to GS Funds that it wishes
to acquire or combine with GGS Holdings. SIG's notice to GS Funds
must include the proposed purchase price and other material terms and
conditions with such specificity as is necessary to permit GS Funds to
evaluate SIG's offer. If, within 90 days of delivery of the notice by
SIG, GS Funds accepts SIG's offer, SIG will be obligated to acquire or
combine with GGS Holdings. In the event GS Funds rejects SIG's proposal,
(i) any sale to a third party effected within 180 days after receipt of such
proposal must not contain terms that are in the aggregate less favorable to
the GGS Holdings stockholders than those set forth in SIG's proposal, (ii)
any sale must provide for the same consideration to be paid to each stock-
holder, and (iii) no sale may constitute an acquisition by or a combination
with an affiliate of GS Funds. Accordingly, under certain circumstances,
GS Funds may have the ability to force SIG to divest itself of its nonstandard
automobile operations. Further, a forced sale of GGS Holdings may also cause
SIG to be characterized as an investment company within the meaning of the
Investment Company Act of 1940 (the "1940 Act") unless the proceeds are
redeployed into other business operations or another exemption from
registration under the 1940 Act is available.
Canadian Federal Income Tax Considerations
This summary is based upon the current provisions of the Income Tax Act
(Canada) (the "Canadian Tax Act"), the regulations thereunder, proposed
amendments thereto publicly announced by the Department of Finance, Canada
prior to the date hereof and the provisions of the Canada-U.S. Income Tax
Convention (1980) (the "Convention") as amended by the Third Protocol (1995).
A purchase of common shares by the Company (other than a purchase of common
shares by the Company on the open market) will give rise to a deemed dividend
under the Canadian Tax Act equal to the amount paid by the Company on the
purchase in excess of the paid-up capital of such shares determined in
accordance with the Canadian Tax Act. Any such dividend deemed to have been
received by a person not resident in Canada will be subject to nonresident
withholding tax as described above. The amount of any such deemed dividend
will reduce the proceeds of disposition to a holder of common shares for
purposes of computing the amount of his capital gain or loss under the Canadian
Tax Act.
A holder of common shares who is not a resident of Canada within the meaning of
the Canadian Tax Act will not be subject to tax under the Canadian Tax Act in
respect of any capital gain on a disposition of common shares (including on a
purchase by the Company) unless such shares constitute taxable Canadian
property of the shareholder for purposes of the Canadian Tax Act and such
shareholder is not entitled to relief under an applicable tax treaty.
Common shares will generally not constitute taxable Canadian property of a
shareholder who is not a resident of Canada for purposes of the Canadian Tax
Act in any taxation year in which such shareholder owned common shares unless
such shareholder uses or holds or is deemed to use or hold such shares in or in
the course of carrying on business in Canada or, a share of the capital stock
of a corporation resident in Canada, that is not listed on a prescribed stock
exchange or a share that is listed on prescribed stock exchange, if at any
time during the five year period immediately preceding the disposition of
the common shares owned, either alone or together with persons with whom he
does not deal at arm's length, not less than 25% of the issued shares of any
class of the capital stock of the Company. In any event, under the
Convention, gains derived by a resident of the United States from the
disposition of common shares will generally not be taxable in Canada unless
50% or more of the value of the common shares is derived principally from
real property situated in Canada.
Currently, under the Convention, the rate of Canadian non-resident withholding
tax on the gross amount of dividends beneficially owned by a person who is a
resident of the United States for the purpose of the Convention and who does
not have a "permanent establishment" or "fixed base" in Canada is 15%.
However, where such beneficial owner is a company which owns at least 10% of
the voting stock of the company, the rate of such withholding is 5%. Amounts
in respect of common shares paid or credited or deemed to be paid or credited
as, on account or in lieu of payment of, or in satisfaction of, dividends to a
shareholder who is not a resident in Canada within the meaning of the Canadian
Tax Act will generally be subject to Canadian non-resident withholding tax.
Such withholding tax is levied at a basic rate of 25% which may be reduced
pursuant to the terms of an applicable tax treaty between Canada and the
country of resident of the non-resident.
U.S. Federal Income Tax Considerations
The following is a general summary of certain U.S. federal income tax
consequence to U.S. Holders of the purchase, ownership and disposition of
common shares. This summary is based on the U.S. Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations promulgated thereunder, and
judicial and administrative interpretations thereof, all as in effect on the
date hereof and all of which are subject to change. This summary does not
address all aspects of U.S. federal income taxation that may be relevant to a
particular U.S. Holder based on such U.S. Holder's particular circumstances.
In particular, the following summary does not address the tax treatment of U.S.
Holders who are broker dealers or who own, actually or constructively, 10% or
more of the Company's oustanding voting stock, and certain U.S. Holders
(including, but not limited to, insurance companies, tax-exempt organizations,
financial institutions and persons subject to the alternative minimum tax) may
be subject to special rules not discussed below.
For U.S. federal income tax purposes, a U.S. Holder of common shares generally
will realize, to the extent of the Company's current and accumulated earnings
and profits, ordinary income on the receipt of cash dividends on the common
shares equal to the U.S. dollar value of such dividends on the date of receipt
(based on the exchange rate on such date) without reduction for any Canadian
withholding tax. Dividends paid on the common shares will not be eligible for
the dividends received deduction available in certain cases to U.S. corp-
orations. In the case of foreign currency received as a divdend that is not
converted by the recipient into U.S. dollars on the date of receipt, a U.S.
Holder will have a tax basis in the foreign currency equal to its U.S. dollars
value on the date of receipt. Any gain or loss recognized upon a subsequent
sale or other disposition of the foregin currency, including an exchange for
U.S. dollars, will be ordinary income or loss. Subject to certain requirements
and limitations imposed by the Code, a U.S. Holder may elect to claim the
Canadian tax withheld or paid with respect to dividends on the common shares
either as a deduction or as a foreign tax credit against the U.S. federal
income tax liability of such U.S. Holder. The requirements and limitations
imposed by the Code with respect to the foreign tax credit are complex and
beyond the scope of this summary, and consequently, prospective purchasers of
common shares should consult with their own tax advisors to determine whether
and to what extent they would be entitled to such credit.
For U.S. federal income tax purposes, upon a sale or exchange of a common
share, a U.S. Holder will recognize gain or loss equal to the difference
between the amount realized on such sale or exchange and the tax basis of such
common share. If a common share is held as a capital asset, any such gain or
loss will be capital gain or loss, and will be long-term capital gain or
loss if the U.S. Holder has held such common share for more than one year.
Under current Treasury regulations, dividends paid on the common share to U.S.
Holders will not be subject to the 31% U.S. backup withholding tax. Proposed
Treasury regulations which are not yet in effect and which will only apply
prospectively, however, would subject dividends paid on the common shares
through a U.S. or U.S. related broker to the 31% U.S. backup withholding tax
unless certain information reporting requirements are satisfied. Whether and
when such proposed Treasury regulations will become effective cannot be
determined at this time. The payment of proceeds of a sale or other dispo-
sition of common shares in the U.S. through a U.S. or U.S. related broker
generally will be subject to U.S. information reporting requirements and may
also be subject to the 31% U.S. backup withholding tax, unless the U.S. Holder
furnishes the broker with a duly completed and signed Form W-9. Any amounts
withheld under the U.S. backup withholding tax rules may be refunded or
credited against the U.S. Holder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the U.S. Internal
Revenue Service.
Employees
At December 31, 1996 the Company and its subsidiaries employed approximately
600 persons. The Company believes that relations with its employees are
excellent.
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
The statements contained in this Annual Report which are not historical facts,
including but not limited to, statements concerning (i) the impact of federal
and state laws and regulations, including but not limited to, the 1994 Reform
Act and 1996 Reform Act, on the Company's business and results of operations,
(ii) the competitive advantage afforded to IGF by approaches adopted by
management in the areas of information, technology, claims handling and under-
writing, (iii) the sufficiency of the Company's cash flow to meet the operating
expenses, debt service obligations and capital needs of the Company and its
subsidiaries, and (iv) the impact of declining MPCI Buy-up Expense Reim-
bursements on the Company's results of operations, are forward-looking
statements within the meanings of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
From time to time the Company may also issue other statements either orally or
in writing, which are forward looking within the meaning of these statutory
provisions. Forward looking statements are typically identified by the words
"believe", "expect", "anticipate", "intend", "estimate", "plan" and similar
expressions. These statements involve a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could differ
materially from the forward looking statements in this Form 10-K or from other
forward looking statements made by the Company. In addition to the risks and
uncertainties of ordinary business operations, some of the facts that could
cause actual results to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements are the
risks and uncertainties (i) discussed herein, (ii) contained in the Company's
other filings with the Securities and Exchange Commission and public statements
from time to time, and (iii) set forth below:
Uncertain Pricing and Profitability
One of the distinguishing features of the property and casualty industry is
that its products generally are priced, before its costs are known, because
premium rates usually are determined before losses are reported. Premium rate
levels are related in part to the availability of insurance coverage, which
varies according to the level of surplus in the industry. Increases in surplus
have generally been accompanied by increased price competition among property
and casualty insurers. The nonstandard automobile insurance business in recent
years has experienced very competitive pricing conditions and there can be no
assurance as to the Company's ability to achieve adequate pricing. Changes in
case law, the passage of new statutes or the adoption of new regulations
relating to the interpretation of insurance contracts can retroactively and
dramatically affect the liabilities associated with known risks after an
insurance contract is in place. New products also present special issues in
establishing appropriate premium levels in the absence of a base of experience
with such products' performance.
The number of competitors and the similarity of products offered, as well as
regulatory constraints, limit the ability of property and casualty insurers to
increase prices in response to declines in profitability. In states which
require prior approval of rates, it may be more difficult for the Company to
achieve premium rates which are commensurate with the Company's underwriting
experience with respect to risks located in those states. In addition, the
Company does not control rates on its MPCI business, which are instead set by
the FCIC. Accordingly, there can be no assurance that these rates will be
sufficient to produce an underwriting profit.
The reported profits and losses of a property and casualty insurance company
are also determined, in part, by the establishment of, and adjustments to,
reserves reflecting estimates made by management as to the amount of losses and
loss adjustment expenses ("LAE") that will ultimately be incurred in the
settlement of claims. The ultimate liability of the insurer for all losses and
LAE reserved at any given time will likely be greater or less than these
estimates, and material differences in the estimates may have a material
adverse effect on the insurer's financial position or results of operations in
future periods.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many factors which
can cause fluctuation in the results of operations of this business. Many of
these factors are not subject to the control of the Company. The size of the
nonstandard market can be significantly affected by, among other factors, the
underwriting capacity and underwriting criteria of standard automobile
insurance carriers. In addition, an economic downturn in the states in which
the Company writes business could result in fewer new car sales and less demand
for automobile insurance. Severe weather conditions could also adversely
affect the Company's business through higher losses and LAE. These factors,
together with competitive pricing and other considerations, could result in
fluctuations in the Company's underwriting results and net income.
Nature of Crop Insurance Business
The Company's operating results from its crop insurance program can vary
substantially from period to period as a result of various factors, including
timing and severity of losses from storms, drought, floods, freezes and other
natural perils and crop production cycles. Therefore, the results for any
quarter or year are not necessarily indicative of results for any future period.
The underwriting results of the crop insurance business are recognized through-
out the year with a reconciliation for the current crop year in the fourth
quarter.
The Company expects that for the foreseeable future a majority of its crop
insurance will continue to be derived from MPCI business. The MPCI program is
federally regulated and supported by the federal government by means of premium
subsidies to farmers, expense reimbursement and federal reinsurance pools for
private insurers. As such, legislative or other changes affecting the MPCI
program could impact the Company's business prospects. The MPCI program has
historically been subject to modification at least annually since its
establishment in 1980, and some of these modifications have been
significant. No assurance can be given that future changes will not
significantly affect the MPCI program and the Company's crop insurance
business.
The 1994 Reform Act also reduced the expense reimbursement rate payable to the
Company for its costs of servicing MPCI policies that exceed the basic CAT
Coverage level (such policies, "Buy-up Coverage") for the 1997, 1998 and 1999
crop years to 29%, 28% and 27.5%, respectively, of the MPCI Premium serviced, a
decrease from the 31% level established for the 1994, 1995 and 1996 crop years.
Although the 1994 Reform Act directs the FCIC to alter program procedures and
administrative requirements so that the administrative and operating costs of
private insurance companies participating in the MPCI program will be reduced
in an amount that corresponds to the reduction in the expense reimbursement
rate, there can be no assurance that the Company's actual costs will not exceed
the expense reimbursement rate. The FCIC has appointed several committees
comprised of members of the insurance industry to make recommendations
concerning this matter.
The 1994 Reform Act also directs the FCIC to establish adequate premiums for
all MPCI coverages at such rates as the FCIC determines are actuarially
sufficient to attain a targeted loss ratio. Since 1980, the average MPCI loss
ratio has exceeded this target ratio. There can be no assurance that the FCIC
will not increase rates to farmers in order to achieve the targeted loss ratio
in a manner that could adversely affect participation by farmers in the MPCI
program above the CAT Coverage level.
The 1996 Reform Act, signed into law by President Clinton in April, 1996,
provides that, MPCI coverage is not required for federal farm program benefits
if producers sign a written waiver that waives eligibility for emergency crop
loss assistance. The 1996 Reform Act also provides that, effective for the
1997 crop year, the Secretary of Agriculture may continue to offer CAT Coverage
through USDA offices if the Secretary of Agriculture determines that the number
of approved insurance providers operating in a state is insufficient to
adequately provide catastrophic risk protection coverage to producers. There
can be no assurance as to the ultimate effect which the 1996 Reform Act may
have on the business or operations of the Company.
Total MPCI Premium for each farmer depends upon the kinds of crops grown,
acreage planted and other factors determined by the FCIC. Each year, the FCIC
sets, by crop, the maximum per unit commodity price ("Price Election") to be
used in computing MPCI Premiums. Any reduction of the Price Election by the
FCIC will reduce the MPCI Premium charged per policy, and accordingly will
adversely impact MPCI Premium volume.
The Company's crop insurance business is also affected by market conditions in
the agricultural industry which vary depending on such factors as federal
legislation and administration policies, foreign country policies relating to
agricultural products and producers, demand for agricultural products, weather,
natural disasters, technologic advances in agricultural practices, inter-
national agricultural markets and general economic conditions both in the
United States and abroad. For example, the number of MPCI Buy-up Coverage
policies written has historically tended to increase after a year in which a
major natural disaster adversely affecting crops occurs, and to decrease
following a year in which favorable weather conditions prevail.
Highly Competitive Businesses
Both the nonstandard automobile insurance and crop insurance businesses are
highly competitive. Many of the Company's competitors in both the nonstandard
automobile insurance and crop insurance business segments have substantially
greater financial and other resources than the Company, and there can be no
assurance that the Company will be able to compete effectively against such
competitors in the future.
In its nonstandard automobile business, the Company competes with both large
national writers and smaller regional companies. The Company's competitors
include other companies which, like the Company, serve the independent agency
market, as well as companies which sell insurance directly to customers.
Direct writers may have certain competitive advantages over agency writers,
including increased name recognition, loyalty of the customer base to the
insurer rather than an independent agency and, potentially, reduced acquisition
costs. In addition, certain competitors of the Company have from time to time
decreased their prices in an apparent attempt to gain market share. Also, in
certain states, state assigned risk plans may provide nonstandard automobile
insurance products at a lower price than private insurers.
In the crop insurance business, the Company competes against other crop
insurance companies and, with respect to CAT Coverage, USDA field service
offices in certain areas. In addition the crop insurance industry has become
increasingly consolidated. From the 1985 crop year to the 1996 crop year, the
number of insurance companies that have entered into agreements with the FCIC
to sell and service MPCI policies has declined from 50 to 16. The Company
believes that to compete successfully in the crop insurance business it will
have to market and service a volume of premiums sufficiently large to enable
the Company to continue to realize operating efficiencies in conducting its
business. No assurance can be given that the Company will be able to compete
successfully if this market consolidates further.
Nature of Nonstandard Automobile Insurance Business
The nonstandard automobile insurance business is affected by many factors
which can cause fluctuations in the results of operations of this business.
Many of these facts are not subject to the control of the Company. The size
of the nonstandard market can be significantly affected by, among other
factors, the underwriting capacity and underwriting criteria of standard
automobile insurance carriers. In addition, an economic downturn in the states
in which the Company writes business could result in fewer new car sales and
less demand for automobile insurance. Severe weather conditions could also
adversely affect the Company's business through higher losses and LAE. These
factors, together with competitive pricing and other considerations, could
result in fluctuations in the Company's underwriting results and net income.
Nature of Crop Insurance Business
The Company's operating results from its crop insurance program can vary sub-
stantially from period to period as a result of various factors, including
timing and severity of losses from storms, droughts, floods, freezes and other
natural periods and crop production cycles. Therefore, the results for any
quarter or year are not necessarily indicative of results for any future
period. The underwriting results of the crop insruance business are
recognized throughout the year with a reconciliation for the current crop year
in the fourth quarter.
The Company expects that for the foreseeable future a majority of its crop
insurance business will continue to be derived from MPCI business. The MPCI
program is federally regulated and supported by the federal government by
means of premium subsidies to farmers, expense reimbursement and federal
reinsurance pools for private insurers. As such, legislative or other changes
affecting the MPCI program could impact the Company's business prospects. The
MPCI program has historically been subject to modification at least annually
since its establishment in 1980, and some of these modifications have been
significant. No assurance can be given that future changes will not
significantly affect the MPCI program and the Company's crop insurance
business.
The Company's crop insruance business is also affected by market conditions
in the agricultural industry which vary depending on such factors as federal
legislation and administration policies, foreign country policies relating
to agricultural products and producers, demand for agricultural products,
weather, natural disasters, technological advances in agricultural practices,
international agricultural markets and general economic conditions both in
the United States and abroad. For example, the number of MPCI Buy-up
Coverage policies written has historically tended to increase after a year in
which a major natural disaster adversely affecting crops occurs, and to
decrease following a year in which favorable weather conditions prevail.
For further information about the Company's MPCI business, see "Business-
Crop Insurance-Products".
Importance of Ratings
A.M. Best has currently assigned Superior a B+ (Very Good) rating and Pafco a
B- (Adequate) rating. Subsequent to the Acquisition, the rating of Superior
was reduced from A- to B+ as a result of the leverage of GGS Holdings resulting
from indebtedness in connection with the Acquisition. A "B+" and a "B-" rating
are A.M. Best's sixth and eighth highest rating classifications, respectively,
out of 15 ratings. A "B+" rating is awarded to insurers which, in A.M. Best's
opinion, "have demonstrated very good overall performance when compared to the
standards established by the A.M. Best Company" and "have a good ability to
meet their obligations to policyholders over long period of time". A "B-"
rating is awarded to insurers which, in A.M. Best's opinion, "have demonstrated
adequate overall performance when compared to the standards established by the
A.M. Best Company" and "generally have an adequate ability to meet their obli-
gations to policyholders, but their financial strength is vulnerable to
unfavorable changes in underwriting or economic conditions." IGF recently
received an "NA-2" rating (a "rating not assigned" category for companies that
do not meet A.M. Best's minimum size requirement) from A.M. Best. IGF intends
to seek a revised rating after the infusion of capital from the proceeds of the
Offering, although there can be no assurance that a revised rating will be
obtained or as to the level of any such rating. A.M. Best bases its ratings
on factors that concern policyholders and agents and not upon factors
concerning investor protection. Such ratings are subject to change and are
not recommendations to buy, sell or hold securities. One factor in an
insurer's ability to compete effectively is its A.M. Best rating. The A.M.
Best ratings for the Company's rated Insurers are lower than for many of the
Company's competitors. There can be no assurance that such ratings or
future changes therein will not affect the Company's competitive position.
Geographic Concentration
The Company's nonstandard automobile insurance business is concentrated in the
states of Florida, California, Indiana, Missouri and Virginia; consequently the
Company will be significantly affected by changes in the regulatory and
business climate in those states. The Company's crop insurance business is
concentrated in the states of Iowa, Texas, Illinois, Kansas and Minnesota
and the Company will be significantly affected by weather conditions, natural
perils and other factors affecting the crop insurance business in those states.
Future Growth and Continued Operations Dependent on Access to Capital
Property and casualty insurance is a capital intensive business. The Company
must maintain minimum levels of surplus in the Insurers in order to continue to
write business, meet the other related standards established by insurance
regulatory authorities and insurance rating bureaus and satisfy financial ratio
covenants in loan agreements.
Historically, the Company has achieved premium growth as a result of both
acquisitions and internal growth. It intends to continue to pursue acquisition
and new internal growth opportunities. Among the factors which may restrict
the Company's future growth is the availability of capital. Such capital will
likely have to be obtained through debt or equity financing or retained
earnings. There can be no assurance that the Company's insurance subsidiaries
will have access to sufficient capital to support future growth and also
satisfy the capital requirements of rating agencies, regulators and creditors.
In addition, the Company will require additional capital to finance future
acquisitions. If the Company's representatives on the Board of Directors of
GGS Holdings cause GGS Holdings to decline acquisition opportunities because
the Company is unable to raise sufficient capital to fund its pro-rata share
of the purchase price, the GS Funds may be able to force a sale of GGS
Holdings. The ability of each of the Company and GGS Holdings to raise
capital through an issuance of voting securities may be affected by conflicts
of interest between each of them and their respective control persons and
other affiliates.
Uncertainty Associated with Estimating Reserves for Unpaid Losses and LAE
The reserves for unpaid losses and LAE established by the Company are estimates
of amounts needed to pay reported and unreported claims and related LAE based
on facts and circumstances then known. These reserves are based on estimates
of trends in claims severing judicial theories of liability and other factors.
Although the nature of the Company's insurance business is primarily short-
tail, the establishment of adequate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's reserves for losses and LAE and have a material
adverse effect on the Company's results of operations and financial condition.
Due to the inherent uncertainty of estimating these amounts, it has been
necessary, and may over time continue to be necessary, to revise estimates of
the Company's reserves for losses and LAE. The historic development of
reserves for losses and LAE may not necessarily reflect future trends in the
development of these amounts. Accordingly, it may not be appropriate to
extrapolate redundancies or deficiencies based on historical information.
Reliance Upon Reinsurance
In order to reduce risk and to increase its underwriting capacity, the Company
purchases reinsurance. Reinsurance does not relieve the Company of liability
to its insureds for the risks ceded to reinsurers. As such, the Company is
subject to credit risk with respect to the risks ceded to reinsurers. Although
the Company places its reinsurance with reinsurers, including the FCIC, which
the Company generally believes to be financially stable, a significant
reinsurer's insolvency or inability to make payments under the terms of a
reinsurance treaty could have a material adverse effect on the Company's
financial condition or results of operations.
The amount and cost of reinsurance available to companies specializing in
property and casualty insurance are subject, in large part, to prevailing
market conditions beyond the control of such companies. The Company's ability
to provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.
Due to continuing market uncertainties regarding reinsurance capacity, no
assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration and is
unwilling to bear the associated increase in net exposures, the Company may
need to reduce the levels of its underwriting commitments.
Risks Associated with Investments
The Company's results of operations depend in part on the performance of its
invested assets. Certain risks are inherent in connection with fixed maturity
securities including loss upon default and price volatility in reaction to
changes in interest rates and general market factors. Equity securities
involve risks arising from the financial performance of, or other developments
affecting, particular issuers as well as price volatility arising from general
stock market conditions.
Comprehensive State Regulation
The Company's insurance subsidiaries are subject to comprehensive regulation
by government agencies in the states in which they operate. The nature and
extent of that regulation vary from jurisdiction to jurisdiction but
typically involve prior approval of the acquisition of control of an
insurance company or of any company controlling an insurance company,
regulation of certain transactions entered into by an insurance company with
any of its affiliates, limitations on dividends, approval or filing of
premium rates and policy forms for many lines of insurance, solvency
standards, minimum amounts of capital and surplus which must be maintained,
limitations on types and amounts of investments, restrictions on the size of
risks which may be insured by a single company, limitation of the right to
cancel or non-renew policies in some lines, regulation of the right to
withdraw from markets or agencies, requirements to participate in residual
markets, licensing of insurers and agents, deposits of securities for the
benefit of policyholders, reporting with respect to financial condition, and
other matters. In addition, state insurance department examiners perform
periodic financial and market conduct examinations of insurance companies.
Such regulation is generally intended for the protection of policyholders
rather than security holders. No assurance can be given that future legis-
lative or regulatory changes will not adversely affect the Company.
Holding Company Structure; Dividend And Other Restrictions; Management Fees
Holding Company Structure. The Company is a holding company whose principal
asset is the capital stock of the subsidiaries. The Company relies primarily
on dividends and other payments from its subsidiaries, including its insurance
subsidiaries to meet its obligations to creditors and to pay corporate
expenses. The Insurers are domiciled in the states of Indiana and Florida and
each of these states limits the payment of dividends and other distributions
by insurance companies. In addition, a significant portion of the invested
assets of the reinsurance company domiciled in Barbados are held in trust
accounts to secure its obligations to the cedents.
Dividend and Other Restrictions. Indiana law defines as "extraordinary" any
dividend or distribution which, together with all other dividends and
distributions to shareholders within the preceding twelve months, exceeds the
greater of: (i) 10% of statutory surplus as regards policyholders as of the end
of the preceding year, or (ii) the prior year's net income. Dividends which
are not "extraordinary" may be paid ten days after the Indiana Department of
Insurance ("Indiana Department") receives notice of their declaration.
"Extraordinary" dividends and distributions may not be paid without the prior
approval of the Indiana Commissioner or until the Indiana Commissioner has
been given thirty days' prior notice and has not disapproved within that
period. The Indiana Department must receive notice of all dividends,
whether "extraordinary" or not, within five business days after they are
declared. Notwithstanding the foregoing limit, a domestic insurer may not
declare or pay a dividend from any source of funds other than "Earned
Surplus" without the prior approval of the Indiana Department. "Earned
Surplus" is defined as the amount of unassigned funds set forth in the
insurer's most recent annual statement, less surplus attributable to unrealized
capital gain or re-evaluation of assets. Further, no Indiana domiciled insurer
may make payments in the form of dividends or otherwise to its shareholders
unless it possesses assets in the amount of such payments in excess of the sum
of its liabilities and the aggregate amount of the par value of all shares of
capital stock; provided, that in no instance shall such dividend reduce the
total of (i) gross paid-in and contributed surplus, plus (ii) special surplus
funds, plus (iii) unassigned funds, minus (iv) treasury stock at cost, below an
amount equal to 50% of the aggregate amount of the par value of all shares of
the insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or distribute
cash or other property to its stockholders except out of that part of its
available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may make dividend payments or distributions to stockholders
without prior approval of the Florida Department of Insurance ("Florida
Department") if the dividend or distribution does not exceed the larger of: (i)
the lesser of (a) 10% of surplus or (b) net investment income, not including
realized capital gains, plus a 2-year carryforward, (ii) 10% of surplus with
dividends payable constrained to unassigned funds minus 25% of unrealized
capital gains, or (iii) the lesser of (a) 10% of surplus or (b) net investment
income plus a 3-year carryforward with dividends payable constrained to
unassigned funds minus 25% of unrealized capital gains. Alternatively, a
Florida domestic insurer may pay a dividend or distribution without the prior
written approval of the Florida Department if (1) the dividend is equal to or
less than the greater of (i) 10% of the insurer's surplus as regards policy-
holders derived from net operating profits on its business and net realized
capital gains, or (ii) the insurer's entire net operating profits (including
unrealized gains or losses) and realized net capital gains derived during the
immediately preceding calendar year; (2) the insurer will have policyholder
surplus equal to or exceeding 115% of the minimum required statutory surplus
after the dividend or distribution; (3) the insurer files a notice of the
dividend or distribution with the Florida Department at least ten business
days prior to the dividend payment or distribution; and (4) the notice
includes a certification by an officer of the insurer attesting that, after the
payment of the dividend or distribution, the insurer will have at least 115% of
required statutory surplus as to policyholders. Except as provided above, a
Florida domiciled insurer may only pay a dividend or make a distribution (i)
subject to prior approval by the Florida Department, or (ii) thirty days after
the Florida Department has received notice of such dividend or distribution and
has not disapproved it within such time. In the consent order approving the
Acquisition (the "Consent Order"), the Florida Department has prohibited
Superior from paying any dividends (whether extraordinary or not) for four
years without the prior written approval of the Florida Department.
Although the Company believes that funds required for it to meet its financial
and operating obligations will be available, there can be no assurance in this
regard. Further, there can be no assurance that, if requested, the Indiana
Department will approve any request for extraordinary dividends from Pafco or
IGF or that the Florida Department will allow any dividends to be paid by
Superior during the four year period described above.
Payment of dividends by IGF requires prior approval by the lender under the
credit agreement to which IGF is a party. There can be no assurance that IGF
will be able to obtain this consent. The Company is in the process of seeking
regulatory approval for a new arrangement whereby underwriting, marketing and
administrative functions of IGF will be assumed by, and employees will be
transferred to, IGF Holdings. As a result of this restructuring, management
fees would be paid by IGF to IGF Holdings, thereby providing an additional
source of liquidity for the Company to the extent these payments exceed the
operating and other expenses of IGF Holdings. There can be no assurance that
this regulatory approval will be obtained.
The maximum dividends permitted by state law are not necessarily indicative of
an insurer's actual ability to pay dividends or other distributions to a parent
company, which also may be constrained by business and regulatory consid-
erations, such as the impact of dividends on surplus, which could affect an
insurer's competitive position, the amount of premiums that can be written and
the ability to pay future dividends. Further, state insurance laws and regu-
lations require that the statutory surplus of an insurance company following
any dividend or distribution by such company be reasonable in relation to its
outstanding liabilities and adequate for its financial needs.
Management Fees. The management agreement originally entered into between the
Company and Pafco was assigned as of April 30, 1996 by the Company to GGS
Management, a wholly-owned subsidiary of GGS Holdings. This agreement provides
for an annual management fee equal to 15% of gross premiums written. A similar
management agreement with a management fee of 17% of gross premiums written has
been entered into between GGS Management and Superior. Employees of the
Company relating to the nonstandard automobile insurance business and all
Superior employees became employees of GGS Management effective April 30, 1996.
As part of the approval of the transaction relating to the formation of GGS
Holdings, the Indiana Department has required Pafco to resubmit its management
agreement for review by the Indiana Department no later than May 1, 1997 (the
first anniversary of the Formation Transaction), together with supporting
evidence that management fees charged to Pafco are fair and reasonable in
comparison to fees charged between unrelated parties for similar services.
In the Consent Order approving the Acquisition, the Florida Department has
reserved, for a period of three years, the right to re-evaluate the reason-
ableness of fees provided for in the Superior management agreement at the end
of each calendar year and to require Superior to make adjustments in the
management fees based on the Florida Department's consideration of the
performance and operating percentages of Superior and other pertinent data.
There can be no assurance that either the Indiana Department or the Florida
Department will not in the future require a reduction in these management
fees.
Furthermore, as a result of certain restrictive covenants with respect to
dividends and other payments contained in the GGS Senior Credit Facility, GGS
Holdings and its subsidiaries, Pafco and Superior, are not expected to
constitute a significant source of funds for the Company. In addition, since
the GS Funds own 48% of the outstanding capital stock of GGS Holdings, the
Company would only be entitled to receive 52% of any dividend or distribution
paid by GGS Holdings to its stockholders.
Certain Rights of the GS Funds to Cause A Sale of GGS Holdings
The Stockholder Agreement establishes certain rights of the GS Funds to cause a
sale of GGS Holdings upon the occurrence of certain triggering events,
including (i) the failure to consummate a registered initial public offering of
GGS Holdings stock representing, on a fully diluted basis, at least 20% of all
such stock issued and outstanding, and generating at least $25 million in net
proceeds to the sellers of such securities, by April 30, 2001, (ii) the third
separate occasion, during the term of the Stockholder Agreement on which an
equity financing or acquisition transaction proposed by the GS Funds is
rejected by the GGS Holdings Board of Directors, (iii) the loss of voting
control of Goran or SIG (defined, with respect to Goran as being direct
or indirect ownership of more than 40% of the outstanding voting stock of Goran
if any other holder or group holds in excess of 10% of the outstanding voting
stock of Goran and otherwise 25% thereof, and defined, with respect to SIG,
as requiring both (a) direct ownership by Goran in excess of 50% of SIG's
voting stock, and (b) retention by Alan G. Symons and his family members of
voting control of Goran by Alan G. Symons or his family members or affiliates,
or (iv) the cessation of Alan G. Symons' employment as CEO of GGS Holdings
for any reason. As a result of the considerations arising under the
Investment Company Act of 1940 (the "1940 Act"), with respect to GGS
Holdings, any public offering by GGS Holdings would probably be required to
consist solely of a secondary offering of shares held by stockholders.
Upon the occurrence of any of such events, and at any time or from time to time
thereafter, GS Funds may, by notifying SIG in writing, initiate the
process of seeking to effect a sale of GGS Holdings on terms and conditions
which are acceptable to GS Funds. However, within thirty days after SIG
receives notice of GS Funds' intention to initiate the sale of GGS Holdings,
SIG may provide written notice to the GS Funds that it wishes to acquire or
combine with GGS Holdings. SIG's notice to GS Funds must include the proposed
purchase price and other material terms and conditions with such specificity
as is necessary to permit GS Funds to evaluate SIG's offer. If, within ninety
days of delivery of the notice by SIG, GS Funds accept SIG's offer, SIG will
be obligated to acquire or combine with GGS Holdings. In the event GS Funds
rejects SIG's proposal, (i) any sale to a third party effected within 180 days
after receipt of such proposal must not contain terms that are in the aggregate
less favorable to the GGS Holdings stockholders than those set forth in SIG's
proposal, (ii) any sale must provide for the same consideration to be
paid to each stockholder, and (iii) no sale may constitute an acquisition by or
a combination with an affiliate of GS Funds. Accordingly, under certain
circumstances, GS Funds may have the ability to force SIG to divest itself
of its nonstandard automobile operations. Further, a forced sale of GGS
Holdings may also cause SIG to be characterized as an investment company
within the meaning of the 1940 Act unless the proceeds are redeployed into
other business operations or another exemption from registration under the
1940 Act is available.
ITEM 2 - PROPERTIES
The headquarters for the Company, SIG, GGS Holdings and Pafco are located at
4720 Kingsway Drive, Indianapolis, Indiana. The building is an 80,000 square
foot multilevel structure approximately 50% of which is utilized by Pafco. The
remaining space is leased to third parties at a price of approximately $10 per
square foot.
Pafco also owns an investment property located at 2105 North Meridian,
Indianapolis, Indiana. The property is a 21,700 square foot, multilevel
building leased out entirely to third parties.
Superior's operations are conducted at leased facilities located in Atlanta,
Georgia, Tampa, Florida and Orange, California. Under a lease term which
extends through February, 1998, Superior leases office space at 280 Interstate
North Circle, N.W., Suite 500 Atlanta, Georgia. Superior occupies 43,448
square feet at this location and subleases an additional 3,303 square feet
to third party tenants. Superior also has an office located at 3030 W. Rocky
Point Drive, Suite 770, Tampa, Florida consisting of 18,477 square feet of
space leased for a term extending through February 2000. In addition, Superior
occupies an office at 1745 West Orangewood, Orange, California consisting of
3,264 square fee under a lease extending through May 1997.
IGF owns a 17,500 square foot office building located at 2882 106th Street,
des Moines, Iowa which serves as its corporate headquarters. The building is
fully occupied by IGF. IGF also owns certain improved commercial property
which is adjacent to its corporate headquarters.
IGF has entered into a purchase agreement to acquire an office building in Des
Moines, Iowa, to be used as its crop insurance division home office. The
purchase price was $2.6 million, of which $2.4 million was escrowed on February
1, 1997. The terms include a floating closing date whereby the transaction
will close on the earlier of February 1, 1998 or thirty days after the closing
of the sale of the Company's currently occupied home office building, also
located in Des Moines. The purchase of the new building is not contingent on
the sale of the current building.
ITEM 3 - LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation arising in the
ordinary course of business. The Company believes that the ultimate resolution
of these lawsuits will not have a material adverse effect on its financial
condition or results of operations. The Company, through its claims reserves,
reserves for both the amount of estimated damages attributable to these
lawsuits and the estimated costs of litigation.
IGF is the administrator of a run-off book of business. The FCIC has requested
that IGF take responsibility for the claims liabilities of these policies under
its administration. IGF has requested reimbursement of certain expenses from
the FCIC with respect to this run-off activity. IGF instituted litigation
against the FCIC on March 23, 1995 in the United States District Court for the
Southern District of Iowa seeking $4.3 million as reimbursement for these
expenses. The FCIC has counterclaimed for approximately $1.2 million in claims
payments for which FCIC contends IGF is responsible as successor to the run-off
book of business. While the outcome of this lawsuit cannot be predicted with
certainty, the Company believes that the final resolution of this lawsuit will
not have a material adverse effect on the financial condition of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during 1996 to a vote of security holders of the
Registrant, through the solicitation of proxies or otherwise.
SEPARATE ITEM, EXECUTIVE OFFICERS OF THE REGISTRANT
Presented below is certain information regarding the executive officers of the
Company who are not also directors. Their respective ages and their respective
positions with the Company are listed as follows:
Name Age Position
David L. Bates 37 Vice President, General Counsel
and Secretary of the Company
Gary P. Hutchcraft 35 Vice President, Chief Financial
Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel and
Secretary of SIG since November, 1995 after having been named Vice President
and General Counsel of the Company in April, 1995. Mr. Bates served as a
member of the Fort Howard Corporation Legal Department from September, 1988
through March, 1995. Prior to that time, Mr. Bates served as a Tax Manager
with Deloitte & Touche.
Mr. Hutchcraft, C.P.A., has served as Vice President,Chief Financial Officer
and Treasurer of SIG and the Company since July, 1996. Prior to that time, Mr.
Hutchcraft served as an Assurance Manager with KPMG Peat Marwick, LLP from
July, 1988 to July, 1996.
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information regarding the trading market for the Company's Common Shares, the
range of selling prices for each quarterly period for the years ended December
31, 1996 and 1995 with respect to the Common Shares and the approximate number
of holders of Common Shares as of December 31, 1996 the Common Shares and other
matters is included under the caption Market Information on Page 35 of the
1996 Annual Report, included as Exhibit 13, which information is incorporated
herein by reference.
The Company currently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will depend,
among other things, upon earnings, capital requirements, any financing
agreement covenants and the financial condition of the Company. In addition,
regulatory restrictions and provisions of the GGS Senior Credit Facility limit
distributions to shareholders.
ITEM 6 - SELECTED FINANCIAL DATA
Selected Financial Data of the Company follows:
GORAN CAPITAL INC.
Selected Financial Data
As of the Year Ended December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994 1993 1992
Gross Premium Revenue $307,634 $151,717 $126,978 $114,135 $128,440
Reported Net Earnings 31,296 7,171 3,940 1,397 4,413
US/Canada GAAP
Differences:
Discounting on
Outstanding Claims 62 (161) 88 49 143
Deferred Income Taxes (64) (344) 1,180 562 0
Revised Net Earnings 31,294 6,666 5,208 2,008 4,556
Earnings Per Share $ 5.47 $ 1.20 $ 0.96 $ 0.38 $ 0.94
EPS-Before
Extraordinary Item $ 5.47 $ 1.20 $ 0.96 $ 0.38 $ 0.94
EPS-Fully Diluted $ 5.47 $ 1.20 $ 0.96 $ 0.38 $ 0.94
Dividends Per Share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Reported Total Assets 381,342 160,816 115,240 128,690 96,573
US/Canada GAAP
Differences:
Loans to Purchase
Shares (595) (563) (593) (741) (774)
Deferred Income
Taxes 1,357 1,466 1,742 548 0
Outstanding Claims
Ceded 0 0 0 0 0
Unearned Premiums
Ceded 0 0 0 0 0
Unrealized gain (loss)
on Investments 1,225 (221) (1,383) 0 0
Revised Total Assets 383,329 161,498 115,006 128,497 95,799
Long Term Bonds and
Debentures 0 9,237 10,787 12,936 14,633
Reported Shareholders'
Equity 47,258 12,622 5,067 1,088 (739)
US/Canada GAAP
Differences:
Deferred Income
Taxes 1,357 1,466 1,742 548 0
Discounting on
claims (1,261) (1,327) (1,134) (1,292) (1,396)
Loans to Purchase
Shares (595) (563) (593) (741) (774)
Unrealized Gain (Loss)
on Investments 1,225 (221) (1,383) 0 0
Revised Shareholders'
Equity 47,984 11,977 3,699 (397) (2,909)
Shares Outstanding 5,724,476 5,567,644 5,399,463 5,242,101 4,834,160
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF 0PERATIONS
The discussion entitled "Management Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report on
pages 5 through 13, included as Exhibit 13 is incorporated herein
by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included in the 1996 Annual Report,
included as Exhibit 13, and listed in Item 14 of this Report are
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding Directors of the Company is
incorporated herein by reference to the Company's definitive proxy statement
for its 1996 annual meeting of common stockholders filed with the Commission
pursuant to Regulation 14A (the "1996 Proxy Statement").
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the Company's 1996 Proxy Statement.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The documents listed below are filed as a part of this Report except as
otherwise indicated:
1. Financial Statements. The following described consolidated financial
statements found on the pages of the 1996 Annual Report indicated below are
incorporated into Item 8 of this Report by reference.
Description of Financial Statement Item
Report of Indpendent Accountants
Consolidated Balance Sheets, December 31,
1996 and 1995
Consolidated Statements of Earnings, Years
Ended December 31, 1996 and 1995
Consolidated Statements of Retained Earnings
(Deficit), Years Ended December 31,
1996 and 1995
Consolidated Statements of Cash Resources,
Years Ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements,
Years Ended December 31, 1996 and 1995
2. Financial Statement Schedules.
The following financial statement schedules are included herein.
Description of Financial Statement Item
Report of Independent Account On Differences
Between Canadian and United States Generally
Accepted Accounting Principles and
Supplementary Schedules
Differences Between Canadian And United States
Generally Accepted Accounting Principles
Exhibit 1 - Consolidated Statement of Changes
In Cash Resources
Exhibit 2 - Summary of Investments That Exceed
10% Of Shareholders' Equity
Exhibit 3 - Summary of Non Income Producing
Investments
Exhibit 4 - Amounts Due From Insurance Companies
In Excess of 10% of Shareholders' Equity
Exhibit 5 - Analysis Of Changes In Shareholders'
Equity
Schedule I - Summary Of Investments Other Than
Investments In Related Parties
Schedule II - Condensed Financial Information
Of Registrant
Schedule IV - Reinsurance
Schedule V - Valuation And Qualifying Accounts
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations
Schedules other than those listed above have been omitted because the required
information is contained in the financial statements and notes thereto or
because such schedules are not required or applicable.
3. Exhibits. The Exhibits set forth on the Index to Exhibits are
incorporated herein by reference.
4. Reports on Form 8-K. Registrant filed no reports on Form 8-K during the
quarter ended December 31, 1996.
<PAGE>
GORAN CAPITAL INC.
Differences Between Canadian And United States General Accepted Accounting
Principles
For The Years Ended December 31, 1996, 1995 and 1994
A reconciliation of financial statement amounts from Canadian Generally
Accepted Accounting Principles to U.S. Generally Accepted Accounting
Principles is as follows:
1996 1995 1994
Net Earnings In Accordance
With Canadian Generally
Accepted Accounting Principles $31,296 $7,171 $3,940
Add Effect Of Difference In
Accounting For:
Deferred Income Taxes
(See Note (e)) (64) (344) 1,180
Outstanding Claims
(See Note (f)) 62 (161) 88
Net Earnings In Accordance
With United States Generally
Accepted Accounting Principles $31,294 $6,666 $5,208
Applying United States Generally Accepted Accounting Principles, deferred
income tax assets would be increased by $1,357, $1,466 and $1,742, outstanding
claims would be increased by $1,261, $1,327 and $1,134 and cumulative trans-
lation adjustment would be increased by $41, $36, and $14, as at December 31,
1996, 1995 and 1994, respectively. As a result of these adjustments, retained
earnings would be increased by $96, $139 and $608 as at December 31, 1996, 1995
and 1994, respectively. The effect of the above noted differences on other
individual balance sheet items and on working capital is not significant.
B. Earnings Per Share
Earnings per share, as determined in accordance with United States Generally
Accepted Accounting Principles, are set out below. Primary earnings per share
are computed based on the weighted average number of common shares outstanding
during the year plus common share equivalents consisting of stock options and
warrants. Primary and fully diluted earnings per share are calculated using
the Treasury Stock method and assume conversion of securities when the result
is dilutive.
The following average number of shares were used for the compilation of primary
and fully diluted earnings per share:
1996 1995 1994
Primary $5,724,476 $5,567,644 $5,399,463
Fully Diluted 5,724,476 5,567,644 5,399,463
Earnings per share, as determined in accordance with U.S. Generally
Accepted Accounting Principles, are as follows:
1996 1995 1994
Primary Earnings Per Share $5.47 $1.20 $0.96
Fully Diluted Earnings Per Share 5.47 1.20 0.96
C. Statement Of Changes In Cash Resources
U.S. Generally Accepted Accounting Principles require that the
components of the changes in cash resources, in most cases, be reported on a
gross basis.
Exhibit 1 is a Statement of Cash Resources that incorporates the necessary
added disclosure detail.
D. Supplemental Cash Flow Information
Cash paid for interest and income taxes is summarized as follows:
1996 1995 1994
Cash Paid For Interest $4,005 $1,548 $1,773
Cash Paid For Income Taxes,
Net of Refunds 9,825 1,953 166
E. Income Taxes
The difference in accounting for deferred income taxes reflects the adoption
for U.S. Generally Accepted Accounting Principles, effective January
1, 1993, of Statement of Financial Accounting Standards No. 109 ("SFAS" No.
109"), "Accounting for Income Taxes". This standard requires an asset and
liability approach that takes into account changes in tax rates when valuing
the deferred tax amounts to be reported in the balance sheet.
Deferred tax assets recognized under Canadian Generally Accepted Accounting
Principles and Accounting Principles Board Opinion No. 11, which require
realization beyond a reasonable doubt in order to record the assets, amounted
to $NIL, $73 and $214 at December 31, 1996, 1995 and 1994, respectively, and
pertained to Canadian operations only.
The adoption of SFAS No. 109 results in additional deferred tax assets
recognized for deductible temporary differences and loss carry-forwards in the
amount of $3,531, $2,581 and $2,375 net of valuation allowances of NIL, $69
and $260 and deferred tax liabilities recognized for taxable temporary
differences in the amount of $2,174, $1,114 and $633 at December 31, 1996,
1995 and 1994, respectively.
F. Outstanding Claims
The difference in accounting for outstanding claims reflects the application
for U.S. Generally Accepted Accounting Principles of SEC Staff
Accounting Bulletin No. 62, "Discounting By Property/Casualty Insurance
Companies". This standard does not allow discounting of unpaid claim lia-
bilities by public companies, except in specific circumstances that are not
applicable to the Company.
G. Receivables From Sale Of Capital Stock
The SEC Staff Accounting Bulletins require that accounts or notes receivable
arising from transactions involving capital stock should be presented as
deductions from shareholders' equity and not as assets. According, in order to
comply with U.S. Generally Accepted Accounting Principles, shareholders'
equity would be reduced by $595, $563 and $593 at December 31, 1996, 1995 and
1994, respectively, to reflect the loans due from certain shareholders which
relate to the purchase of common shares of the Company.
H. Concentration Of Investments
U.S. Generally Accepted Accounting Principles require that disclosure
be made of significant concentrations of investments and of investments that
are non-income producing. The Company considers investments whose value
exceeds 10% of shareholders' equity to be significant. The relevant dis-
closures are provides in Exhibits 2 and 3, respectively.
I. Concentrations of Credit Risk
U.S. Generally Accepted Accounting Principles require disclosure of
significant concentrations of credit risk. The Company's credit risk is with
respect to amounts receivable from other insurance companies. The Company
considers credit risks in excess of 10% of shareholders' equity to be
significant. The relevant disclosure is provided in Exhibit 4.
J. Unrealized Loss On Investments
U.S. Generally Accepted Accounting Principles require that unrealized
losses on investment portfolios be included as a component in determining
shareholders' equity. In addition, SFAS No. 115 permits prospective
recognition of unrealized gains on investment portfolios for year-ends
commencing after December 15, 1993. As a result, shareholders' equity would
be increased by $1,225 as at December 31, 1996 and reduced by $221 and $1,383
as at December 31, 1995 and 1994, respectively.
K. Changes In Shareholders' Equity
An analysis of the components of the change in shareholders' equity, determined
in accordance with Canadian Generally Accepted Accounting Principles, is
provided in Exhibit 5.
A reconciliation of shareholders' equity from Canadian Generally Accepted
Accounting Principles to U.S. Generally Accepted Accounting Principles
is as follows:
1996 1995 1994
Shareholders' Equity In Accordance
With Canadian Generally
Accepted Accounting Principles $47,258 $12,622 $ 5,067
Add (deduct) Effect Of Difference
In Accounting For:
Deferred Income Taxes (See
Note (a)) 1,357 1,466 1,742
Outstanding Claims (See
Note (a)) (1,261) (1,327) (1,134)
Receivables From Sale Of
Capital Stock (See Note (g)) (595) (563) (593)
Unrealized Gain (Loss) On
Investments (See Note (j)) 1,225 (221) (1,383)
Shareholders' Equity (Deficiency)
In Accordance With U.S.
Generally Accepted
Accounting Principles $47,984 $11,977 $ 3,699
<PAGE>
GORAN CAPITAL INC.
Consolidated Statement of Changes
In Cash Resources
For the Year Ended December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994
Cash Provided By Operating
Activities:
Net income for the period $ 31,296 $7,171 $3,941
Items Not Affecting Cash
Resources:
Amortization 2,438 693 566
Minority Interest In Net
Income Of Consolidated
Subsidiary 2,801 (16) 16
Loss (gain) On Sale Of
Investments 637 198 (358)
Loss (gain) On Sale Of Capital
Assets (4) (7) (1)
Increase in Unearned Premiums 13,178 9,247 (7,037)
Increase (Decrease) In
Outstanding Losses (4,545) 29,289 (18,341)
Decrease (Increase) In Deferred
Policy Acquisition Costs 1,649 (3,058) (864)
Decrease In Deferred Income
Taxes 73 147 214
Decrease In Goodwill 0 0 0
Decrease (Increase) in
Reinsurance Recoverable on
outstanding claims 8,464 (25,930) 22,259
Decrease (Increase) in prepaid
reinsurance premiums (8,785) 916 (3,548)
Decrease (Increase) In Other
Assets (2,433) (470) 78
Items Not Involving Cash 13,473 11,009 7,058
Increase (Decrease) In Accounts
Payable 5,576 (2,291) 1,352
Decrease (Increase) In Accounts
Receivable (19,448) (6,252) (13,775)
Changes In Operating Working
Capital (13,872) (8,543) (12,423)
30,897 9,637 (1,424)
Financing Activities:
Issue Of Share Capital 599 303 34
Reduction Of Subordinated
Debenture (11,085) (1,462) (1,047)
Increase (Decrease) Of
Borrowed Funds 42,189 220 722
Increase (Decrease) in
Contributed Surplus 2,775 0 0
Increase (Decrease) in
Minority Interest 38,225 0 0
Investing Activities:
Net (Purchase) Sale Of
Marketable Securities (11,996) (4,147) 2,118
Acquisition of subsidiary (66,590) 0 0
Proceeds On Sale Of Capital
Assets 14 11 5
Net Purchase Of Capital Assets (2,473) (1,692) (634)
Other 563 155 (401)
Change In Cash Resources
During The Year 23,118 3,025 (627)
Cash Resources, Beginning Of Year 10,613 7,588 8,215
Cash Resources, End Of Year 33,731 10,613 7,588
Cash Resources Are Comprised Of:
Cash 4,679 4,171 (116)
Short-Term Investments 29,052 6,442 7,704
33,731 10,613 7,588
<PAGE>
GORAN CAPITAL INC.
CONSOLIDATED SUMMARY OF INVESTMENTS
THAT EXCEED 10% OF SHAREHOLDERS' EQUITY
For The Year Ended December 31, 1996
(In Thousands of U.S. Dollars)
Fixed Short-Term Total
Maturities Investments Investment
Federal Home
Loan Bank $ 9,770 $ $ 9,770
Federal
National
Mortgage
Association $14,885 $ $14,885
U.S.
Treasury
Notes $26,318 $ $26,318
U.S.
Treasury
Bills $ $10,292 $61,265
<PAGE>
GORAN CAPITAL INC.
Consoldiated Shareholders' Equity In Accordance
With United States GAAP
As At December 31, 1996
(In Thousands of U.S. Dollars)
Consolidated Shareholders' Equity
in Accordance with U.S. GAAP $47,983,000
Threshold (Rounded) 4,798,300
<PAGE>
GORAN CAPITAL INC.
Concentration of Credit Risk
Amounts Due From Other Insurance
Companies Paid and Unpaid Claims
As At December 31, 1996
(In Thousands of U.S. Dollars)
Company Name Amount
Centre Reinsurance (Bermuda) Limited $16,764
Federal Crop Insurance Corporation $21,800
Total $38,564
Notes: Accounts listed above are amounts greater than $4,798,000 (U.S.)
which is approximately 10% of Shareholders' Equity at December 31, 1996.
Amounts are net of trust accounts posted as collateral with original cedents,
with respect to certain retrocession agreements in which the Company is a
retrocessionnaire.
<PAGE>
GORAN CAPITAL INC.
ANALYSIS OF CHANGES IN SHAREHOLDERS' EQUITY
As at December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994
Capital Stock $16,875 $ 16,126 $ 16,091
Contributed Surplus 0 0 0
Deficit (3,895) (11,066) (15,007)
Cumulative Translation Adjustment (358) 7 (173)
Shareholders' Equity -
Opening Balance $12,622 $ 5,067 $ 911
Activity For The Year
Issue Of Share Capital 541 749 35
Contributed Surplus 2,775 0 0
Net Income For The Year 31,296 7,171 3,941
Translation Adjustment for The Year 24 (365) 180
Shareholders' Equity -
Ending Balance 47,258 12,622 5,067
Comprised Of:
Capital Stock 17,416 16,875 16,126
Contributed Surplus 2,775 0 0
Retained Earnings (Deficit) 27,401 (3,895) (11,066)
Cumulative Translation Adjustment (334) (358) 7
Shareholders' Equity -
Ending Balance 47,258 12,622 5,067
<PAGE>
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE 1 - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
As at December 31, 1996
(In Thousands of U.S. Dollars)
Estimated Amount On
Type of Investment Cost Market Value Balance Sheet
Fixed Maturities:
Bonds:
Government and Government
Agencies $ 57,804 $ 57,826 $ 57,804
States and Municipalities 3,587 3,651 3,587
Public Utilities 350 379 350
All Other Corporate Bonds 76,071 76,527 76,071
Total Fixed Maturities $137,812 $138,383 $137,812
Equity Securities:
Common Stocks $ 28,075 $ 28,729 $ 28,075
Preferred Stocks 0 0 0
Total Equity Securities $ 28,075 $ 28,729 $ 28,075
Mortgage Loans on Real Estate 2,430 2,430 2,430
Real Estate 4,548 4,548 4,548
Other Long-Term Investments 75 75 75
Short Term Investments 29,052 29,052 29,052
Total Investments $201,992 $203,217 $201,992
<PAGE>
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (Parent Company)
Balance Sheet
As At December 31,
(In Thousands U.S. Dollars)
1995 1996
Assets
Cash $ 319 $ 812
Accounts Receivable 419 379
Capital and Other Assets 543 750
Investment In Subsidiaries 10,772 10,807
Total Assets $ 12,054 $ 12,748
Liabilities and Shareholders' Equity
Accounts Payable $ 9,758 $ 1,225
Other Payables 973 757
Subordinated Debenture 0 11,084
Total Liabilities 10,731 13,066
Shareholders' Equity
Common Shares 18,473 18,002
Deficit (17,150) (18,320)
Total Shareholders' Equity 1,323 (318)
Total Liabilities and Shareholders' Equity $12,054 $12,748
GORAN CAPITAL INC.
Statement of Earnings (Loss)
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994
Revenues
Management Fees $ 352 $ 796 $ 901
Royalty Income 0 0 69
Dividend Income 3,500 0 0
Other Income 0 0 1,449
Net Investment Income 264 448 399
Total Revenues 4,116 1,244 2,818
Expenses
Debenture Interest Expense 868 998 1,089
Amortization 200 114 160
General, Administrative And
Acquisition Expenses 1,879 1,338 1,170
Total Expenses 2,946 2,450 2,419
Net Income (Loss) $ 1,170 $ (1,206) 399
Deficit, beginning of year (18,320) (17,114) (17,513)
Deficit, end of year (17,150) (18,320) (17,114)
<PAGE>
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
For The Years Ended December 31, 1994, 1995
and 1996
(In Thousands of U.S. Dollars)
1994 1995 1996
Cash Flows From Operations:
Net Income (Loss) $ 1,170 $ (1,206) $ 399
Items Not Involving Cash:
Amortization 199 114 160
Gain on Sale of Capital Assets (4) (7) 0
Decrease (Increase) in Accounts
Receivable (40) 1,822 40
Decrease (Increase) in Other
Assets (3) (29) (2)
Increase (Decrease) in Accounts
Payable 8,533 1,227 (164)
Increase (Decrease) in Other
Payables 0 (141) (214)
Net Cash Provided (Used) by Operations 10,071 1,780 219
Cash Flows From Financing Activities:
Redemption of Share Capital by
Subsidiary 0 0 623
Proceeds on Sale of Capital
Assets 14 11 0
Issue of Common Shares 599 305 35
Net Cash Provided By Financing
Activities 613 316 658
Cash Flows From Investing Activities:
Purchase of Fixed Assets 0 (3) 0
Other, net (93) 3 0
Reduction of Debentures (11,084) (1,454) (1,076)
Net Cash Used by Investing Activities: (11,177) (1,454) (1,076)
Net Increase (Decrease) in Cash (493) 642 (199)
Cash at Beginning of Year 812 170 369
Cash At End of Year 319 812 170
Cash Resources are Comprised of:
Cash 187 109 (29)
Short-Term Investments 132 703 199
319 812 170
<PAGE>
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE II - CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
For The Years Ended December 31, 1994, 1995
and 1996
Basis of Presentation
The condensed financial information should be read in conjunction with the
consolidated financial statements of Goran Capital Inc. The condensed
financial information includes the accounts and activities of the Parent
Company which acts as the holding company for the insurance subsidiaries.
<PAGE>
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE IV - REINSURANCE
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994
Direct Amount $102,178 $122,088 $298,596
Assumed From Other
Companies $ 24,800 $ 29,629 $ 9,038
Ceded To Other
Companies $ 68,505 65,356 87,202
Net Amount $ 58,473 $ 86,361 $220,432
Percentage Of Amount
Assumed To Net 42.4% 34.3% 4.1%
<PAGE>
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1994-Allowance 1995-Allowance 1996-Allowance
for Doubtful for Doubtful for Doubtful
Accounts Accounts Accounts
Additions:
Balance At Beginning
Of Period $1,179 $1,209 $ 927
Charged To Costs
And Expenses<F1> (86) 2,523 5,034
Charged to Other
Accounts - - - - - - 0
Deductions From
Reserves (116)<F2> 2,805<F2> 4,981<F2>
Balance At End
Of Period $1,209 $ 927 $1,480
[FN]
<F1> In 1993, the Company began to direct bill policyholders rather than
agents for premiums. Therefore, bad debt expenses in 1993 increased
accordingly. During late 1994 and into 1995, the Company experienced an
increase in premiums written. During 1995, the Company further evaluated the
collectibility of this business and incurred a bad debt expense of approxi-
mately $2.5 million. The Company continually monitors the adequacy of its
allowance for doubtful accounts and believes the balance of such allowance
at December 31, 1993, 1994 and 1995 was adequate.
<F2>
Uncollectible accounts written off, net of recoveries.
<PAGE>
GORAN CAPITAL INC. - CONSOLIDATED
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY - CASUALTY INSURANCE OPERATIONS
For The Years Ended December 31,
(In Thousands of U.S. Dollars)
1996 1995 1994
Deferred Policy
Acquisition Costs $ 12,800 $ 2,379 $ 1,479
Reserves for Losses and
Loss Adjustment Expenses 101,719 59,421 29,269
Unearned Premiums 87,825 17,497 14,416
Earned Premiums 191,759 49,641 32,126
Net Investment Income 6,738 1,173 1,241
Losses And Loss Adjustment
Expenses Incurred Related To:
Current Years 137,895 35,184 26,268
Prior Years (570) 787 202
Paid Losses And Loss
Adjustment Expenses 130,895 31,075 26,995
Amortization Of Deferred
Policy Acquisition Costs 27,657 7,150 4,852
Premiums Written 305,499 $124,634 $103,134
Note: All amounts in the above table are net of the effects of reinsurance and
related commission income, except for net investment income regarding which
reinsurance is not applicable, premiums written liabilities for losses and loss
adjustment expenses, and unearned premiums which are stated on a gross basis.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, thereto duly authorized.
GORAN CAPITAL INC.
March 15, 1997 By: /s/ Alan G. Symons,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 29, 1996, on
behalf of the registrant in the capacities indicated:
(1) Principal Executive Officer:
/s/ Alan G. Symons
Chief Executive Officer
(2) Principal Financial/Accounting Officer:
/s/Gary P. Hutchcraft
Vice President and Chief Financial Officer
(3) The Board of Directors:
/s/G. Gordon Symons /s/David B. Shapira
Chairman of the Board Director
/s/John K. McKeating /s/James G. Torrance
Director Director
/s/J. Ross Schofield /s/Douglas H. Symons
Director Director
/s/Alan G. Symons
Director
EXHIBIT INDEX
Reference to
Regulation S-K
Exhibit No. Document
1 Final Draft of the Underwriting Agreement dated November 4
1996 among Registrant, Symons International Group, Inc.,
Advest, Inc. and Mesirow Financial, Inc.
3.1 The Registrant's Articles of Incorporation are incorporated
by reference to Exhibit 1 of the Registrant's Form 20-F,
filed October 31, 1994.
3.2 Registrant's Restated Bylaw 1
4.1 Sample Share Certificate and Articles of Amalgamation
defining rights attaching to common shares are incorporated
by reference to Exhibit 2 of Registrant's Form 20-F filed
October 31, 1994.
10.1 The Stock Purchase Agreement among Registrant, Symons
International Group, Inc., Fortis, Inc. and Interfinancial,
Inc. dated January 31, 1996 is incorporated by reference to
Exhibit 10.1 of Symons International Group, Inc.'s
Registration Statement on Form S-1, Reg. No. 333-9129.
10.2(1) The Stock Purchase Agreement among GGS Management Holdings,
Inc., GS Capital Partners II, L.P., Registrant and Symons
International Group, Inc. dated January 31, 1996 is
incorporated by reference to Exhibit 10.2(1) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.2(2) The First Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Registrant and Symons International Group, Inc. dated
March 28, 1996 is incorporated by reference to Exhibit
10.2(2) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.2(3) The Second Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Registrant and Symons International Group, Inc. dated
April 30, 1996 is incorporated by reference to Exhibit
10.2(3) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.2(4) The Third Amendment to the Stock Purchase Agreement by and
among GGS Management Holdings, Inc., GS Capital Partners II,
L.P., Registrant, Symons International Group, Inc. and Pafco
General Insurance Company dated September 24, 1996 is
incorporated by reference to Exhibit 10.2(4) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.3(1) The Stockholders Agreement among GGS Management Holdings,
Inc., GS Capital Partners II, L.P., Symons International
Group, Inc. and Registrant dated April 30, 1996 is
incorporated by reference to Exhibit 10.3(1) of the Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.3(2) The Amended and Restated Stockholder Agreement among GGS
Management Holdings, Inc., GS Capital Partners II, L.P.,
Symons International Group, Inc. and Registrant dated
September 24, 1996 is incorporated by reference to Exhibit
10.3(2) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.4 The Registration Rights Agreement among GGS Management
Holdings, Inc., GS Capital Partners II, L.P., Registrant and
Symons International Group, Inc. dated April 30, 1996 is
incorporated by reference to Exhibit 10.4 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.5 The Management Agreement among Superior Insurance Company,
Superior American Insurance Company, Superior Guaranty
Insurance Company and GGS Management, Inc. dated April 30,
1996 is incorporated by reference to Exhibit 10.5 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.6 The Management Agreement between Pafco General Insurance
Company and Symons International Group, Inc. dated May 1,
1987, as assigned to GGS Management, Inc. effective April 30,
1996, is incorporated by reference to Exhibit 10.6 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.7 The Administration Agreement between IGF Insurance Company
and Symons International Group, Inc. dated February 26, 1990,
as amended, is incorporated by reference to Exhibit 10.7 of
the Symons International Group, Inc.'s Registration Statement
on Form S-1, Reg. No. 333-9129.
10.8 The Agreement between IGF Insurance Company and Symons
International Group, Inc. dated November 1, 1990 is
incorporated by reference to Exhibit 10.8 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.9(1) The Credit Agreement between GGS Management, Inc., various
Lenders and The Chase Manhattan Bank (National Association),
as Administrative Agent, dated April 30, 1996 is incorporated
by reference to Exhibit 10.11(1) of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No.
333-9129.
10.9(2) The Pledge Agreement between GGS Management Holdings, Inc.
and Chase Manhattan Bank, N.A. dated April 30, 1996 is
incorporated by reference to Exhibit 10.11(2) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.9(3) The Pledge Agreement between GGS Management, Inc. and Chase
Manhattan Bank, N.A. dated April 30, 1996 is incorporated by
reference to Exhibit 10.11(3) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.9(4) The First Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated September 26,
1996
10.9(5) The Second Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated December 31,
1996
10.9(6) The Third Amendment to the Credit Agreement between GGS
Management, Inc., various Lenders and Chase Manhattan Bank,
N.A., as Administrative Agent, dated March 26,
1997
10.10 The Registration Rights Agreement between Registrant and
Symons International Group, Inc. dated May 29, 1996 is
incorporated by reference to Exhibit 10.13 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.11(1) The License, Improvement and Support Agreement between
Tritech Financial Systems, Inc. and Symons International
Group, Inc. dated August 30, 1995 is incorporated by
reference to Exhibit 10.14(1) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.11(2) The License of Computer Software between Tritech Financial
Systems, Inc. and Symons International Group, Inc. dated
August 30, 1995 is incorporated by reference to Exhibit
10.14(2) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.12(1) The Agreement among Cliffstan Investments, Inc., Pafco
General Insurance Company and Gage North Holdings, Inc. dated
September 1, 1989 is incorporated by reference to Exhibit
10.15(1) of Symons International Group, Inc.'s Registration
Statement on Form S-1, Reg. No. 333-9129.
10.12(2) The Purchase of Promissory Note and Assignment of Security
Agreement between Pafco General Insurance Company and Granite
Reinsurance Company, Ltd., dated September 30, 1992 is
incorporated by reference to Exhibit 10.15(2) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.12(3) The Guarantee of Alan G. Symons dated April 22, 1994 is
incorporated by reference to Exhibit 10.15(3) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.12(4) The Share Pledge Agreement between Symons International
Group, Ltd. and Pafco General Insurance Company dated April
22, 1994 is incorporated by reference to Exhibit 10.15(4) of
Symons International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.13(1) The Employment Agreement between GGS Management Holdings,
Inc. and Alan G. Symons dated January 31, 1996 is
incorporated by reference to Exhibit 10.16(1) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.13(2) The Employment Agreement between GGS Management Holdings,
Inc. and Douglas H. Symons dated January 31, 1996 is
incorporated by reference to Exhibit 10.16(2) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.14(1) The Employment Agreement between IGF Insurance Company and
Dennis G. Daggett effective February 1, 1996 is incorporated
by reference to Exhibit 10.17(1) of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No.
333-9129.
10.14(2) The Employment Agreement between IGF Insurance Company and
Thomas F. Gowdy effective February 1, 1996 is incorporated by
reference to Exhibit 10.17(2) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.15 The Employment Agreement between Superior Insurance Company
and Roger C. Sullivan, Jr. dated May 9, 1996 is incorporated
by reference to Exhibit 10.18 of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.16 The Employment Agreement between Registrant and Gary P.
Hutchcraft effective June 30, 1996 is incorporated by
reference to Exhibit 10.19 of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.17 The Goran Capital Inc. Stock Option Plan is incorporated by
reference to Exhibit 10.20 of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.18 The GGS Management Holdings, Inc. 1996 Stock Option Plan is
incorporated by reference to Exhibit 10.21 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.19 The Symons International Group, Inc. 1996 Stock Option Plan
is incorporated by reference to Exhibit 10.22 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.20 The Symons International Group, Inc. Retirement Savings Plan
is incorporated by reference to Exhibit 10.24 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.21 The Insurance Service Agreement between Mutual Service
Casualty Company and IGF Insurance Company dated May 20, 1996
is incorporated by reference to Exhibit 10.25 of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.22(1) The Automobile Third Party Liability and Physical Damage
Quota Share Reinsurance. Contract between Pafco General
Insurance Company and Superior Insurance Company is
incorporated by reference to Exhibit 10.27(1) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.22(2) The Crop Hail Quota Share Reinsurance Contract and Crop
Insurance Service Agreement between Pafco General Insurance
Company and IGF Insurance Company is incorporated by
reference to Exhibit 10.27(2) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.22(3) The Automobile Third Party Liability and Physical Damage
Quota Share Reinsurance Contract between IGF Insurance
Company and Pafco General Insurance Company is incorporated
by reference to Exhibit 10.27(3) of Symons International
Group, Inc.'s Registration Statement on Form S-1, Reg. No.
333-9129.
10.22(4) The Multiple Line Quota Share Reinsurance Contract between
IGF Insurance Company and Pafco General Insurance Company is
incorporated by reference to Exhibit 10.27(4) of Symons
International Group, Inc.'s Registration Statement on Form
S-1, Reg. No. 333-9129.
10.22(5) The Standard Revenue Agreement between Federal Crop Insurance
Corporation and IGF Insurance Company is incorporated by
reference to Exhibit 10.27(5) of Symons International Group,
Inc.'s Registration Statement on Form S-1, Reg. No. 333-9129.
10.23 The Commitment Letter, effective October 24, 1996, between
Fifth Third Bank of Central Indiana and Symons International
Group, Inc. is incorporated by reference to Exhibit 10.28 of
Symons International Group, Inc.'s Registration Statement on
Form S-1, Reg. No. 333-9129.
10.24 The Reinsurance Agreement No. 1000-91 (Quota Share Agreement)
and Reinsurance agreement No. 1000-90 (Stop Loss Reinsurance
and Reserves Administration Agreement) are incorporated by
reference to Exhibit 3(c) of Registrant's Form 20-F filed
October 31, 1994.
10.25 The Form of Share Option Agreement is incorporated by
reference to Exhibit 10.05 of Registrant's Form 10-K for the
year ended December 31, 1994.
10.26 The Share Pledge Agreement between Symons International
Group, Ltd and Registrant is incorporated by reference to
Exhibit 10.06 of Registrant's Form 10-K for the year ended
December 31, 1994.
10.27 The MPCI Mulit-Year Stop Loss Reinsurance Agreement is
incorporated by reference to Exhibit 10.07 of Registrant's
Form 10-K for the year ended December 31, 1994.
10.28 The Automobile Liability and Physical Damage Quota Share
Reinsurance Agreement, as amended, is incorporated by
reference to Exhibit 10.08 of Registrant's Form 10-K for the
year ended December 31, 1994.
11 Statement re Computation of Per Share Earnings
13 Annual Report to Security Holders, 1996 and 1995
21 The Subsidiaries of the Registrant are incorporated by
reference to Footnote 1 of the Registrant's consolidated
financial statements contained in its Annual Report to
Security Holders filed hereunder as Exhibit 13.
99 Management Proxy Circular with respect to 1997 Annual
Meeting of Shareholders of Registrant
3,000,000 Shares
(plus 450,000 Shares to cover overallotments, if any)
SYMONS INTERNATIONAL GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
November 4, 1996
ADVEST, INC.
MESIROW FINANCIAL, INC.
As Representatives (the "Representatives")
of the Several Underwriters
Named in Schedule I Hereto
c/o Advest, Inc.
90 State House Square
Hartford, CT 06103
Dear Sirs:
Symons International Group, Inc., an Indiana corporation (the
"Company") and a wholly owned subsidiary of Goran Capital Inc., a Canadian
federally chartered corporation ("Parent"), proposes, subject to the terms and
conditions stated herein, to sell to the Underwriters (the "Underwriters") named
in Schedule I hereto an aggregate of Three Million (3,000,000) shares (the
"Company Shares") of the Company's Common Stock, no par value ("Common Stock").
In addition, in order to cover overallotments in the sale of the
Company Shares, the Underwriters may, at the Underwriters' election and subject
to the terms and conditions stated herein, purchase ratably in proportion to the
amounts set forth opposite their respective names in Schedule I hereto, up to
Four Hundred Fifty Thousand (450,000) additional shares of Common Stock from the
Company (such additional shares of Common Stock, the "Optional Shares"). The
Company Shares and the Optional Shares are referred to collectively herein as
the "Shares."
As part of the offering contemplated by this Agreement, Advest, Inc.
has agreed to reserve out of the Shares set forth opposite its name on Schedule
I to this Agreement, up to 150,000 Shares, for sale to certain officers,
directors and employees of the Company and its affiliates, certain family
members of the foregoing and other persons having business relationships with
1
<PAGE>
the Company or its affiliates (collectively, "Participants"), as set forth in
the Prospectus under the heading "Underwriting" (the "Directed Share Program").
The Shares to be sold by Advest, Inc. pursuant to the Directed Share Program
(the "Directed Shares") will be sold by Advest, Inc. pursuant to this Agreement
at the public offering price. Any Directed Shares not orally confirmed for
purchase by any Participants by the end of the first business day after the date
on which this Agreement is executed will be offered to the public by Advest,
Inc. as set forth in the Prospectus.
The Company hereby confirms its engagement of each of Advest, Inc. and
Mesirow Financial, Inc. as, and each of Advest, Inc. and Mesirow Financial, Inc.
hereby confirms its agreement with the Company to render services as, a
"qualified independent underwriter" within the meaning of Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc. with
respect to the offering and sale of the Shares. Each of Advest, Inc. and Mesirow
Financial, Inc., solely in its capacity as qualified independent underwriter and
not otherwise, is referred to herein as a "QIU" (and together with the other
QIU, as the "QIUs").
Each of the Company and Parent, intending to be legally bound, hereby
confirms its agreement with the Underwriters as follows:
1. Representations and Warranties of the Company and Parent.
(a) Each of the Company and Parent, and IGF Holdings, Inc., an Indiana
corporation and a wholly owned subsidiary of the Company ("IGFH") (to the extent
that the following representations and warranties relate directly to IGFH or its
subsidiaries), jointly and severally represent and warrant to, and agree with,
each of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-09129)
with respect to the Shares, including a prospectus subject to completion, has
been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement may have been so filed. After
the execution of this Agreement, the Company will file with the Commission
either (A) if such registration statement, as it may have been amended, has
become effective under the Act and information has been omitted therefrom in
accordance with Rule 430A under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement) with such
changes or insertions as
2
<PAGE>
are required by Rule 430A or permitted by Rule 424(b) under the Act and as have
been provided to and approved by the Representatives, or (B) if such
registration statement, as it may have been amended, has not become effective
under the Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been provided to and approved by the
Representatives prior to the execution of this Agreement. As used in this
Agreement, the term "Registration Statement" means such registration statement,
as amended at the time when it was or is declared effective, including (i) all
financial statements, schedules and exhibits thereto, (ii) all documents (or
portions thereof) incorporated by reference therein, and (iii) any information
omitted therefrom pursuant to Rule 430A under the Act and included in the
Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means
each prospectus subject to completion included in such registration statement or
any amendment or post-effective amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement at the
time it was or is declared effective), including all documents (or portions
thereof) incorporated by reference therein; and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b) under the Act
or, if no prospectus is required to be so filed, such term means the prospectus
included in the Registration Statement, in either case, including all documents
(or portions thereof) incorporated by reference therein. As used herein, any
reference to any statement or information as being "made," "included,"
"contained," "disclosed" or "set forth" in any Preliminary Prospectus, a
Prospectus or any amendment or supplement thereto, or the Registration Statement
or any amendment thereto (or other similar references) shall refer both to
information and statements actually appearing in such document as well as
information and statements incorporated by reference therein.
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued and no proceeding for that purpose has been
instituted or threatened by the Commission or the securities authority of any
state or other jurisdiction. If the Registration Statement has become effective
under the Act, no stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and no proceeding for that purpose
has been instituted or threatened or, to the best knowledge of the Company,
contemplated by the Commission or the securities authority of any state or other
jurisdiction.
(iii) When any Preliminary Prospectus was filed with the
Commission it (A) contained all statements required to be stated therein in
accordance with, and complied in all material respects with the requirements of,
the Act and the
3
<PAGE>
rules and regulations of the Commission thereunder and (B) did not include any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective, and at each Time of Delivery (as
hereinafter defined), it (A) contained and will contain all statements required
to be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not and will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus or
any amendment or supplement thereto is filed with the Commission pursuant to
Rule 424(b) (or, if the Prospectus or such amendment or supplement is not
required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective) and at each Time of Delivery, the Prospectus, as amended or
supplemented at any such time, (A) contained and will contain all statements
required to be stated therein in accordance with, and complied or will comply in
all material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not and will not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (iii) do not apply to statements or omissions made
in any Preliminary Prospectus, the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through you specifically for use therein. It is understood that the
statements set forth in each Preliminary Prospectus, the Registration Statement
or any amendment thereto or the Prospectus or any amendment or supplement
thereto (W) in the last paragraph of the cover page, (X) on the inside cover
page with respect to stabilization and passive market making, (Y) under the
section entitled "Underwriting" regarding the Underwriters and the underwriting
arrangements, and (Z) under the section entitled "Legal Matters" regarding the
identity of the counsel for the Underwriters, constitute the only written
information furnished to the Company by or on behalf of any Underwriter through
you specifically for use in any Preliminary Prospectus, the Registration
Statement or any amendment thereto or the Prospectus and any amendment or
supplement thereto, as the case may be.
(iv) The descriptions in the Registration Statement and the
Prospectus of laws, statutes, regulations,
4
<PAGE>
legal and governmental proceedings, contracts and other documents are accurate
in all material respects; and there are no laws, statutes, regulations, or legal
or governmental proceedings required to be described in the Registration
Statement or the Prospectus that are not described as required and no contracts
or documents of a character that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described and filed as required.
(v) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has full power and authority
(corporate and other) to own or lease its properties and conduct its business as
described in the Prospectus. Each of the Company and Parent has full power and
authority (corporate and other) to enter into this Agreement and to perform its
obligations hereunder. Each of the Company and its subsidiaries is duly
qualified to transact business as a foreign corporation and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties,
or conducts any business, so as to require such qualification, except where the
failure to so qualify would not have a material adverse effect on the financial
position, results of operations or business of the Company and its subsidiaries
taken as a whole (a "Material Adverse Event").
(vi) The Company's authorized, issued and outstanding capital
stock is as disclosed in the Prospectus. All of the issued shares of capital
stock of the Company have been duly authorized and validly issued, are fully
paid and nonassessable and conform to the descriptions of the Common Stock
contained in the Prospectus. None of the issued shares of capital stock of the
Company or any of its subsidiaries has been issued or is owned or held in
violation of any statutory (or to the knowledge of the Company, any other)
preemptive rights of shareholders, and no person or entity (including any holder
of outstanding shares of capital stock of the Company or its subsidiaries) has
any statutory (or to the knowledge of the Company, any other) preemptive or
other rights to subscribe for any of the Shares. None of the capital stock of
the Company has been issued in violation of applicable federal or state
securities laws.
(vii) All of the issued shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and are owned beneficially by the Company or a subsidiary
of the Company, free and clear of all liens, security interests, pledges,
charges, encumbrances, defects, shareholders' agreements, voting agreements,
proxies, voting trusts, equities
5
<PAGE>
or claims of any nature whatsoever except for (A) the pledge by GGS Management,
Inc., a Delaware corporation ("GGS Management") of all of the outstanding shares
of capital stock of Pafco General Insurance Company, an Indiana insurance
company, and Superior Insurance Company, a Florida insurance company, as
collateral to secure the GGS Senior Credit Facility (as such term is defined in
the Prospectus), (B) the pledge by GGS Management Holdings, Inc., a Delaware
corporation, of all of the outstanding shares of capital stock of GGS Management
as collateral to secure the GGS Senior Credit Facility, (C) the pledge by IGFH
of 29,614 shares of Common Stock of IGF Insurance Company ("IGF") and 2,494,000
shares of IGF Preferred Stock as collateral to secure both the IGFH Bank Debt
and the IGF Note (as such terms are defined in the Prospectus) and (D) the
pledge by the Company of shares of IGFH and GGS Management Holdings, Inc. as
security for the obligations of Parent under the Amended and Restated Trust
Indenture dated as of December 29, 1992, as amended by the First Supplemental
Indenture dated as of April 30, 1996 which will be released prior to the closing
of the sale and purchase of the Shares (the pledges described in clauses (A),
(B), (C) and (D) being hereinafter referred to as the "Pledges") and (E) the
Stockholder Agreement (as such term is defined in the Prospectus). Other than
the subsidiaries listed on Exhibit 21 to the Registration Statement and the
equity securities held in the investment portfolios of such subsidiaries (the
composition of which is not materially different than the disclosures in the
Prospectus as of specific dates), the Company does not own, directly or
indirectly, any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership, joint venture or other
association.
(viii) Except as disclosed in the Prospectus, there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to subscribe for
or purchase from the Company or any such subsidiary any such capital stock or
any such convertible or exchangeable securities or obligations or (C)
obligations of the Company or any such subsidiary to issue any shares of capital
stock, any such convertible or exchangeable securities or obligations, or any
such warrants, rights or options.
(ix) Since the date of the most recent audited financial
statements included in the Prospectus, neither the Company nor any of its
subsidiaries has sustained any material loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, otherwise than as disclosed in or contemplated by the Prospectus and
other than pursuant to claims
6
<PAGE>
made by insureds in the ordinary course of business under policies issued by the
Company's subsidiaries.
(x) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, (A) neither the Company nor
any of its subsidiaries has incurred any liabilities or obligations, direct or
contingent, or entered into any transactions, not in the ordinary course of
business, that are material to the Company and its subsidiaries, (B) the Company
has not purchased any of its outstanding capital stock or declared, paid or
otherwise made any dividend or distribution of any kind on its capital stock,
(C) there has not been any change in the capital stock, long-term debt or
short-term debt of the Company or any of its subsidiaries, and (D) there has not
been any material adverse change, or any development involving a prospective
material adverse change, in or affecting the financial position, results of
operations or business of the Company and its subsidiaries, in each case other
than as disclosed in or contemplated by the Prospectus.
(xi) Except for the Goran Registration Rights Agreement (as such
term is defined in the Prospectus), there are no contracts, agreements or
understandings between the Company and any person granting such person the right
to require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such person or
to require the Company to include such securities in the securities registered
pursuant to the Registration Statement (or any such right has been effectively
waived) or any securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(xii) Neither the Company nor any of its subsidiaries is, or with
the giving of notice or passage of time or both would be, in violation of its
Articles of Incorporation or Bylaws or in default in any material respect under
any indenture, mortgage, deed of trust, loan agreement, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a party or to
which any of their respective properties or assets are subject.
(xiii) The Company and its subsidiaries have good and marketable
title in fee simple to all real property, if any, and good title to all personal
property owned by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects, except such as
are disclosed in the Prospectus or such as do not constitute a Material Adverse
Event and do not interfere with the use made or proposed to be made of such
property by the Company and its subsidiaries; and any real property and
buildings held
7
<PAGE>
under lease by the Company or any of its subsidiaries are held under valid,
subsisting and enforceable leases, with such exceptions as are disclosed in the
Prospectus or are not material and do not interfere with the use made or
proposed to be made of such property and buildings by the Company or such
subsidiary.
(xiv) Neither the Company nor Parent requires any consent,
approval, authorization, order or declaration of or from, or registration,
qualification or filing with, any court or governmental agency or body in
connection with the sale of the Shares or the consummation of the transactions
contemplated by this Agreement in order for the Company to be permitted to
increase the capital and surplus of the Company's insurance company subsidiaries
as contemplated in the "Use of Proceeds" section of the Prospectus, the
registration of the Shares under the Act (which, if the Registration Statement
is not effective as of the time of execution hereof, shall be obtained as
provided in this Agreement) and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and such as may be required under state securities or blue
sky laws in connection with the offer, sale and distribution of the Shares by
the Underwriters.
(xv) Other than as disclosed in the Prospectus, there is no
litigation, arbitration, claim, proceeding (formal or informal) or investigation
(including without limitation, any insurance regulatory proceeding) pending or,
to the best of the Company's or Parent's knowledge, as the case may be,
threatened in which the Company or any of its subsidiaries or Parent is a party
or of which any of their respective properties or assets are the subject which,
if determined adversely to the Company or any such subsidiary or Parent, would
individually or in the aggregate constitute a Material Adverse Event. Neither
the Company nor any of its subsidiaries nor Parent is in violation of, or in
default with respect to, any law, statute, rule, regulation, order, judgment or
decree, except as described in the Prospectus or such as do not and will not
individually or in the aggregate constitute a Material Adverse Event, and
neither the Company nor any of its subsidiaries nor Parent is required to take
any action in order to avoid any such violation or default.
(xvi) To the best of the Company's knowledge, Coopers & Lybrand
L.L.P., who have certified certain financial statements of the Company and its
consolidated subsidiaries included in the Registration Statement and the
Prospectus, are independent public accountants as required by the Act, the
Exchange Act and the respective rules and regulations of the Commission
thereunder.
(xvii) The consolidated financial statements and schedules
(including the related notes) of the Company and
8
<PAGE>
its consolidated subsidiaries included in the Registration Statement, the
Prospectus and/or any Preliminary Prospectus were prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved and fairly present the financial position and results of
operations of the Company and its subsidiaries, on a consolidated basis, at the
dates and for the periods presented. The selected financial data set forth under
the captions "Summary Company Consolidated Financial Data," "Summary Superior
Consolidated Financial Data," "Selected Consolidated Historical Financial Data
of Symons International Group, Inc.," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company," "Selected
Consolidated Historical Financial Data of Superior Insurance Company" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Superior" in the Prospectus fairly present, on the basis stated in
the Prospectus, the information included therein, and have been compiled on a
basis consistent with that of the audited financial statements included in the
Registration Statement. The supporting notes and schedules included in the
Registration Statement, the Prospectus and/or any Preliminary Prospectus fairly
state in all material respects the information required to be stated therein in
relation to the financial statements taken as a whole. The unaudited interim
consolidated financial statements included in the Registration Statement comply
as to form in all material respects with the applicable accounting requirements
of Rule 10-01 of Regulation S-X under the Act.
(xviii) This Agreement has been duly authorized, executed and
delivered by each of the Company and Parent, and, assuming due execution by the
Representatives of the Underwriters, constitutes the valid and binding agreement
of each of the Company and Parent, enforceable against the Company and Parent in
accordance with its terms, subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws relating to or
affecting the enforcement of creditors' rights generally and to general
equitable principles and except as the enforceability of rights to indemnity and
contribution under this Agreement may be limited under applicable securities
laws or the public policy underlying such laws.
(xix) The sale of the Shares and the performance of this
Agreement and the consummation of the transactions herein contemplated will not
(with or without the giving of notice or the passage of time or both) (A)
conflict with any term or provision of the articles of incorporation or bylaws,
or other organizational documents, of the Company or Parent, (B) result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement
9
<PAGE>
or instrument to which the Company or Parent is a party or to which any of their
respective properties or assets are subject, (C) conflict with or violate any
provision of the governing instruments of the Company or Parent or any law,
statute, rule or regulation or any order, judgment or decree of any court or
governmental agency or body having jurisdiction over the Company or Parent or
any of the properties or assets of the Company or Parent or (D) result in a
breach, termination or lapse of the corporate power and authority of the Company
or Parent to own or lease and operate its assets and properties and conduct its
business as described in the Prospectus.
(xx) When the Shares have been duly delivered against payment
therefor as contemplated by this Agreement, the Shares will be validly issued,
fully paid and non-assessable, and the holders thereof will not be subject to
personal liability solely by reason of being such holders. The certificates
representing the Shares are in proper legal form under, and conform in all
respects to the requirements of, the Indiana Business Corporation Law, as
amended. Neither the filing of the Registration Statement nor the offering or
sale of Shares as contemplated by this Agreement gives any security holder of
the Company any rights for or relating to the registration of any shares of
Common Stock or any other capital stock of the Company, except such as have been
satisfied or waived.
(xxi) The Company has not distributed and will not distribute any
offering material in connection with the offering and sale of the Shares other
than the Registration Statement, a Preliminary Prospectus, the Prospectus and
other material, if any, permitted by the Act.
(xxii) Neither the Company nor any of its officers, directors or
affiliates nor Parent has (A) taken, directly or indirectly, any action designed
to cause or result in, or that has constituted or might reasonably be expected
to constitute, the stabilization or manipulation of the price of any security of
the Company or Parent to facilitate the sale or resale of the Shares or (B)
since the filing of the Registration Statement (1) sold, bid for, purchased or
paid anyone any compensation for soliciting purchases of, the Shares or (2) paid
or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company or Parent.
(xxiii) Neither the Company, any of its subsidiaries, nor any
director, officer, employee or other person associated with or acting on behalf
of the Company or any such subsidiary has, directly or indirectly, violated any
provision of the Foreign Corrupt Practices Act of 1977, as amended.
10
<PAGE>
(xxiv) The operations of the Company and its subsidiaries with
respect to any real property currently leased or owned or by any means
controlled by the Company or any subsidiary (the "Real Property") are in
compliance in all material respects with all federal, state, and local laws,
ordinances, rules, and regulations relating to occupational health and safety
and the environment (collectively, "Laws"), and the Company and its subsidiaries
have not violated any Laws in a way which would give rise to a Material Adverse
Event. Except as disclosed in the Prospectus, there is no pending or, to the
best of the Company's knowledge, threatened claim, litigation or any
administrative agency proceeding, nor has the Company or any subsidiary received
any written or oral notice from any governmental entity or third party, that:
(A) alleges a material violation of any Laws by the Company or any subsidiary or
(B) alleges the Company or any subsidiary is a liable party under the
Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C.
ss. 9601 et seq. or any state superfund law.
(xxv) The Company and each of its subsidiaries owns or has the
right to use trademarks, trademark applications, trade names, service marks,
franchises, trade secrets, proprietary or other confidential information and
intangible properties and assets (collectively, "Intangibles"); and, to the best
knowledge of the Company, neither the Company nor any subsidiary has infringed
or is infringing, and neither the Company nor any subsidiary has received notice
of infringement with respect to, asserted Intangibles of others.
(xxvi) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which they
are engaged; and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a comparable cost, except as
disclosed in the Prospectus. The foregoing representation is not intended to and
does not relate to any reinsurance contracts, agreements or treaties to which
the Company or any of its subsidiaries is a party.
(xxvii) Each of the Company and its subsidiaries makes and keeps
accurate books and records reflecting its assets and maintains internal
accounting controls which provide reasonable assurance that (A) transactions are
executed in accordance with management's authorization, (B) transactions are
recorded as necessary to permit preparation of the Company's consolidated
financial statements in accordance with generally
11
<PAGE>
accepted accounting principles and to maintain accountability for the assets of
the Company, (C) access to the assets of the Company and each of its
subsidiaries is permitted only in accordance with management's authorization and
(D) the recorded accountability for assets of the Company and each of its
subsidiaries is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxviii)The Company and its subsidiaries have filed all foreign,
federal, state and local tax returns that are required to be filed by them and
have paid all taxes shown as due on such returns as well as all other taxes,
assessments and governmental charges that are due and payable; and no material
deficiency with respect to any such return has been assessed or proposed.
(xxix) Except for such plans that are expressly disclosed in the
Prospectus, the Company and its subsidiaries do not maintain, contribute to or
have any material liability with respect to any employee benefit plan, profit
sharing plan, employee pension benefit plan, employee welfare benefit plan,
equity-based plan or deferred compensation plan or arrangements (collectively,
"Plans") that are subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended, and the rules and regulations thereunder
("ERISA"). All Plans are in compliance in all material respects with all
applicable laws, including but not limited to ERISA and the Internal Revenue
Code of 1986, as amended (the "Code"), and have been operated and administered
in all material respects in accordance with their terms. No Plan is a defined
benefit plan or multiemployer plan. The Company does not provide retiree life
and/or retiree health benefits or coverage for any employee or any beneficiary
of any employee after such employee's termination of employment, except as
required by Section 4980B of the Code or under a Plan which is intended to be
"qualified" under Section 401(a) of the Code. No Plan has been involved in any
prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.
Full payment has been made of all amounts which the Company or any of its
subsidiaries were required under the terms of the Plans to have paid as
contributions to such Plans on or prior to the date hereof (excluding any
amounts not yet due). No material liability, claim, action or litigation, has
been incurred, made, commenced or, to the knowledge of the Company, threatened,
by or against the Company or any of its subsidiaries with respect to any Plan
(other than for benefits payable in the ordinary course). No material liability
has been, or could reasonably be expected to be, incurred under Title IV of
ERISA or Section 412 of the Code by any entity required to be aggregated with
the Company or any of its subsidiaries pursuant to Section 4001(b) of ERISA
and/or Section 414(b) or (c) of the Code (and the
12
<PAGE>
regulations promulgated thereunder) with respect to any "employee pension
benefit plan" which is not a Plan. As used in this subsection, the terms
"defined benefit plan," "employee benefit plan," "employee pension benefit
plan," "employee welfare benefit plan" and "multiemployer plan" shall have the
respective meanings assigned to such terms in Section 3 of ERISA.
(xxx) No material labor dispute exists with the Company's or any
of its subsidiary's employees, and no such labor dispute is threatened. The
Company has no knowledge of any existing or threatened labor disturbance by the
employees of any of its principal agents, suppliers, contractors or customers
that would give rise to a Material Adverse Event.
(xxxi) Each contract or other instrument (however characterized
or described) to which the Company or any subsidiary is a party or by which any
of its properties or business is bound or affected and which is material to the
conduct of the Company's business as described in the Prospectus has been duly
and validly executed by the Company or such subsidiary, and, to the knowledge of
the Company, by the other parties thereto. Each such contract or other
instrument is in full force and effect and is enforceable against the parties
thereto in accordance with its terms, and the Company and each of its
subsidiaries are not, and to the knowledge of the Company, no other party is, in
default thereunder, nor has any event occurred that, with the lapse of time or
the giving of notice, or both, would constitute a default under any such
contract or other instrument. All necessary consents under such contracts or
other instruments to disclosure in the Prospectus with respect thereto have been
obtained.
(xxxii) The Company and its subsidiaries have received all
permits, licenses, franchises, authorizations, registrations, qualifications and
approvals (collectively, "Permits") of governmental or regulatory authorities
(including, without limitation, state and/or other insurance regulatory
authorities) as may be required of them to own their properties and conduct
their businesses in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; and the Company and its
subsidiaries have fulfilled and performed all of their material obligations with
respect to such Permits, and no event has occurred which allows or, after notice
or lapse of time or both, would allow revocation or termination thereof or
result in any other material impairment of the rights of the holder of any such
Permit, subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, such Permits contain no
restrictions that materially affect the ability of the Company and its
subsidiaries to conduct their businesses.
13
<PAGE>
(xxxiii)The Company and each of its subsidiaries have filed, or
has had filed on its behalf, on a timely basis, all materials, reports,
documents and information, including but not limited to annual reports and
reports of examination with each applicable insurance regulatory authority,
board or agency, which are required to be filed by it, except where the failure
to have timely filed such materials, reports, documents and information would
not constitute a Material Adverse Event.
(xxxiv) Neither Parent nor the Company nor any of the Company's
subsidiaries is an "investment company" or a company "controlled" by an
investment company as such terms are defined in Sections 3(a) and 2(a)(9),
respectively, of the Investment Company Act of 1940, as amended (the "Investment
Company Act"), and, if the Company conducts its business as set forth in the
Registration Statement and the Prospectus, will not become an "investment
company" and will not be required to register under the Investment Company Act.
(xxxv) To the best knowledge of the Company, none of the
officers, directors (except as previously disclosed to you by the Company in
writing) or shareholders holding 5% or more of any class of the Company's
capital stock are affiliated with any member of the National Association of
Securities Dealers, Inc. (the "NASD").
(xxxvi) The common stock of Parent is registered under the
Exchange Act and Parent is in substantial compliance with the requirements of
the United States federal securities laws (including, without limitation, the
requirements of the Exchange Act), the Nasdaq National Market and the Toronto
Stock Exchange. No document that has been filed by Parent with the Commission
pursuant to the Exchange Act including, without limitation, any Form 10-K, 10-Q
or 8-K, annual report to stockholders or proxy statement, (a) contained at the
time of such filing or, except to the extent corrected or modified by a
subsequent filing under the Exchange Act, contains an untrue statement of
material fact or (b) omitted at the time of filing or, except to the extent
corrected or modified by a subsequent filing under the Exchange Act, omits to
state a material fact necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
(xxxvii)The Company and each of its subsidiaries is in compliance
with all provisions of Section 1 of the Laws of Florida, Chapter 92-198, An Act
Relating to Disclosure of Doing Business with Cuba.
(xxxviii The Company has not offered, or caused the Underwriters
to offer, Shares to any person pursuant to the Directed Share Program with the
specific intent to unlawfully
14
<PAGE>
influence (i) a customer or supplier of the Company to alter the customer's or
supplier's level or type of business with the Company, or (ii) a trade
journalist or publication to write or publish favorable information about the
Company or its products or services.
Any certificate signed by any officer of the Company or any subsidiary
in such capacity and delivered to the Representatives or to counsel for the
Underwriters pursuant to this Agreement shall be deemed a representation and
warranty by the Company or such subsidiary to the several Underwriters as to the
matters covered thereby.
2. Purchase and Sale of Shares.
(a) Subject to the terms and conditions herein set forth, the
Company agrees to sell to each of the Underwriters, and each of the Underwriters
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of Eleven Dollars and Fifty Cents ($11.50) per share (reflecting a seven
percent underwriting discount and a one percent non-accountable expense
allowance payable to the Representatives on behalf of the Underwriters pursuant
to Section 6) (the "Per Share Price"), the number of Company Shares (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
the aggregate number of Shares to be sold by the Company as set forth in the
first paragraph of this Agreement by a fraction, the numerator of which is the
aggregate number of Company Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto, and the
denominator of which is the aggregate number of Company Shares to be purchased
by the several Underwriters hereunder.
(b) The Company hereby grants to the Underwriters the right to
purchase at their election in whole or in part from time to time up to Four
Hundred Fifty Thousand (450,000) Optional Shares, at the Per Share Price, for
the sole purpose of covering overallotments in the sale of the Company Shares.
Any such election to purchase Optional Shares may be exercised by written notice
from the Representatives to the Company, given from time to time within a period
of 30 calendar days after the date of this Agreement and setting forth the
aggregate number of Optional Shares to be purchased and the date on which such
Optional Shares are to be delivered, as determined by you but in no event
earlier than the First Time of Delivery (as hereinafter defined) or, unless you
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice. In the event you elect to purchase all or a
portion of the Optional Shares, the Company agrees to furnish or cause to be
furnished to you the certificates, letters and opinions, and to satisfy all
15
<PAGE>
conditions, set forth in Section 7 hereof at each Subsequent Time of Delivery
(as hereinafter defined).
(c) In making this Agreement, each Underwriter is contracting
severally, and not jointly, and except as provided in Sections 2(b) and 9
hereof, the agreement of each Underwriter is to purchase only that number of
shares specified with respect to that Underwriter in Schedule I hereto. No
Underwriter shall be under any obligation to purchase any Optional Shares prior
to an exercise of the option with respect to such Shares granted pursuant to
Section 2(b) hereof.
3. Offering by the Underwriters. Upon the authorization by you of the
release of the Shares, the several Underwriters propose to offer the Shares for
sale upon the terms and conditions disclosed in the Prospectus.
4. Delivery of Shares; Closing.
(a) Certificates in definitive form for the Shares to be purchased
by each Underwriter hereunder, and in such denominations and registered in such
names as you may request upon at least 48 hours' prior notice to the Company,
shall be delivered by or on behalf of the Company, to you for the account of
such Underwriter, against payment by such Underwriter on its behalf of the
purchase price therefor by (at the Representatives' election) wire transfer of
immediately available funds to such accounts as the Company (as the case may be)
shall designate in writing, or by official bank check or checks (payable in next
day funds), payable to the order of the Company in next-day available funds. The
closing of the sale and purchase of the Shares shall be held at the offices of
LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, New York
10019, except that physical delivery of such certificates shall be made at the
office of The Depository Trust Company, 55 North Water Street, New York, New
York 10041. The time and date of such delivery and payment shall be, with
respect to the Company Shares, at 10:00 a.m., New York, New York time, on the
third (3rd) full business day after this Agreement is executed or at such other
time and date as you and the Company may agree upon in writing, and, with
respect to the Optional Shares, at 10:00 a.m., New York, New York time, on the
date specified by you in the written notice given by you of the Underwriters'
election to purchase all or part of such Optional Shares, or at such other time
and date as you and the Company may agree upon in writing. Such time and date
for delivery of the Company Shares is herein called the "First Time of
Delivery," such time and date for delivery of any Optional Shares, if not the
First Time of Delivery, is herein called a "Subsequent Time of Delivery," and
each such time and date for delivery is herein called a "Time of Delivery." The
Company will make such certificates available for checking and
16
<PAGE>
packaging at least 24 hours prior to each Time of Delivery at the office of The
Depository Trust Company, 55 North Water Street, New York, New York 10041 or at
such other location specified by you in writing at least 48 hours prior to such
Time of Delivery.
5. Covenants of the Company.
(a) The Company and the Parent covenant and agree with each of the
Underwriters that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective prior to the execution and delivery of
this Agreement, to become effective. If the Registration Statement has been
declared effective prior to the execution and delivery of this Agreement, the
Company will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to by you,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second
business day following the execution and delivery of this Agreement or (B) the
fifth business day after the date on which the Registration Statement is
declared effective. The Company will advise you promptly of any such filing
pursuant to Rule 424(b). The Company will file promptly all reports and any
definitive proxy or information statements required to be filed by the Company
with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of the Prospectus and for so long as the
delivery of a prospectus is required in connection with the offering, sale and
distribution of the Shares.
(ii) The Company will not file with the Commission the
prospectus or the amendment referred to in the second sentence of Section
1(a)(i) hereof, any amendment or supplement to the Prospectus or any amendment
to the Registration Statement unless you have received a reasonable period of
time to review any such proposed amendment or supplement and consented to the
filing thereof and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective as promptly as possible. Upon
the request of the Representatives or counsel for the Underwriters, the Company
will promptly prepare and file with the Commission, in accordance with the rules
and regulations of the Commission, any amendments to the Registration Statement
or amendments or supplements to the Prospectus that may be necessary or
advisable in connection with the distribution of the Shares by the several
Underwriters and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective as promptly as possible. If
required, the Company will file any amendment or supplement to the Prospectus
with the Commission in the manner and within the time period required by Rule
424(b) under the Act. The Company will advise the Representatives, promptly
after
17
<PAGE>
receiving notice thereof, of the time when the Registration Statement or any
amendment thereto has been filed or declared effective or the Prospectus or any
amendment or supplement thereto has been filed and will provide evidence to the
Representatives of each such filing or effectiveness.
(iii) The Company will advise you promptly after receiving
notice or obtaining knowledge of (A) when any post-effective amendment to the
Registration Statement is filed with the Commission, (B) the receipt of any
comments from the Commission concerning the Registration Statement, (C) when any
post-effective amendment to the Registration Statement becomes effective, or
when any supplement to the Prospectus or any amended Prospectus has been filed,
(D) the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any part thereof or any order
preventing or suspending the use of any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, (E) the suspension of the qualification
of the Shares for offer or sale in any jurisdiction or of the initiation or
threatening of any proceeding for any such purpose, (F) any request made by the
Commission or any securities authority of any other jurisdiction for amending
the Registration Statement, for amending or supplementing the Prospectus or for
additional information. The Company will use its best efforts to prevent the
issuance of any such stop order or suspension and, if any such stop order or
suspension is issued, to obtain the withdrawal thereof as promptly as possible.
(iv) If the delivery of a prospectus relating to the Shares is
required under the Act at any time prior to the expiration of nine months after
the date of the Prospectus and if at such time any events have occurred as a
result of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if for any reason it is necessary
during such same period to amend or supplement the Prospectus, the Company will
promptly notify you and upon your request (but at the Company's expense) prepare
and file with the Commission an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance and will furnish
without charge to each Underwriter and to any dealer in securities as many
copies of such amended or supplemented Prospectus as you may from time to time
reasonably request. If the delivery of a prospectus relating to the Shares is
required under the Act at any time nine months or more after the date of the
Prospectus, upon your request but at the expense of such Underwriter, the
Company will prepare and deliver to such Underwriter as many
18
<PAGE>
copies as you may request of an amended or supplemented Prospectus complying
with Section 10(a)(3) of the Act.
(v) The Company promptly from time to time will take such action
as you may reasonably request to qualify the Shares for offering and sale under
the securities or blue sky laws of such jurisdictions as you may request and
will continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Shares, provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction.
(vi) The Company will promptly provide you, without charge, (A)
three manually executed copies of the Registration Statement as originally filed
with the Commission and of each amendment thereto, including all exhibits and
all documents or information incorporated by reference therein, (B) for each
other Underwriter a conformed copy of the Registration Statement as originally
filed and of each amendment thereto, without exhibits but including all
documents or information incorporated by reference therein and (C) so long as a
prospectus relating to the Shares is required to be delivered under the Act, as
many copies of each Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as you may reasonably request.
(vii) As soon as practicable, but in any event not later than
the last day of the thirteenth month after the effective date of the
Registration Statement, the Company will make generally available to its
security holders an earnings statement of the Company and its subsidiaries, if
any, covering a period of at least 12 months beginning after the effective date
of the Registration Statement (which need not be audited) complying with Section
11(a) of the Act and the rules and regulations thereunder.
(viii) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the Prospectus,
the Company and Parent will not, without your prior written consent, offer,
issue, sell, contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or securities
convertible into or exercisable or exchangeable for shares of Common Stock,
except as provided in Section 2.
(ix) During the period of three years after the effective date
of the Registration Statement, the Company will furnish to you and, upon
request, to each of the other Underwriters, without charge, (A) copies of all
reports or other communications (financial or other) furnished to shareholders
and
19
<PAGE>
(B) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission, the National Association
of Securities Dealers, Inc. or any national securities exchange.
(x) Prior to the termination of the underwriting syndicate
contemplated by this Agreement, neither the Company nor any of its officers,
directors or affiliates nor Parent will (A) take, directly or indirectly, any
action designed to cause or to result in, or that might reasonably be expected
to constitute, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of any of the Shares or (B) sell,
bid for, purchase or pay anyone any compensation for soliciting purchases of,
the Shares other than as contemplated under the Directed Share Program.
(xi) If at any time during the period beginning on the date the
Registration Statement becomes effective and ending on the later of (A) the date
30 days after such effective date and (B) the date that is the earlier of (1)
the date on which the Company first files with the Commission a Quarterly Report
on Form 10-Q after such effective date and (2) the date on which the Company
first issues a quarterly financial report to shareholders after such effective
date, (x) any publication or event relating to or affecting the Company shall
occur as a result of which in your reasonable opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such publication or event necessitates an amendment of or supplement to
the Prospectus), or (y) any rumor relating to or affecting the Company shall
occur as a result of which in your reasonable opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such rumor necessitates an amendment of or supplement to the
Prospectus), the Company will consult with you concerning the necessity of a
press release or other public statement, and, if the Company determines that a
press release or other public statement is necessary, the Company will forthwith
prepare and consult with you concerning the substance of, and disseminate a
press release or other public statement, reasonably satisfactory to you,
responding to or commenting on such publication, event or rumor.
(xii) The Company will comply with the Act, the Exchange Act and
the rules and regulations thereunder so as to permit the continuance of sales of
and dealings in the Shares for as long as may be necessary to complete the
distribution of the Shares as contemplated hereby.
(xiii) In case of any event, at any time within the period
during which a prospectus is required to be delivered
20
<PAGE>
under the Act, as a result of which any Preliminary Prospectus or the
Prospectus, as then amended or supplemented, would contain an untrue statement
of a material fact, or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, or, if it is necessary at any time to amend any
Preliminary Prospectus or the Prospectus to comply with the Act or any
applicable securities or blue sky laws, the Company promptly will prepare and
file with the Commission, and any applicable state securities commission, an
amendment, supplement or document that will correct such statement or omission
or effect such compliance and will furnish to the several Underwriters such
number of copies of such amendment(s), supplement(s) or document(s) as the
Representatives may reasonably request. For purposes of this subsection, the
Company will provide such information to the Representatives, the Underwriters'
counsel and counsel to the Company as shall be necessary to enable such persons
to consult with the Company with respect to the need to amend or supplement the
Registration Statement, any Preliminary Prospectus or the Prospectus or file any
document, and shall furnish to the Representatives and the Underwriters' counsel
such further information as each may from time to time reasonably request.
(xiv) The Company will use its best efforts to maintain the
qualification or listing of the shares of Common Stock (including, without
limitation, the Shares) on the Nasdaq National Market.
(xv) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent required
by the NASD or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Advest, Inc. will notify the
Company as to which Participants will need to be so restricted. At the request
of Advest, Inc., the Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time.
(xvi) The Company will pay all fees and disbursements incurred
by the Underwriters in connection with the offer of any Directed Shares outside
of the United States under the Directed Share Program and stamp duties, similar
taxes or duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program.
(b) The Company and Parent covenant with Advest, Inc. that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign
21
<PAGE>
jurisdiction in which the Directed Shares are offered in connection with the
Directed Share Program.
6. Expenses. The Company will pay all costs and expenses incident to
the performance of the obligations of the Company under this Agreement, whether
or not the transactions contemplated hereby are consummated or this Agreement is
terminated pursuant to Section 10 hereof, including, without limitation, all
costs and expenses incident to (i) the printing of and mailing expenses
associated with the Registration Statement, the Preliminary Prospectus and the
Prospectus and any amendments or supplements thereto, this Agreement, the
Agreement among Underwriters, the underwriters' questionnaire submitted to each
of the Underwriters by the Representatives in connection herewith, the power of
attorney executed by each of the Underwriters in favor of Advest, Inc. in
connection herewith, the Dealer Agreement and related documents (collectively,
the "Underwriting Documents") and the preliminary Blue Sky memorandum relating
to the offering prepared by LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to
the Underwriters (collectively with any supplement thereto, the "Preliminary
Blue Sky Memorandum"); (ii) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation
and, if applicable, filing of the Registration Statement (including all
amendments thereto), any Preliminary Prospectus, the Prospectus and any
amendments and supplements thereto, the Underwriting Documents and the
Preliminary Blue Sky Memorandum; (iii) the delivery of copies of the foregoing
documents to the Underwriters; (iv) the filing fees of the Commission and the
NASD relating to the Shares; (v) the preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Shares, including transfer
agent's and registrar's fees; (vi) the qualification of the Shares for offering
and sale under state securities and blue sky laws, including filing fees and
fees and disbursements of counsel for the Underwriters (and local counsel
therefor) relating thereto; (vii) any listing of the Shares on the Nasdaq
National Market; (viii) any expenses for travel, lodging and meals incurred by
the Company and any of its officers, directors and employees in connection with
any meetings with prospective investors in the Shares; (ix) the costs of
advertising the offering, including, without limitation, with respect to the
placement of "tombstone" advertisements in publications selected by the
Representatives; and (x) all other costs and expenses reasonably incident to the
performance of the Company's obligations hereunder that are not otherwise
specifically provided for in this Section 6. In addition, the Company has agreed
to pay to Advest, Inc., on behalf of the Underwriters, at each Time of Delivery,
a non-accountable expense allowance in the amount of 1% of the gross
22
<PAGE>
proceeds from the sale of the Shares to be applied to the reimbursement of
underwriting syndicate expenses.
7. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters hereunder to purchase and pay for the Shares to be delivered at
each Time of Delivery shall be subject, in their discretion, to the accuracy of
the representations and warranties of each of the Company and Parent contained
herein as of the date hereof and as of such Time of Delivery, to the accuracy of
the statements of Company officers made pursuant to the provisions hereof, to
the performance by each of the Company and Parent of its covenants and
agreements hereunder, and to the following additional conditions precedent:
(a) If the registration statement as amended to date has not become
effective prior to the execution of this Agreement, such registration statement
shall have been declared effective not later than 11:00 a.m., Hartford,
Connecticut time, on the date of this Agreement or such later date and/or time
as shall have been consented to by you in writing. The Prospectus and any
amendment or supplement thereto shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing and in accordance with Section 5(a) of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceedings for that purpose shall have been
instituted, threatened or, to the knowledge of the Company, Parent or the
Representatives, contemplated by the Commission; and all requests for additional
information on the part of the Commission shall have been complied with to your
reasonable satisfaction.
(b) All corporate proceedings and other matters incident to the
authorization, form and validity of this Agreement, the Shares and the form of
the Registration Statement and the Prospectus, and all other legal matters
relating to this Agreement and the transactions contemplated hereby, shall be
satisfactory in all material respects to counsel to the Underwriters.
(c) The Representatives shall have received copies of executed
lock-up agreements from each of Parent, the Company and the Company's officers
and directors who own shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock or who may be issued shares of
Common Stock under an option plan or other arrangement to the effect that such
individuals and entities will not offer, sell, contract to sell, or otherwise
dispose of, any such shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock for a period of 180 days after the
23
<PAGE>
date of the Prospectus without the written consent of Advest, Inc.
(d) The Representatives shall have received at or prior to the
First Time of Delivery from the Underwriters' counsel the Preliminary Blue Sky
Memorandum, such memorandum to be in form and substance satisfactory to the
Representatives.
(e) LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the
Underwriters, shall have furnished to you such opinion or opinions, dated such
Time of Delivery, with respect to the incorporation of the Company, the validity
of the Shares being delivered at such Time of Delivery, the Registration
Statement, the Prospectus, and other related matters as you may reasonably
request, and the Company shall have furnished to such counsel such documents as
they request for the purpose of enabling them to pass upon such matters.
(f) The NASD shall have indicated that it has no objection to the
underwriting arrangements pertaining to the sale of any of the Shares.
(g) You shall have received an opinion, dated such Time of
Delivery, of Barnes & Thornburg, counsel for the Company, in form and substance
satisfactory to you and your counsel, to the effect that:
(i) The Company has been duly incorporated, is validly existing
as a corporation under the laws of the State of Indiana and has the corporate
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and to enter into
this Agreement and perform its obligations hereunder.
(ii) Each of the subsidiaries listed on Exhibit 21 to the
Registration Statement (the "Subsidiaries") of the Company is validly existing
as a corporation in good standing (where applicable) under the laws of its
jurisdiction of incorporation and has the corporate power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus.
(iii) The Company's authorized, issued and outstanding capital
stock is as disclosed in the Prospectus. All of the issued shares of Common
Stock of the Company have been duly authorized and validly issued, are fully
paid and nonassessable and conform to the description of the Common Stock
contained in the Prospectus. None of the outstanding shares of Common Stock have
been issued in violation of the preemptive or other similar rights of any
shareholder or warrantholder of the Company arising by operation of law, under
the Articles of
24
<PAGE>
Incorporation or Bylaws of the Company or, to our knowledge, under any agreement
to which the Company or any of its Subsidiaries is a party. The issuance of the
shares of Common Stock is not subject to preemptive or other similar rights
under the Articles of Incorporation or Bylaws of the Company or, to our
knowledge, under any agreement to which the Company or any of its Subsidiaries
is a party.
(iv) All of the issued shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable, and, to such counsel's knowledge, are owned beneficially
by the Company or its subsidiaries, free and clear of all liens, security
interests, pledges, charges, encumbrances, shareholders' agreements, voting
agreements, proxies, voting trusts, defects, equities or claims of any nature
whatsoever (collectively, "Encumbrances"), including, without limitation,
Encumbrances arising or resulting from any indenture, mortgage, deed of trust,
loan agreement, lease or other agreement of or entered into by Parent, except
for the Pledges and the Stockholder Agreement (as such term is defined in the
Prospectus).
(v) When the Shares have been duly delivered against payment
therefor as contemplated by this Agreement, the Shares will be duly authorized,
validly issued and fully paid and nonassessable, the holders thereof will not be
subject to personal liability solely by reason of being such holders and the
Shares will conform to the description of the Common Stock contained in the
Prospectus; the certificates evidencing the Shares will comply with all
applicable requirements of Indiana law; and the Shares will have been listed on
the Nasdaq National Market.
(vi) To such counsel's knowledge, neither the Company nor any of
its subsidiaries is, or with the giving of notice or passage of time or both,
would be, in violation of its Articles of Incorporation or Bylaws, in each case
as amended to date.
(vii) The sale of the Shares being sold at such Time of Delivery
and the performance of this Agreement and the consummation of the transactions
herein contemplated will not violate any provision of the Articles of
Incorporation or Bylaws of the Company or any of its Subsidiaries, in each case
as amended to date, or to such counsel's knowledge, any existing law, statute,
rule or regulation, or conflict with, or (with or without the giving of notice
or the passage of time or both) result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument known to
such counsel to which the Company or any such Subsidiary
25
<PAGE>
is a party or to which any of their respective properties or assets is subject
(except for any conflicts with, breaches of or violations of any such
indentures, mortgages, deeds of trust, loan agreements, leases or other
agreements or instruments which would not, individually or in the aggregate,
have a material adverse effect on the financial position, results of operations
or business of the Company and its subsidiaries taken as a whole), or, conflict
with or violate any order, judgment or decree known to such counsel, of any
court or governmental agency or body having jurisdiction over the Company or any
of its Subsidiaries or any of their respective properties or assets, except with
respect to any statute, rule or regulation of any regulatory authority imposing
any obligation on the part of the Underwriters by way of their purchase of the
Shares, as to which no opinion need be rendered.
(viii) To such counsel's knowledge, no consent, approval,
authorization, order or declaration of or from, or registration, qualification
or filing with, any court or governmental agency or body is required for the
sale of the Shares or the consummation of the transactions contemplated by this
Agreement, except such as have been or will have been obtained and are or will
be in effect, and except the registration of the Shares under the Act, the
Exchange Act and such as may be required under state securities or blue sky laws
in connection with the offer, sale and distribution of the Shares by the
Underwriters, as to which such counsel expresses no opinion.
(ix) To such counsel's knowledge and other than as disclosed in
or contemplated by the Prospectus, there is no litigation, arbitration, claim,
proceeding (formal or informal) or investigation pending or threatened, in which
the Company or any of its Subsidiaries is a party or of which any of their
respective properties or assets is the subject which, if determined adversely to
the Company or any such Subsidiary, would individually or in the aggregate have
a material adverse effect on the financial position, results of operations or
business of the Company and its subsidiaries taken as a whole.
(x) The statements in the Prospectus under "Business --
Regulation," "Business -- Legal Proceedings," "Description of Capital Stock" and
"Shares Eligible for Future Sale" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes, licenses,
rules or regulations, or legal conclusions, are correct in all material
respects.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
26
<PAGE>
(xii) Neither the Company nor any of its subsidiaries nor Parent
is an "investment company" or a company "controlled" by an investment company as
such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the
Investment Company Act of 1940, as amended.
(xiii) The Registration Statement and the Prospectus and each
amendment or supplement thereto (other than the financial statements, the notes
and schedules thereto and other financial data included therein, to which such
counsel need express no opinion), as of their respective effective or issue
dates, complied as to form in all material respects with the requirements of the
Act and the respective rules and regulations thereunder. The descriptions in the
Registration Statement and the Prospectus of contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown; and such counsel do not know of any contracts or documents of a
character required to be described in the Registration Statement or Prospectus
or to be filed as exhibits to the Registration Statement which are not described
and filed as required.
(xiv) Such counsel has been advised by the Division of
Corporation Finance of the Commission that the Registration Statement has become
effective under the Act; any required filing of the Prospectus pursuant to Rule
424(b) has been made in the manner and within the time period required by Rule
424(b); and, to such counsel's knowledge, (A) no stop order suspending the
effectiveness of the Registration Statement or any part thereof has been issued
and (B) no proceedings for that purpose have been instituted or threatened or
are contemplated by the Commission.
Such counsel shall also state that they have participated in the
preparation of the Registration Statement and the Prospectus and in conferences
with officers and other representatives of the Company, representatives of the
independent public accountants for the Company, and representatives of and
counsel to the Underwriters at which the contents of the Registration Statement,
the Prospectus and related matters were discussed and, although such counsel has
not passed upon or assumed any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, and although such counsel has not undertaken to verify independently
the accuracy or completeness of the statements in the Registration Statement or
the Prospectus and, therefore, would not necessarily have become aware of any
material misstatement of fact or omission to state a material fact, on the basis
of and subject to the foregoing, nothing has come to such counsel's attention to
lead them to believe that the Registration Statement, or any further
27
<PAGE>
amendment thereto made prior to such Time of Delivery, on its effective date and
as of such Time of Delivery, contained or contains any untrue statement of a
material fact or omitted or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that the
Prospectus, or any amendment or supplement thereto made prior to such Time of
Delivery, as of its issue date and as of such Time of Delivery, contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading (provided that such
counsel need express no belief regarding the financial statements, the notes and
schedules thereto and other financial and statistical data contained in the
Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of officers of the
Company and public officials and letters from officials of the NASD and on the
opinions of other counsel reasonably satisfactory to you and your counsel as to
matters which are governed by laws other than the laws of the State of Indiana
and the Federal laws of the United States; provided that such counsel shall
state in their opinion that they are so relying, and they are justified in
relying on such other opinions. Copies of such certificates of officers of the
Company and other opinions shall be addressed and furnished to the Underwriters
and furnished to counsel for the Underwriters.
(h) You shall have received an opinion, dated such Time of
Delivery, of David L. Bates, Esquire, General Counsel of the Company and Parent,
in form and substance satisfactory to you and your counsel, to the effect that:
(i) The Company has been duly incorporated, is validly existing as
a corporation under the laws of the State of Indiana and has the corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and to enter into
this Agreement and perform its obligations hereunder. The Company is duly
qualified to transact business as a foreign corporation and is in good standing
under the laws of each other jurisdiction in which it owns or leases property,
or conducts any business, so as to require such qualification, except where the
failure to so qualify would not have a material adverse effect on the financial
position, results of operations or business of the Company and its subsidiaries
taken as a whole. Parent has been duly incorporated, is validly existing as a
federally chartered corporation in good standing under the laws of Canada and
has the
28
<PAGE>
corporate power and authority to enter into this Agreement and perform its
obligations hereunder.
(ii) Each of the subsidiaries of the Company is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement
and the Prospectus. Each such subsidiary is duly qualified to transact business
as a foreign corporation and is in good standing under the laws of each other
jurisdiction in which it owns or leases property, or conducts any business, so
as to require such qualification, except where the failure to so qualify would
not have a material adverse effect on the financial position, results of
operations or business of the Company and its subsidiaries taken as a whole.
(iii) Except as disclosed in the Prospectus, there are, to such
counsel's knowledge, no outstanding (A) securities or obligations of Parent, the
Company or any of the Company's subsidiaries convertible into or exchangeable
for any capital stock of the Company or any such subsidiary, (B) warrants,
rights or options to subscribe for or purchase from Parent, the Company or any
such subsidiary any such capital stock or any such convertible or exchangeable
securities or obligations or (C) obligations of Parent, the Company or any such
subsidiary to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights or options.
(iv) Except for the Goran Registration Rights Agreement (as such
term is defined in the Prospectus), to such counsel's knowledge, there are no
contracts, agreements or understandings known to such counsel between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement (or any such right has been effectively waived) or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Act.
(v) To such counsel's knowledge, neither the Company nor any of
its subsidiaries nor Parent is, or with the giving of notice or passage of time
or both, would be, in violation of its Articles of Incorporation or Bylaws, in
each case as amended to date, or, in default in any material respect under any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instrument known to such counsel to
29
<PAGE>
which the Company, any such subsidiary or Parent is a party or to which any of
their respective properties or assets is subject.
(vi) To such counsel's knowledge and other than as disclosed in
or contemplated by the Prospectus, there is no litigation, arbitration, claim,
proceeding (formal or informal) or investigation pending or threatened, in which
the Company, any of its subsidiaries or Parent is a party or of which any of
their respective properties or assets is the subject which, if determined
adversely to the Company, any such subsidiary or Parent, would individually or
in the aggregate have a material adverse effect on the financial position,
results of operations or business of the Company and its subsidiaries taken as a
whole; and, to the best of such counsel's knowledge, neither the Company nor any
of its subsidiaries nor Parent is in violation of, or in default with respect
to, any law, statute, rule, regulation, order, judgment or decree, except as
described in the Prospectus or such as do not and will not individually or in
the aggregate have a material adverse effect on the financial position, results
of operations or business of the Company and its subsidiaries taken as a whole,
nor is the Company, any such subsidiary or Parent required to take any action in
order to avoid any such violation or default.
(vii) This Agreement has been duly authorized, executed and
delivered by each of the Company and Parent.
(viii) All offers and sales of the Company's capital stock prior
to the date hereof were at all relevant times duly registered or exempt from the
registration requirements of the Act, and were duly registered or the subject of
an available exemption from the registration requirements of the applicable
state securities or blue sky laws, or any actions in respect thereof are barred
by the applicable statutes of limitations.
(ix) To such counsel's knowledge, the Company and each of its
subsidiaries have received all permits, licenses, franchises, authorizations,
registrations, qualifications and approvals (collectively, "permits") of
governmental or regulatory authorities (including, without limitation, state
and/or other insurance regulatory authorities) as may be required of them to own
their properties and to conduct their businesses in the manner described in the
Prospectus, subject to such qualification as may be set forth in the Prospectus;
to the best of such counsel's knowledge, the Company and each of its
subsidiaries have fulfilled and performed all of their material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time or both would allow, revocation or termination thereof or
result in any other material impairment of the rights of the holder of any such
permits, subject in each case to such qualifications as may be set forth
30
<PAGE>
in the Prospectus; and other than as described in the Prospectus, such permits
contain no restrictions that materially affect the ability of the Company and
its subsidiaries to conduct their businesses.
Such counsel shall also state that he has participated in the
preparation of the Registration Statement and the Prospectus and in conferences
with officers and other representatives of the Company, representatives of the
independent public accountants for the Company, and representatives of and
counsel to the Underwriters at which the contents of the Registration Statement,
the Prospectus and related matters were discussed and, although such counsel has
not passed upon or assumed any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus, and although such counsel has not undertaken to verify independently
the accuracy or completeness of the statements in the Registration Statement or
the Prospectus and, therefore, would not necessarily have become aware of any
material misstatement of fact or omission to state a material fact, on the basis
of and subject to the foregoing, nothing has come to such counsel's attention to
lead him to believe that the Registration Statement, or any further amendment
thereto made prior to such Time of Delivery, on its effective date and as of
such Time of Delivery, contained or contains any untrue statement of a material
fact or omitted or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that the
Prospectus, or any amendment or supplement thereto made prior to such Time of
Delivery, as of its issue date and as of such Time of Delivery, contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading (provided that such
counsel need express no belief regarding the financial statements, the notes and
schedules thereto and other financial and statistical data contained in the
Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of officers of the
Company and Parent, and public officials and letters from officials of the NASD
and on the opinions of other counsel reasonably satisfactory to you and your
counsel as to matters which are governed by laws other than the laws of the
State of Indiana and the Federal laws of the United States; provided that such
counsel shall state in his opinion that he is so relying, and he is justified in
relying on such other opinions. Copies of such certificates of officers of the
31
<PAGE>
Company and Parent and other opinions shall be addressed and furnished to the
Underwriters and furnished to counsel for the Underwriters.
(i) You shall have received an opinion, dated such Time of
Delivery, of Smith Lyons, counsel for the Parent, in form and substance
satisfactory to you and your counsel, to the effect that:
(i) Parent has been duly incorporated and is validly existing
under the laws of Canada and has the corporate power and authority to enter into
this Agreement and perform its obligations hereunder.
(ii) The execution, delivery and performance by Parent of this
Agreement does not result in, and with the giving of notice or passage of time
or both, would not result in, a violation of its Articles of Amalgamation or
Bylaws, in each case as amended to date.
(iii) To such counsel's knowledge and other than as disclosed in
or contemplated by the Prospectus, there is no litigation, arbitration, claim,
proceeding (formal or informal) or investigation pending or threatened, in which
Parent is a party or of which any of its properties or assets is the subject
which, if determined adversely to Parent, would individually or in the aggregate
have a material adverse effect on the financial position, results of operations
or business of the Company and its subsidiaries taken as a whole; and, to such
counsel's knowledge, Parent is not in violation of, or in default with respect
to, any law, statute, rule, regulation, order, judgment or decree, except as
described in the Prospectus or such as do not and will not individually or in
the aggregate have a material adverse effect on the financial position, results
of operations or business of the Company and its subsidiaries taken as a whole,
nor is Parent required to take any action in order to avoid any such violation
or default.
(iv) This Agreement has been duly authorized, executed and
delivered by Parent.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel may deem proper, on certificates of officers of
Parent and public officials. Copies of such certificates of officers of Parent
and other opinions shall be addressed and furnished to the Underwriters and
furnished to counsel for the Underwriters.
(j) You shall have received from Coopers & Lybrand L.L.P., letters
dated, respectively, the date hereof (or, if the Registration Statement has been
declared effective prior
32
<PAGE>
to the execution and delivery of this Agreement, dated such effective date and
the date of this Agreement) and each Time of Delivery, in form and substance
satisfactory to you, which letters shall cover such matters as you shall request
as well as:
(i) confirming that they are independent certified public
accountants (within the meaning of the Act) with respect to the Company and its
subsidiaries;
(ii) stating that, in their opinion, the financial statements,
certain summary and selected consolidated financial and operating data, and any
supplementary financial information and schedules audited by them and included
in the Prospectus or the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the Act; and
they have made a review in accordance with standards established by the American
Institute of Certified Public Accountants of the unaudited consolidated interim
financial statements, and any supplementary financial information and schedules,
selected financial data, and/or condensed financial statements derived from
audited financial statements of the Company for the periods specified in such
letter, and, as indicated in their report thereon, copies of which have been
furnished to the Representatives;
(iii) stating that, on the basis of specified procedures, which
included the procedures specified by the American Institute of Certified Public
Accountants ("AICPA") for a review of interim financial information, as
described in SFAS No. 71, Interim Financial Information (with respect to the
latest unaudited consolidated financial statements of the Company included in
the Registration Statement), a reading of the latest available unaudited interim
consolidated financial statements of the Company (with an indication of the date
of the latest available unaudited interim financial statements), a reading of
the latest available minutes of the meetings of the shareholders and the Board
of Directors of the Company and its subsidiaries, and audit and compensation
committees of such Boards, if any, and inquiries to certain officers and other
employees of the Company and its subsidiaries responsible for operational,
financial and accounting matters and other specified procedures and inquiries,
nothing has come to their attention that would cause them to believe that (A)
the unaudited consolidated financial statements included in the Registration
Statement (1) do not comply in form in all material respects with the applicable
accounting requirements of the Act or (2) any material modifications should be
made to such unaudited financial statements for them to be in conformity with
generally accepted accounting principles; (B) at the date of the latest
available unaudited interim consolidated financial statements of the Company and
a specified date not more than five business days prior to the date of such
letter, there
33
<PAGE>
was any change in the capital stock and other items specified by the
Representatives, increase in long-term debt, decrease in net current assets,
total assets, investments or shareholders' equity of the Company and its
subsidiaries, as compared with the amounts shown in the June 30, 1996 unaudited
consolidated balance sheet of the Company included in the Registration
Statement, or that for the periods from June 30, 1996 to the date of the latest
available unaudited financial statements of the Company and to a specified date
not more than five days prior to the date of the letter, there were any
decreases, as compared to the corresponding periods in the prior year, in gross
premiums written, net investment income, net realized capital gains, or total or
per share amounts of net income, or other items specified by the
Representatives, except in all instances for changes, decreases or increases
which the Registration Statement discloses have occurred or may occur and except
for such other changes, decreases or increases which the Representatives shall
in their sole discretion accept; or (C) any other unaudited income statement
data and balance sheet items included in the Registration Statement do not agree
with the corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial statements included
or incorporated by reference in the Registration Statement;
(iv) stating that, on the basis of a reading of the unaudited
pro forma financial statements included in the Registration Statement and the
Prospectus (the "pro forma financial statements"), carrying out certain
specified procedures, inquiries of certain officials of the Company and its
subsidiary, Superior Insurance Company who have responsibility for financial and
accounting matters, and proving the arithmetic accuracy of the application of
the pro forma adjustments to the historical amounts in the pro forma financial
statements, nothing has come to their attention that would cause them to believe
that the pro forma financial statements do not comply in all material respects
with the applicable accounting requirements of Rule 11- 02 of Regulation S-X or
that the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements;
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentage of revenues and earnings statements and other
numerical data and financial information pertaining to the Company and its
subsidiaries set forth in the Registration Statement and all of the dollar
amounts and percentages in the Registration Statement, in each case to the
extent that such information is derived from the accounting records subject to
the internal control structure, policies and
34
<PAGE>
procedures of the Company's and its subsidiaries' accounting system, or has been
otherwise derived in a manner permitted by AICPA Statement on Auditing Standards
No. 72 with the results obtained from the application of specific readings,
inquiries and other appropriate procedures (which procedures do not constitute
an audit in accordance with generally accepted auditing standards) set forth in
the letter and with the accounting records of the Company and its subsidiaries,
and found them to be in agreement.
In the event that the letters referred to in this Section 7(h) set forth any
changes, decreases or increases in the items identified by you, it shall be a
further condition to the obligations of the Underwriters that (i) such letters
shall be accompanied by a written explanation by the Company as to the
significance thereof, unless the Representatives deem such explanation
unnecessary and (ii) such changes, decreases or increases do not, in your sole
judgment, make it impracticable or inadvisable to proceed with the purchase,
sale and delivery of the Shares being delivered at such Time of Delivery as
contemplated by the Registration Statement, as amended as of the date of such
letter.
(k) Since the date of the latest audited financial statements
included in the Prospectus and except pursuant to claims made by insureds in the
ordinary course of business under policies of insurance issued by the Company's
subsidiaries which claims are reasonably consistent with the Company's
historical claims experience, neither the Company nor any of its subsidiaries
shall have sustained (i) any loss or interference with their respective
businesses from fire, explosion, flood, hurricane or other calamity, whether or
not covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as disclosed in or contemplated by the
Prospectus, or (ii) any change, or any development involving a prospective
change (including, without limitation, a change in management or control of the
Company), in or affecting the position (financial or otherwise), results of
operations, net worth or business prospects of the Company and its subsidiaries,
otherwise than as disclosed in or contemplated by the Prospectus, the effect of
which, in either such case, is in your sole judgment so material and adverse as
to make it impracticable or inadvisable to proceed with the purchase, sale and
delivery of the Shares being delivered at such Time of Delivery as contemplated
by the Registration Statement, as amended as of the date hereof.
(l) Subsequent to the date hereof, there shall not have occurred
any of the following: (i) any suspension or limitation in trading in securities
generally on the New York Stock Exchange, or any setting of minimum prices for
trading on
35
<PAGE>
such exchange, or in the Common Stock of the Company by the Commission or the
National Association of Securities Dealers Automated Quotation National Market
System (except for suspensions or limitations that last only a portion of one
business day); (ii) a moratorium on commercial banking activities in New York,
Indiana or Connecticut declared by either federal or state authorities; or (iii)
any outbreak or escalation of hostilities involving the United States,
declaration by the United States of a national emergency or war or any other
national or international calamity or emergency if the effect of any such event
specified in this clause (iii) in your sole judgment makes it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares being
delivered at such Time of Delivery as contemplated by the Registration
Statement, as amended as of the date hereof.
(m) The Company shall have furnished to you at such Time of
Delivery certificates of the chief executive and chief financial officers of the
Company satisfactory to you, as to the accuracy in all material respects of the
respective representations and warranties of the Company herein at and as of
such Time of Delivery with the same effect as if made at such Time of Delivery,
as to the performance by the Company of all of their respective obligations
hereunder to be performed at or prior to such Time of Delivery, and as to such
other matters as you may reasonably request, and the Company shall have
furnished or caused to be furnished certificates of such officers as to such
matters as you may reasonably request.
(n) The representations and warranties of each of the Company
and Parent in this Agreement and in the certificates delivered by each of the
Company and Parent pursuant to this Agreement shall be true and correct in all
material respects when made and on and as of each Time of Delivery as if made at
such time, and each of the Company and Parent shall have performed all covenants
and agreements and satisfied all conditions contained in this Agreement required
to be performed or satisfied by each of the Company and Parent at or before such
Time of Delivery.
(o) The Shares shall continue to be listed on the National
Association of Securities Dealers Automated Quotation National Market System.
(p) The Representatives shall have received copies of executed
lock-up agreements from each of Parent, Parent's principal shareholders and
Parent's officers and directors who own shares of common stock of Parent or
securities convertible into or exchangeable or exercisable for common stock of
Parent to the effect that such individuals and entities will not offer, sell,
contract to sell, or otherwise dispose of, any such shares of common stock of
Parent or securities convertible
36
<PAGE>
into or exchangeable or exercisable for common stock of Parent for a period of
180 days after the date of the Prospectus without the prior written consent of
Advest, Inc.
8. Indemnification and Contribution.
(a) Each of the Company and Parent agrees to jointly and severally
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement made by the Company or Parent
in Section 1(a) of this Agreement; (ii) any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or (B) any application or other document, or
amendment or supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify the Shares under the securities or blue sky laws thereof or
filed with the Commission or any securities association or securities exchange
(each an "Application"); or (iii) the omission of or alleged omission to state
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or any
Application, a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating, defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or action;
provided, however, that neither the Company nor Parent shall be liable in any
such case to the extent that any such loss, claim, damage, liability or action
(i) arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement or
any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Application in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through you expressly for use therein (which information is solely as set forth
in Section 1(a)(iii) hereof) or (ii) is asserted by a person who purchased any
of the Shares which are the subject thereof from an Underwriter and if a copy of
the Prospectus (as amended or supplemented) which corrected the untrue statement
or alleged untrue statement or omission or alleged omission which is the basis
of the loss, claim, damage, liability or action for which indemnification is
sought was not delivered or given to such person at or prior to the written
37
<PAGE>
confirmation of the sale to such person. Neither the Company nor Parent will,
without the prior written consent of the Representatives of the Underwriters,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding (or related cause of action or
portion thereof) in respect of which indemnification may be sought hereunder
(whether or not any Underwriter is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of each Underwriter from all liability arising out of such
claim, action, suit or proceeding (or related cause of action or portion
thereof).
(b) Each of the Company and Parent agrees to jointly and severally
indemnify and hold harmless each QIU, in its capacity as QIU, against any
losses, claims, damages or liabilities, joint or several, to which such QIU may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon: (i) any untrue statement or alleged untrue statement made by the Company
or Parent in Section 1(a) of this Agreement; (ii) any untrue statement or
alleged untrue statement of any material fact contained in (A) the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or (B) any Application; (iii) the
omission of or alleged omission to state in the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment
or supplement thereto, or any Application, a material fact required to be stated
therein or necessary to make the statements therein not misleading; or (iv)
other than as referred to in the preceding clauses (i) through (iii), such QIU's
actions as a QIU, except insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arising under this clause (iv) result from such
QIU's willful misconduct or gross negligence, and will reimburse each QIU for
any legal or other expenses reasonably incurred by such QIU in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action; provided,
however, that neither the Company nor Parent shall be liable in any such case to
the extent that any such loss, claim, damage, liability or action (i) arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto or any Application in reliance upon and in conformity with written
information relating to such QIU furnished to the Company by or on behalf of
such QIU in such capacity through you expressly for use therein (it being
understood and acknowledged by the Company that such written information shall
consist solely
38
<PAGE>
of the three sentences that are set forth in the second to last paragraph of the
section entitled "Underwriting" in the Prospectus) or (ii) is asserted by a
person who purchased any of the Shares which are the subject thereof from an
Underwriter and if a copy of the Prospectus (as amended or supplemented) which
corrected the untrue statement or alleged untrue statement or omission or
alleged omission which is the basis of the loss, claim, damage, liability or
action for which indemnification is sought was not delivered or given to such
person at or prior to the written confirmation of the sale to such person.
(c) Each Underwriter, severally but not jointly, agrees to
indemnify and hold harmless the Company and Parent against any losses, claims,
damages or liabilities to which the Company and Parent may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or any Application or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through you expressly for use therein; and will
reimburse the Company and Parent for any legal or other expenses reasonably
incurred by the Company and Parent in connection with investigating or defending
any such loss, claim, damage, liability or action.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
which it may have to any indemnified party otherwise than under such subsection.
In case any such action shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party); provided, however, that if the
defendants in any such action include both the indemnified
39
<PAGE>
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be one or more legal defenses available to it or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
assume the defense of such action on behalf of such indemnified party and such
indemnified party shall have the right to select separate counsel to defend such
action on behalf of such indemnified party. After such notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel appointed to
defend such action, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses, other
than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence or (ii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. Nothing in this Section 8(d) shall preclude an
indemnified party from participating at its own expense in the defense of any
such action so assumed by the indemnifying party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and Parent on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and Parent on the one hand and the Underwriters on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company and Parent on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company and Parent bear to
the total underwriting discounts and commissions received by the
40
<PAGE>
Underwriters. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company and Parent on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, Parent and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (e) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(f) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless a QIU under subsection (b) above
in respect of any losses, claims, damages or liabilities (or actions in respect
thereof) referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such QIU as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and Parent
on the one hand and the QIUs on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such amount paid or payable by such QIU in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and Parent on the one hand and the QIUs on the other in
connection with the statements or
41
<PAGE>
omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and Parent on the
one hand and the QIUs on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and Parent bear to the underwriting discounts and commissions
received by the QIUs. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company and Parent on the one hand or the QIUs on
the other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company,
Parent and the QIUs agree that it would not be just and equitable if
contributions pursuant to this subsection (f) were determined by pro rata
allocation (even if the QIUs were treated as one entity for such purpose) or by
any other method of allocation which does not take account of the equitable
considerations referred to above in this subsection (f). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this subsection
(f) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection (f), no QIUs
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it as shown on Schedule I and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The QIUs' obligations in this
subsection (f) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(g) The obligations of the Company and Parent under this Section 8
shall be in addition to any liability which the Company and Parent may otherwise
have and shall extend, upon the same terms and conditions, and to each officer,
director and employee of the Underwriters (including the QIUs) and to each
person, if any, who controls any Underwriter (including the QIUs) within the
meaning of the Act or the Exchange Act; and the obligations of the Underwriters
(including the QIUs) under this Section 8 shall be in addition to any liability
which the respective Underwriters (including the QIUs) may otherwise have
42
<PAGE>
and shall extend, upon the same terms and conditions, to each officer and
director of the Company and Parent and to each person, if any, who controls the
Company or Parent within the meaning of the Act or the Exchange Act.
9. Default of Underwriters.
(a) If any Underwriter defaults in its obligation to purchase
Shares at a Time of Delivery, you may in your discretion arrange for you or
another party or other parties to purchase such Shares on the terms contained
herein. If within thirty-six (36) hours after such default by any Underwriter
you do not arrange for the purchase of such Shares, the Company shall be
entitled to a further period of thirty-six (36) hours within which to procure
another party or other parties satisfactory to you to purchase such Shares on
such terms. In the event that, within the respective prescribed periods, you
notify the Company that you have so arranged for the purchase of such Shares, or
the Company notifies you that it has so arranged for the purchase of such
Shares, you or the Company shall have the right to postpone a Time of Delivery
for a period of not more than seven (7) days in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees to file
promptly any amendments to the Registration Statement or the Prospectus that in
your opinion may thereby be made necessary. The cost of preparing, printing and
filing any such amendments shall be paid for by the Underwriters. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you or the Company as
provided in subsection (a) above, if any, the aggregate number of such Shares
which remains unpurchased does not exceed one-eleventh (1/11) of the aggregate
number of Shares to be purchased at such Time of Delivery, then the Company
shall have the right to require each non-defaulting Underwriter to purchase the
number of Shares which such Underwriter agreed to purchase hereunder at such
Time of Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made.
10. Termination.
(a) This Agreement may be terminated with respect to the Company
Shares or any Optional Shares in the sole
43
<PAGE>
discretion of the Representatives by notice to the Company given prior to the
First Time of Delivery or any Subsequent Time of Delivery, respectively, in the
event that (i) any condition to the obligations of the Underwriters set forth in
Section 7 hereof has not been satisfied, or (ii) the Company shall have failed,
refused or been unable to deliver such party's respective Shares or the Company
or Parent shall have failed, refused or been unable to perform all obligations
and satisfy all conditions on their respective parts to be performed or
satisfied hereunder at or prior to such Time of Delivery, in either case other
than by reason of a default by any of the Underwriters. If this Agreement is
terminated pursuant to this Section 10(a), the Company and/or Parent will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including counsel fees and disbursements) that shall have been incurred by them
in connection with the proposed purchase and sale of the Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in Section 9(a), the aggregate number of such Shares which remains
unpurchased exceeds one-eleventh (1/11) of the aggregate number of Shares to be
purchased at such Time of Delivery, or if the Company shall not exercise the
right described in Section 9(b) to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to a Subsequent Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company, except for the expenses to be borne by the Company
and the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
11. Survival. The respective indemnities, agreements, representations,
warranties and other statements of the Company, Parent and their officers and
the several Underwriters, as set forth in this Agreement or made by or on behalf
of them, respectively, pursuant to this Agreement, shall remain in full force
and effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person
referred to in Section 8(e) or the Company, Parent or any officer or director or
controlling person of the Company or Parent referred to in Section 8(e), and
shall survive delivery of and payment for the Shares. The respective agreements,
covenants, indemnities and other statements set forth in Sections 6 and 8 hereof
shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement.
44
<PAGE>
12. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be mailed, delivered or telegraphed and
confirmed in writing to you in care of Advest, Inc., 90 State House Square,
Hartford, CT 06103, Attention: David Minot (with a copy to LeBoeuf, Lamb, Greene
& MacRae, L.L.P., 125 West 55th Street, New York, NY 10019, Attention: Lars
Bang-Jensen, Esquire); and if sent to the Company, shall be mailed, delivered or
telegraphed and confirmed in writing to Symons International Group, Inc., 4720
Kingsway Drive, Indianapolis, IN 46205, Attention: Alan G. Symons (with a copy
to Barnes & Thornburg, 11 South Meridian Street, Indianapolis, IN 46205,
Attention: Catherine Bridge, Esquire).
13. Representatives. You will act for the several Underwriters in
connection with the transactions contemplated by this Agreement, and any action
under this Agreement taken by you jointly or by Advest, Inc. will be binding
upon all the Underwriters.
14. Binding Effect. This Agreement shall be binding upon, and inure
solely to the benefit of, the Underwriters, the Company, Parent and to the
extent provided in Sections 8 and 10 hereof, the officers, directors and
employees and controlling persons referred to therein and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign by reason merely of such purchase.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to any
provisions regarding conflicts of laws.
16. Counterparts. This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
45
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and upon
the acceptance hereof by Advest, Inc., on behalf of each of the Underwriters,
this letter will constitute a binding agreement among the Underwriters, Parent
and the Company. It is understood that your acceptance of this letter on behalf
of each of the Underwriters is pursuant to the authority set forth in the
Agreement among Underwriters, a copy of which shall be submitted to the Company
for examination, upon request, but without warranty on your part as to the
authority of the signers thereof.
Very truly yours,
SYMONS INTERNATIONAL GROUP, INC.
By:/s/ Alan G. Symons
-----------------------------------
Name: Alan G. Symons
Title:Chief Executive Officer
GORAN CAPITAL INC.
By:/s/ Alan G. Symons
-----------------------------------
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
written above at Hartford, Connecticut.
ADVEST, INC.
MESIROW FINANCIAL, INC.
By: ADVEST, INC.
By:/s/ Phil M. Skidmore
-----------------------------------
Name: Phil M. Skidmore
Title: Group Vice President
Director Investment Banking
On behalf of each of the Underwriters
46
<PAGE>
JOINDER
The following subsidiary of the Company, intending to be legally bound,
hereby joins this Agreement for purposes of Sections 1 and 8 hereof.
IGF HOLDINGS, INC.
By:/s/ David L. Bates
------------------------
Title VP & Sec
47
<PAGE>
SCHEDULE I
Number of
Optional
Total Number Shares to be
of Company Purchased if
Shares Maximum
to be Option
Underwriter Purchased Exercised
Advest, Inc. 920,000 138,000
Mesirow Financial, Inc. 920,000 138,000
Dean Witter Reynolds Inc. 60,000 9,000
Deutsche Morgan Grenfell Inc. 60,000 9,000
Donaldson, Lufkin & Jenrette Securities
Corporation 60,000 9,000
Dresdner Kleinwort Benson North America LLC 60,000 9,000
A.G. Edwards & Sons, Inc. 60,000 9,000
Goldman, Sachs & Co. 60,000 9,000
Lehman Brothers Inc. 60,000 9,000
Morgan Stanley & Co. Incorporated 60,000 9,000
Oppenheimer & Co., Inc. 60,000 9,000
NatCity Investments, Inc. 60,000 9,000
J.C. Bradford & Co. 35,000 5,250
Brean Murray & Co., Inc. 35,000 5,250
City Securities Corporation 35,000 5,250
Dominick & Dominick, Inc. 35,000 5,250
EVEREN Securities, Inc. 35,000 5,250
First of Michigan Corporation 35,000 5,250
Friedman, Billings, Ramsey & Co., Inc. 35,000 5,250
Janney Montgomery Scott Inc. 35,000 5,250
Ladenburg, Thalmann & Co. Inc. 35,000 5,250
Legg Mason Wood Walker, Incorporated 35,000 5,250
McDonald & Company Securities, Inc. 35,000 5,250
Morgan Keegan & Company, Inc. 35,000 5,250
The Robinson-Humphrey Company, Inc. 35,000 5,250
Sands Brothers & Co., Ltd. 35,000 5,250
Stephens Inc. 35,000 5,250
Wheat, First Securities, Inc. 35,000 5,250
--------- -------
Total 3,000,000 450,000
========= =======
BY-LAW I
A by-law relating generally to the
transaction of the business and affairs of
GORAN CAPITAL INC.
(the "Corporation")
CONTENTS
Page No.
Article One Interpretation 1
Article Two Business of the Corporation 2
Article Three Directors 4
Article Four Committees of the Board 6
Article Five Remuneration of Directors, Officers 7
and Employees
Article Six Officers 7
Article Seven Conduct of Directors and
Officers and Indemnity 9
Article Eight Shares 11
Article Nine Dividends and Rights 13
Article Ten Meetings of Shareholders 14
Article Eleven Notices 18
-1-
<PAGE>
BY-LAW I
ARTICLE ONE
INTERPRETATION
1.01. Definitions: In this by-law and all other by-laws, unless the context
requires: otherwise
(a) "Act" means the Canada Business Corporations Act or any
successor statute, as amended from time to time, and the
regulations thereunder;
(b) "board' means the board of directors of the Corporation, and
includes the sole director when the required number of
directors is one;
(c) "business day" means any day with the exception of Saturday,
Sunday and any other day that is defined as a holiday in the
Interpretation Act (Canada) or any successor statute, as
amended from time to time;
(d) "by-laws" means all by-laws of the Corporation from time to
time in effect;
(e) "contracts or documents" includes deeds, mortgages, hypothecs,
charges, conveyances, transfers and assignments of property
(real or personal, immovable or movable, legal or equitable),
agreements, releases, receipts and discharges for the payment
of money, share certificates and other securities, warrants
and all instruments in writing;
(f) "Corporation" means Goran Capital Inc.;
(g) "Director" means the Director appointed under the Act;
(h) "directors" means the directors of the Corporation;
(i) "meeting of shareholders" includes an annual meeting of
shareholders, a special meeting of shareholders and a meeting
of the holders of any class or series of shares of the
Corporation;
(j) "officer" means an officer of the Corporation;
(k) "person" includes an individual, partnership, association,
body corporate, trustee, executor, administrator or legal
representative;
-2-
<PAGE>
(1) "recorded address" means, with respect to a single
shareholder, his latest address as recorded in the securities
register of the Corporation; with respect to joint
shareholders, the first address appearing in the securities
register in respect of their joint holding; and with respect
to any other person, but subject to the Act, his latest
address as recorded in the records of the Corporation or
otherwise known to the secretary;
(m) "securities register" means any register or branch register of
securities of the Corporation;
(n) "signing officer" means, in relation to any contract or
document, any one of the persons authorized to sign the same
on behalf of the Corporation by this by-law or by a resolution
passed pursuant to it; and
(o) subject to the foregoing, all terms that are defined in the
Act have the meanings given to such terms in the Act.
1.02. Primacy: Despite any provision of this or any other by-law, where any
such provision conflicts with the articles, the articles shall govern.
1.03. Rules of Interpretation: In this or any other by-law, unless the
context indicates otherwise, the singular includes the plural and
vice-versa; and the neuter includes the masculine and feminine and
vice-versa.
1.04. Effective Headings: The division of this by-law into articles and the
insertion of headings are for convenience only and shall not affect the
construction or interpretation hereof.
ARTICLE TWO
BUSINESS OF THE CORPORATION
2.01. Registered Office: The Corporation may from time to time:
(a) by resolution of the directors change the address of the
registered office of the Corporation within the place in
Canada specified in its articles; and
(b) by an amendment to its articles, change the place within
Canada in which its registered office is situated.
2.02. Seal: The Corporation may have a seat in such form as the directors
shall from time to time determine by resolution.
2.03. Financial Year: The financial year of the Corporation shall end on such
day of the year as the directors shall from time to time determine by
resolution.
-3-
<PAGE>
2.04. Execution of Instruments:
(a) Unless the directors otherwise determine by resolution,
contracts or documents requiring execution by the Corporation
may be signed by any director or by any officer of the
Corporation except an assistant officer and all contracts or
documents so signed shall be binding upon the Corporation
without further authorization or formality. The directors may
from time to time determine by resolution the manner in which
and the person or persons by whom contracts or documents shall
be signed by the Corporation or any particular contract or
document or class of contracts or documents shall be signed.
(b) Subject to the provisions of this by-law and the Act, and if
authorized by resolution of the directors, the corporate seal,
if any, of the Corporation and the signature of any director
or officer of the Corporation or any other person authorized
by resolution of the directors to sign contracts and documents
may be mechanically or electronically reproduced upon any
contracts or documents of the Corporation. Any such
mechanically or electronically reproduced signature shall be
deemed to have been manually signed by such directors,
officers or persons whose signature or signatures is or are so
reproduced and shall be valid to all intents and purposes as
if they had been signed manually and shall bind the
Corporation notwithstanding that the person whose signature is
so reproduced may have ceased to hold a particular office or
position at the date of delivery or issue of such contracts or
documents.
2.05. Exercise of Corporation's Voting Rights: Except as otherwise determined
by resolution of the directors, the persons or persons authorized to
sign contracts or documents on behalf of the Corporation may execute
and deliver instruments of proxy and may arrange for the issuance of
voting certificates or other evidence of the right to exercise the
voting rights attaching to any securities held by the Corporation and
such instruments, certificates or other evidence shall be in favour of
such person as may be determined by such person or persons authorized
to sign contracts or documents on behalf of the Corporation.
2.06. Banking Arrangements:
(a) Subject to subsection 2.06(b) of this by-law, the banking
business of the Corporation shall be transacted with such
banks, trust companies or other persons as the directors may
from time to time by resolution designate.
(b) All the banking business of the Corporation shall be
transacted on behalf of the Corporation by such officer or
other individuals and to such extent as the directors may from
time to time determine by resolution determine and, if so
authorized by a resolution of the directors, any such officer
or other individual may transact the
-4-
<PAGE>
banking business of the Corporation with such banks, trust
companies or other persons as such officer or other individual
may from time to time determine.
2.07. Borrowing Powers: Without restricting any powers of the directors,
whether derived from the Act or otherwise, the articles of the
Corporation are deemed to state that the directors may, without
authorization of the shareholders,
(a) borrow money on the credit of the Corporation;
(b) issue, reissue, sell or pledge debt obligations of the
Corporation;
(c) subject to section 44 of the Act, give a guarantee on behalf
of the Corporation to secure performance of an obligation of
any person; and
(d) mortgage, hypothecate, pledge or otherwise create a security
interest in all or any property of the Corporation, owned or
subsequently acquired, to secure any obligation of the
Corporation.
ARTICLE THREE
DIRECTORS
3.01. Powers of the Directors: Subject to any unanimous shareholder
agreement, the directors shall manage the business and affairs of the
Corporation.
3.02. Qualifications: The following persons are disqualified from being a
director of the Corporation:
(a) anyone who is less than eighteen years of age;
(b) anyone who is of unsound mind and has been so found by a court
in Canada or elsewhere;
(c) a person who is not an individual; or
(d) a person who has the status of bankrupt.
3.03. Number and Quorum of Directors: Subject to the Act, the Corporation shall
have one or more directors. The number of directors, including the number to be
elected at the annual meeting, shall be the number from time to time fixed by
the articles or the number within the minimum and maximum number provided for in
the articles. Subject to subsection 105(4)of the Act, a majority of the
directors must be resident Canadians (as defined in the Act). The number of
directorsfrom time to time required to constitute a quorum for the transaction
of business at a meeting of the board shall be 51% of the directors or the
minimum number of
-5-
<PAGE>
directors required by the articles (or, if that is a fraction, the next largest
whole number of directors). Reference is made to sections 3.07 and 3.12.
3.04. Election and Term: A director's term of office (subject to the provisions,
if any, of the Corporation's articles, and subject to his election for an
expressly stated term) shall be from the date of the meeting at which he is
elected or appointed until the close of the annual meeting of shareholders next
following his election or appointment or until his successor is elected or
appointed.
3.05. Resignation: A resignation of any director becomes effective at the time a
written resignation is sent to the Corporation, or at the time specified in the
resignation, whichever is later.
3.06. Removal: Subject to the Act and the articles, the shareholders of the
Corporation may by ordinary resolution at a special meeting remove any director
from office. A vacancy created by the removal of a director may be filled at the
meeting of the shareholders at which the director is removed.
3.07. Vacancies: Notwithstanding any vacancy among the directors, a quorum of
directors may exercise all the powers of the directors.
3.08. Calling Meetings: Meetings of directors, or of any committee of directors,
shall be held from time to time at such places, on such days and at such times
as any director of the Corporation may determine, and the secretary of the
Corporation shall give notice of any such meeting when directed by the person
calling it as aforesaid.
3.09. Notice: Notice of the time and place of any meeting of directors shall be
sent in accordance with Article Eleven hereof to each director not less than two
business days before the date of the meeting. A meeting of directors may resume
without further notice following an adjournment if the time and place for
resuming the meeting are announced at the meeting prior to the adjournment.
3.10. First Meeting of New Directors: For the first meeting of directors to be
held following the election of directors at an annual or special meeting of the
shareholders or for a meeting of directors at which a director is appointed to
fill a vacancy in the board, no notice of such meeting need be given to the
newly elected or appointed director or directors in order for the meeting to be
duly constituted, provided a quorum of the directors is present.
3.11. Regular Meetings: The directors may by resolution appoint a day or days in
any months for regular meetings of directors to be held at a place or by
communications facilities and at an hour to be named. A copy of any resolution
of the directors fixing the time and place or manner of participation for such
regular meetings shall be sent to each director immediately after being passed
and to each director elected or appointed thereafter, but no other notice shall
be required for any such regular meeting.
-6-
<PAGE>
3.12. Canadian Majority: No business other than the filling of a vacancy among
the directors shall be transacted at a meeting of directors unless a majority of
the directors present are resident Canadians, except as permitted by the Act or
where a resident Canadian director who is unable to be present approves in
writing or by telephone or other communication facilities the business
transacted at the meeting and a majority of resident Canadian directors would
have been present had that director been present at the meeting.
3.13. Meetings by Telephone: A director may, if all the directors of the
Corporation consent, participate in a meeting of directors or of a committee of
directors by means of such telephone or other communications facilities as
permit all persons participating in the meeting to hear each other, and a
director participating in such a meeting by such means is deemed for the
purposes of the Act to be present at the meeting.
3.14. Chairman: The chairman of the board or in his absence the president if a
director, or in their absence a vice-president who is a director, shall be
chairman of any meeting of directors. If no such officer is present, the
directors present shall choose one of their number to be chairman of the
meeting.
3.15. Voting: Questions arising at any meeting of directors shall be decided by
a majority of the votes cast at such meeting. If equal votes are cast in favour
of and against any issue, the chairman of the meeting shall be entitled to a
casting vote to decide the issue.
3.16. Adjournment: Any meeting of directors or of any committee of directors may
be adjourned from time to time by the chairman of the meeting, with the consent
of the meeting, to a fixed time and place and no notice of the time and place
for the holding of the adjourned meeting need be given to any director if the
time and place of the adjourned meeting is announced at the original meeting.
Any adjourned meeting shall be duly constituted if held in accordance with the
terms of the adjournment and a quorum is present thereat. The directors who
formed a quorum at the original meeting are not required to form the quorum at
the adjourned meeting. If there is no quorum present at the adjourned meeting,
the original meeting shall be deemed to have terminated forthwith after its
adjournment.
3.17. Signed Resolutions: A resolution in writing, signed by all the directors
entitled to vote on that resolution at a meeting of directors or committee of
directors, is as valid as if it had been passed at a meeting of directors or
committee of directors. Any such resolution may be signed in counterparts and if
signed as of any date shall be deemed to have been passed on such date.
ARTICLE FOUR
COMMITTEES OF THE BOARD
4.01. Audit Committee: The directors may, and where required by the Act shall,
appoint from among their number an audit committee composed of such number of
directors, being not less than
-7-
<PAGE>
three, as the directors may from time to time by resolution determine. Except as
permitted by the Act, a majority of the members of the audit committee shall not
be officers or employees of the Corporation or of any affiliate of the
Corporation. The audit committee shall review the annual financial statements of
the Corporation and report thereon to the directors before such financial
statements are approved by the directors, and may exercise any other powers
lawfully delegated to it by the directors under the Act.
4.02. Other Committees: From time to time the directors may by resolution also
appoint from among their number one or more other committees, a majority of each
of which shall be resident Canadians except as permitted by the Act. Each
committee may exercise those powers lawfully delegated to it by the directors
under the Act.
4.03. Procedure: The members of each committee shall hold office while directors
during the pleasure of the directors or until their successors shall have been
appointed. The board may fill any vacancy in a committee from among their
number. Unless otherwise determined by the directors, each committee may fix its
quorum, elect its chairman and adopt rules to regulate its procedure. Subject to
the foregoing, the procedure of each committee shall be governed by the
provisions of this by-law which govern proceedings of the directors so far as
the same can apply except that a meeting of a committee may be called by any
member thereof (or by any member or the auditor, in the case of the audit
committee), notice of any such meeting shall be given to each member of the
committee (or each member and the auditor, in the case of the audit committee)
and the meeting shall be chaired by the chairman of the committee or, in his
absence, some other member of the committee. Each committee shall keep records
of its proceedings and transactions and shall report all such proceedings and
transactions to the directors in a timely manner.
ARTICLE FIVE
REMUNERATION OF DIRECTORS,
OFFICERS AND EMPLOYEES
5.01 Remuneration: The remuneration to be paid to the directors of the
Corporation shall be such as the directors shall from time to time determine by
resolution and such remuneration shall be in addition to the salary paid to any
officer or employee of the Corporation who is also a director. The directors may
also by resolution award special remuneration to any director in undertaking any
special services on the Corporation's behalf other than the normal work
ordinarily required of a director of the Corporation. The confirmation of any
such resolution or resolutions by the shareholders shall not be required. The
directors may fix the remuneration of the officers and employees of the
Corporation. The directors, officers and employees shall also be entitled to be
paid their traveling and other expenses properly incurred by them in connection
with the affairs of the Corporation.
ARTICLE SIX
OFFICERS
-8-
<PAGE>
6.01. Appointment of Officers: From time to time the directors may appoint a
chairman of the board of directors, a president, one or more vice-presidents (to
which title may be added words indicating seniority or function), a secretary, a
treasurer, a controller and such other officers as the directors may by
resolution determine, including one or more assistants to any of the officers so
appointed. One person may hold more than one office. Except for the chairman of
the board and the managing director, the officers so appointed need not be
directors.
6.02. Appointment of Non-Officers: The directors may also appoint other persons
to serve the Corporation in such other positions and with such titles, powers
and duties as the directors may by resolution determine from time to time.
6.03. Terms of Employment: The directors may from time to time by resolution
settle the terms of employment of the officers and other persons appointed by
them and may remove at their pleasure any such person without prejudice to his
rights, if any, to compensation under any employment contract. Otherwise each
such person shall hold his office or position until he resigns or ceases to be
qualified for his office or position or until his successor is appointed.
6.04. Powers and Duties of Officers: The directors may from time to time by
resolution specify the duties of each officer, delegate to him powers to manage
any business or affairs of the Corporation (including the power to sub-delegate)
and change such duties and powers, all insofar as not prohibited by the Act. To
the "tent not otherwise so specified or delegated, and subject to the Act, the
duties and powers of the officers of the Corporation shall be as follows:
(a) Chairman of the Board: The chairman of the board shall, when
present, preside at all meetings of directors and
shareholders.
(b) President: The president shall be the chief executive officer
of the Corporation and shall have, subject to the authority of
the board, general supervision and control of the business and
affairs of the Corporation. During the absence or disability
of the chairman of the board and when no chairman of the board
is appointed, the president shall exercise the powers and
discharge the duties of that office. He shall report to the
board in a timely manner on the exercise of his powers.
(c) Vice-President: Each vice-president shall exercise such powers
and discharge such duties as the chief executive officer may
prescribe from time to time. During the absence or disability
of the president and when no president is appointed his powers
may be exercised and his duties may be discharged by the
vice-president or, if there are more than one, by a
vice-president in order of seniority (as determined by the
directors), except that no vice-president shall preside at a
meeting of directors if he is not a director.
(d) Secretary: The secretary shall attend and act as secretary of
all meetings of directors, its committees and shareholders. He
shall send or cause to be sent all notices and
-9-
<PAGE>
documents the Corporation is required to send to shareholders,
directors, the auditor, the Director and governmental or
regulatory bodies or agencies. He shall prepare or cause to be
prepared all lists of shareholders and all registers and
records (other than accounting records) required under the Act
and shall be the custodian of all books, papers, records,
documents and other instruments belonging to the Corporation
except to the extent that some other person has been appointed
for that purpose, and of the stamp used for affixing the
corporate seal, if any, of the Corporation. He shall also
exercise such other powers and discharge such other duties as
the chief executive officer may prescribe from time to time.
(e) Treasurer: The treasurer, under the direction of the
directors, shall control the deposit of money, the safekeeping
of securities and the disbursement of funds of the
Corporation. Whenever required he shall render to the board an
account of his transactions as treasurer and report to and
advise the directors on the financial position and
requirements of the Corporation and the results of its
operations. During the absence or disability of the controller
and when no controller has been appointed, the treasurer shall
exercise the powers and discharge the duties of that office.
He shall also exercise such other powers and discharge such
other duties as the chief executive officer may prescribe from
time to time. If there is no vice-president, finance, the
treasurer shall be the chief financial officer of the
Corporation.
(f) Controller: The controller shall have charge of and cause to
be kept adequate accounting records in which shall be recorded
all receipts and disbursements of the Corporation in
accordance with all applicable laws. He shall advise the
directors on the accounting procedures and methods used by the
Corporation and shall exercise such other powers and discharge
such other duties as the chief executive officer may prescribe
from time to time.
(g) Other Officers: The powers and duties of all other officers of
the Corporation shall be such as the terms of their engagement
call for or as the chief executive officer may prescribe from
time to time. Any of the powers and duties of an officer to
whom an assistant has been appointed may be exercised and
discharged by such assistant, unless the directors or the
chief executive officer otherwise directs.
6.05. Agents and Attorneys: The directors, by resolution, or any officer
designated by the directors from time to time by resolution, may appoint agents
or attorneys for the Corporation with such lawful powers (including the power to
sub-delegate) as may be thought fit.
ARTICLE SEVEN
CONDUCT OF DIRECTORS AND OFFICERS AND INDEMNITY
-10-
<PAGE>
7.01. Standard of Care: Every director and officer of the Corporation in
exercising his powers and discharging his duties shall act honestly and in good
faith with a view to the best interests of the Corporation and shall exercise
the care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances.
7.02. Disclosure of Interest: A director or officer who
(a) is a party to a material contract or proposed material
contract with the Corporation, or
(b) is a director or an officer of or has a material interest in
any person who is a party to a material contract or proposed
material contract with the Corporation,
shall disclose in writing to the Corporation or request to have entered in the
meetings of meetings of directors the nature and extent of his interest.
Except as permitted by the Act, a director so interest shall not vote
on any resolution to approve such contract or transaction.
A general notice to the directors by a director or officer, declaring
that he is a director or officer of or has a material interest in a person and
is to be regarded as interested in any contract made with that person, is a
sufficient declaration of interest in relation to any contract so made.
7.03. Effect of Disclosure: A material contract between the Corporation and one
or more of the directors or officers, or between the Corporation and another
person of which a director or officer of the Corporation is a director or
officer or in which he has a material interest, is neither void nor voidable by
reason only of that relationship or by reason only that a director with an
interest in the contract is present at or is counted to determine the presence
of a quorum of a meeting of directors or committee of directors that authorized
the contract, if the director disclosed his interest in accordance with the Act,
and the contract was approved by the directors or the shareholders and it was
reasonable and fair to the Corporation at the time it was approved.
7.04. Indemnity: Every person who at any time is or has been a director or
officer of the Corporation or who at any time acts or has acted at the
Corporation's request as a director or officer of a body corporate of which the
Corporation is or was a shareholder or creditor, and the heirs and legal
representatives of every such person, shall at all times be indemnified by the
Corporation in every circumstance where the Act so permits or requires. In
addition and without prejudice to the foregoing and subject to the limitations
in the Act regarding indemnities in respect of derivative actions, every person
who at any time is or has been a director or officer of the Corporation or
properly incurs or has properly incurred any liability on behalf of the
Corporation or who at any time acts or has acted at the Corporation's request
(in respect of the Corporation or any other person), and his heirs and legal
representatives, shall at all times be indemnified by the Corporation against
all costs, charges and expenses, including an amount paid to settle an action or
satisfy a fine or judgment,
-11-
<PAGE>
reasonably incurred by him in respect of or in connection with any civil,
criminal or administrative action, proceeding or investigation (apprehended,
threatened, pending, under way or completed) to which he is or may be made a
party, or in which he is or may become otherwise involved, by reason of being or
having been such a director or officer or by reason of so incurring or having so
incurred such liability or by reason of so acting or having so acted (or by
reason of anything alleged to have been done, omitted or acquiesced in by him in
any such capacity or otherwise in respect of any of the foregoing), and all
appeals therefrom, if:
(a) he acted honestly and in good faith with a view to the best
interests of the Corporation; and
(b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he had
reasonable grounds for believing his conduct was lawful.
Nothing in this section shall affect any other right to indemnity to which any
person may be or become entitled by contract or otherwise, and no settlement or
plea of guilty in any action or proceeding shall alone constitute evidence that
a person did not meet a condition set out in clause (a) or (b) of this section
or any corresponding condition in the Act. From time to time the board may
determine that this section shall also apply to the employees of the Corporation
who are not directors or officers of the Corporation or to an., particular one
or more or class of such employees, either generally or in respect of a
particular occurrence or class of occurrences and either prospectively or
retroactively. From time to time thereafter the board may also revoke, limit or
vary the continued such application of this section.
7.05. Limitation of Liability: So long as he acts honestly and in good faith
with a view to the best interests of the Corporation, no person referred to in
section 7.04 (including, to the extent it is then applicable to them, any
employees referred to therein) shall be liable for any damage, loss, cost or
liability sustained or incurred by the Corporation, except where so required by
the Act.
7.06. Insurance: Subject to the Act, the Corporation may purchase liability
insurance for in the benefit of any person referred to in section 7.04.
ARTICLE EIGHT
SHARES
8.01. Issue: Subject to the articles, the directors may by resolution issue all
or from time to time any of the unissued shares in the capital of the
Corporation to such persons and for such consideration as the directors may
determine by resolution. No share shall be issued until the Corporation has
received the requisite consideration for it in compliance with the Act.
-12-
<PAGE>
8.02. Commissions: From time to time the directors may authorize the Corporation
to pay a reasonable commission to any person in consideration of his purchasing
or agreeing to purchase shares of the Corporation from the Corporation or from
any other person, or in consideration of his procuring or agreeing to procure
purchasers for such shares.
8.03. Share Certificates: Every shareholder is entitled at his option to a share
certificate that complies in the Act and states the number, class and series
designation, if any, of shares held by him as appears on the records of the
Corporation., or a non-transferable written acknowledgment of his right to
obtain such a share certificate. However, the Corporation is not bound to issue
more than one share certificate or acknowledgement in respect of shares held
jointly by several persons, and delivery of such certificate or acknowledgement
to one of such persons is sufficient delivery to all of them. Share certificates
and acknowledgments shall be in such forms as the board shall approve from time
to time and, unless otherwise ordered by the board, shall be signed by the
chairman of the board or the president together with the Secretary and need not
be under corporate seal. However, certificates representing shares in respect of
which a transfer agent has been appointed shall be signed manually by or on
behalf of such transfer agent and other share certificates and acknowledgements
shall be signed manually by at least one signing officer.
8.04. Replacement of Share Certificates: The directors may prescribe either
generally or in a particular case the conditions, in addition to those provided
in the Act, upon which a new share certificate may be issued in place of any
share certificate which is claimed to have been lost, destroyed or wrongfully
taken, or which has become defaced.
8.05. Transfer Agent: From time to time the directors may by resolution appoint
or remove a trustee, transfer agent or other agent to keep the securities
register and the register of transfers, one or more persons or agents to keep
branch registers, and a registrar, trustee or agent to maintain a record of
issued security certificates and warrants. Subject to the Act, one person may be
appointed for purposes of the foregoing in respect of all securities and
warrants of the Corporation or any class thereof.
8.06. Registration of Transfer: No transfer of shares need be recorded in the
register of transfers except upon presentation of the certificate representing
such shares endorsed by the appropriate person under the Act, together with
reasonable assurance that the endorsement is genuine and effective, and upon
compliance with such restrictions on transfer, if any, as are authorized by the
articles and effective against the transferee, upon satisfaction of any debt for
which the Corporation has a lien on the shares that is effective against the
transferee, and upon compliance with all other conditions set out in the Act.
8.07. Lien for Indebtedness: If the articles of the Corporation provide that the
Corporation has a lien on a share registered in the name of a shareholder or his
legal representative for a debt of that shareholder to the Corporation, the
directors of the Corporation may apply any dividends or other distributions paid
or payable on or in respect of the share or shares in respect of which the
-13-
<PAGE>
Corporation has such a lien in repayment of the debt of that shareholder to the
Corporation. Subject to the Act, the Corporation may enforce such lien without
notice or liability by:
(a) refusing to register a transfer of any such shares until the
debt is paid;
(b) setting off against the debt any dividends or other
distributions (including any proceeds of redemption or
purchase for cancellation) payable by the Corporation to such
shareholder;
(c) purchasing any such shares and applying the purchase price,
less any taxes thereon and costs of purchase, to the debt;
(d) selling any such shares as if the Corporation were the owner
thereof, at any time and place and to any person and on any
commercially reasonable terms, and applying to the debt the
cash proceeds of the sale, less any taxes thereon and all
reasonable expenses incurred in connection with the sale; or
(e) canceling such shares in satisfaction of the debt, or by any
other method permitted by law or by any combination of any of
the foregoing.
8.08. Dealings with Registered Shareholder: Subject to the Act, the Corporation
may treat the registered owner of a share as the person exclusively entitled to
vote, to receive notices, to receive any dividend or other payment in respect of
the share and otherwise to exercise all the rights and powers of a holder of the
share. The Corporation may, however, and where required by the Act shall treat
as the registered shareholder any executor, administrator, heir, legal
representative, guardian, committee, trustee, curator, tutor, liquidator or
trustee in bankruptcy who furnishes appropriate evidence to the Corporation
establishing his authority to exercise the rights relating to a share of the
Corporation.
ARTICLE NINE
DIVIDENDS AND RIGHTS
9.01. Dividends: Subject to the Act and the articles, the directors from time to
time may declare dividends payable to the shareholders according to their
respective rights and interests in the Corporation. Dividends may be paid in
money or property or by issuing fully paid shares of the Corporation or options
or rights to acquire such shares. The directors shall by resolution determine
the value of any such property, shares, options or rights and such determination
shall be conclusive evidence of the value thereof.
9.02. Dividend Cheques: A dividend payable to any shareholder in money may be
paid by cheque payable to the order of the shareholder and shall be mailed to
the shareholder by prepaid mail
-14-
<PAGE>
addressed to him at his recorded address unless he directs otherwise. In the
case of joint holders the cheque shall be made payable to the order of all of
them, unless such joint holders direct otherwise in writing. The mailing of a
cheque as aforesaid, unless it is not paid on due presentation, shall discharge
the Corporation's liability for the dividend to the extent of the amount of the
cheque plus the amount of any tax thereon which the Corporation has properly
withheld. If any dividend cheque sent is not received by the payee, the
Corporation shall issue to such person a replacement cheque for a like amount on
such reasonable terms as to indemnity, reimbursement of expenses and evidence of
non-receipt and of title as the directors or any person designated by them may
require.
9.03. Record Date for Dividends and Rights: The directors may by resolution fix
in advance a date preceding by not more than 50 clear days the date for the
payment of any dividend or the making, of any distribution or for the issue of
any warrant or other evidence of right to acquire securities of the Corporation,
as a record date for the determination of the persons entitled to receive
payment of such dividend or distribution or to receive such right. In every such
case only the persons who are holders of record of the relevant shares at the
close of business on the date so fixed shall be entitled to receive payment of
such dividend or distribution or to receive such right. Notice of any such
record date fixed by the directors shall be given as and when required by the
Act. Where no such record date is fixed by the directors, the record date for
the determination of the persons entitled to receive payment of such dividend or
distribution or to receive such right shall be the close of business on the day
on which the board passes the resolution relating thereto.
ARTICLE TEN
MEETINGS OF SHAREHOLDERS
10.01. Annual Meeting: Subject to the Act, the annual meeting of the
shareholders shall be held on such day and at such time as the directors from
time to time may determine by resolution, for the purpose of receiving the
financial statements and reports required by the Act to be placed before each
annual meeting of shareholders, electing directors (if required), appointing the
auditor (if required) and fixing or authorizing the directors to fix his
remuneration and transacting such other business as may properly be brought
before the meeting.
10.02. Special Meeting: From time to time the directors may by resolution call a
special meeting of the shareholders to be held on such day and at such time as
the directors may determine. The holders of not less than 5% of the issued
shares of the Corporation carrying the right to vote at the meeting sought to be
held may requisition a special meeting of shareholders. Any special meeting of
shareholders may be combined with an annual meeting.
10.03. Place of Meetings: Meetings of shareholders shall be held at the
registered office of the Corporation or at such other place within Canada as the
directors from time to time may by resolution determine.
-15-
<PAGE>
10.04. Record Date: The directors may by resolution fix in advance a record
date, preceding the date of any meeting of shareholders by not more than 50
clear days nor less than 21 clear days, for the determination of the
shareholders entitled to notice of the meeting, and where no such record date
for notice is fixed by the directors, the record date for notice shall be the
close of business on the day immediately preceding the day on which notice is
given. Notice of any such record date fixed by the directors shall be given as
and when required by the Act.
10.05. Shareholder List: For each meeting of shareholders the secretary shall
prepare or cause to be prepared an alphabetical list of shareholders entitled to
receive notice of the meeting showing the number of shares entitled to be voted
at the meeting and held by each such shareholder. The list shall be prepared
(a) if a record date for such notice is fixed by the directors,
not later than 10 clear days thereafter,
(b) if no such record date is fixed by the directors, at the close
of business on the day immediately preceding the day on which
notice of the meeting is given, or
(c) if no notice is given, on the day on which the meeting is
held. The list shall be available for examination by any
shareholder prior to the meeting during usual business hours
at the registered office of the Corporation or at the place
where the securities register is kept, and at the meeting.
Where a separate list is not prepared, the names of the
shareholders entitled to receive notice of the meeting and the
number of shares entitled to be voted thereat and held by
them, respectively, as they appear in the securities register
at the requisite time (excluding shares not entitled to be
voted at the meeting), shall constitute the list prepared in
accordance with this section.
10.06. Notice: Notice in writing of the time, place and purpose for holding each
meeting of shareholders shall be sent not less than 21 clear days and not more
than 50 clear days, before the date on which the meeting is to be held, to each
director, the auditor (if any) of the Corporation and each person who on the
record date for notice appears in the securities register of the Corporation as
the holder of one or more shares carrying the right to vote at the meeting or as
the holder of one or more shares the holders of which are otherwise entitled to
receive notice of the meeting. Notice of a meeting of shareholders shall state
or be accompanied by a statement of the nature of all special business to be
transacted at the meeting, in sufficient detail to permit the shareholder to
form a reasoned judgment thereon, and the text of any special resolution or
by-law to be submitted to the meeting. For this purpose all business transacted
at a special meeting of shareholders and all business transacted at an annual
meeting of shareholders, except consideration of the minutes of an earlier
meeting, the financial statements and auditor's report, election of directors
and reappointment of the incumbent auditor, is "special business'. Reference is
made to Article Eleven.
-16-
<PAGE>
10.07. Proxy and Management Information Circular: Whenever the Corporation is
offering its securities to the public, the secretary shall, concurrently with
sending notice of a meeting of shareholders,
(a) send a form of proxy and management information circular in
accordance with the Act to each shareholder who is entitled to
receive notice of and appears entitled to vote at the meeting,
(b) send such management information circular to any other
shareholder who is entitled to receive notice of the meeting,
to any director who is not a shareholder entitled thereto and
to the auditor, and
(c) file with the Ontario Securities Commission and any other
agencies entitled thereto a copy of all documents sent in
connection with the meeting.
10.08. Financial Statements: Not less than 21 clear days before each annual
meeting of shareholders or before the signing of a resolution in lieu thereof,
the secretary shall send a copy of the annual financial statements and reports
required by the Act to be placed before the annual meeting to each shareholder
who has not informed the Corporation in writing that he does not want such
documents. Whenever the Corporation is offering its securities to the public the
secretary shall file a copy of its financial statements with the Ontario
Securities Commission and any other agencies entitled thereto, as and when
required.
10.09. Shareholder Proposal: Any shareholder entitled to vote at a meeting of
shareholders may submit to the Corporation notice of any proposal that he wishes
to raise at the meeting and may discuss at the meeting any matter in respect of
which he would have been entitled under the Act to submit a proposal. Where so
required by the Act, the management information circular prepared in respect of
the meeting shall set out or be accompanied by the proposal.
10.10. Persons Entitled to be Present: The only persons entitled to attend a
meeting of shareholders shall be those persons entitled to notice thereof and
others who although not entitled to notice are entitled or required under any
provision of the Act or the by-laws to be present at the meeting. Any other
person may be admitted only on the invitation of the chairman of the meeting or
with the consent of the meeting.
10.11. Chairman, Secretary and Scrutineer: The chairman of the board, or in his
absence, the president, or in their absence a vice-president, or any other
person designated from time to time in writing by the chairman of the board
shall be chairman of any meeting of shareholders. If no such officer is present
within 15 minutes after the time appointed for the holding of the meeting, the
persons present and entitled to vote shall choose one of their number to be
chairman. If the secretary is absent, the chairman shall appoint some person,
who need not be a shareholder, to act as secretary of the meeting. One or more
scrutineers, who need not be shareholders, may be appointed by the chairman or
by a resolution of the shareholders.
-17-
<PAGE>
10.12. Quorum: The quorum for the transaction of business at any meeting of
shareholders shall be two persons present and entitled to vote not less than 51
% of the shares entitled to be voted at the meeting. If a quorum is present at
the opening of the meeting the shareholders may proceed with the business of the
meeting notwithstanding that a quorum is not present throughout. If a quorum is
not present within such reasonable time after the time appointed for the holding
of the meeting as the persons present and entitled to vote may determine, they
may adjourn the meeting to a fixed time and place.
10.13. Persons Entitled to Vote: Without prejudice to any other right to vote,
every shareholder recorded on the shareholder list prepared in accordance with
section 10.05 is entitled, at the meeting to which the list relates, to vote the
shares shown thereon opposite his name, except to the extent that the
shareholder transfers ownership of any such shares after the record date for
notice of the meeting and the transferee establishes that he owns the shares and
requests not later than seven clear days before the meeting that his name be
included in the list (in which case the transferee is entitled to vote such
shares at the meeting). However, where two or more persons hold the same shares
jointly, any one of them may in the absence of the others vote in respect of
such shares but if more than one of such persons are present or represented and
vote, they shall vote together as one on the shares jointly held by them or not
at all.
10.14. Proxies: Every shareholder entitled to vote at a meeting of shareholders
may by means of a proxy appoint a proxy holder or alternate proxy holders, who
need not be shareholders, as his nominee to attend and act at the meeting in the
manner, to the extent and with the authority conferred by the proxy. A proxy
shall be in writing and signed by the shareholder or his attorney authorized in
writing or, if the shareholder is a body corporate, by an officer or attorney
thereof duly authorized. A proxy shall conform to the requirements of the Act.
10.15. Time for Deposit of Proxies: The directors may specify in the notice
calling a meeting of shareholders a time, not exceeding 48 hours (excluding any
day which is not a business day) preceding the meeting or any adjournment
thereof, before which proxies must be deposited with the Corporation or its
agent. A proxy shall be acted upon only if, prior to the time so specified, it
shall have been deposited with the Corporation or an agent thereof specified in
such notice or, where no such time is specified in such notice, if it has been
received by the secretary of the Corporation or the chairman of the meeting or
any adjournment thereof before the time of voting.
10.16. Revocation of Proxies: In addition to revocation in any other manner
permitted by law, a proxy may be revoked by an instrument in writing signed in
the same manner as a proxy and deposited either at the registered office of the
Corporation at any time up to and including the last day (excluding any day
which is not a business day) preceding the date of the meeting or any
adjournment thereof at which the proxy is to be used, or with the chairman of
such meeting or any adjournment thereof before the time of voting.
10.17. Authorized Representatives: A shareholder that is a body corporate or
association may, by resolution of its governing body, authorize an individual to
represent it at meetings of shareholders.
-18-
<PAGE>
Where a certified copy of such resolution has been deposited with the secretary,
the authorized individual may exercise at meetings of shareholders all the
rights and privileges which the shareholder he represents could exercise if it
were an individual shareholder, until the secretary receives a certified copy of
another resolution of such governing body authorizing a different individual to
represent the shareholder at meetings of shareholders or otherwise rescinding
the former resolution.
10.18. Voting: At each meeting of shareholders every question shall be decided
by a majority of the votes duly cast thereon, unless otherwise provided by the
Act, the articles, the by-laws or any unanimous shareholder agreement. In case
of an equality of votes the chairman of the meeting shall not be entitled to a
casting vote.
10.19. Show of Hands: At each meeting of shareholders voting shall be by show of
hands unless a ballot is required or demanded as hereinafter provided. Upon a
show of hands every person present and entitled to vote on the show of hands
shall have one vote. Whenever a vote by show of hands has been taken upon a
question, unless a ballot thereon be so required or demanded and such
requirement or demand is not withdrawn, a declaration by the chairman of the
meeting that the vote upon the question was carried or carried by a particular
majority or not carried or not carried by a particular majority, and an entry to
that effect in the minutes of the meeting, shall be prima facie evidence of the
result of the vote without proof of the number or proportion of votes cast for
or against.
10.20. Ballots: On any question proposed for consideration at a meeting of
shareholders a ballot may be required by the chairman or demanded by any person
present and entitled to vote, either before or after any vote by show of hands.
If a ballot is so required or demanded and such requirement or demand is not
withdrawn, a poll upon the question shall be taken in such manner as the
chairman of the meeting shall direct. Subject to the articles, upon a ballot
each person present shall be entitled to one vote in respect of each share which
he is entitled to vote at the meeting on the question.
10.21. Adjournment: The chairman of a meeting of shareholders may with the
consent of the meeting adjourn any meeting of shareholders from time to time to
a fixed time and place and if the meeting is adjourned for less than 30 days no
notice of the time and place for the holding of the adjourned meeting need be
given to any shareholder, other than by announcement at the earliest meeting
that is adjourned. If a meeting of shareholders is adjourned by one or more
adjournments for an aggregate of 30 days or more, notice of the adjourned
meeting shall be given as for an original meeting but, unless the meeting is
adjourned by one or more adjournments for an aggregate of more than 90 days,
subsection 149(l) of the Act does not apply. Any adjourned meeting shall be duly
constituted if held in accordance with the terms of the adjournment and a quorum
is present thereat. The persons who formed a quorum at the original meeting are
not required to form the quorum at the adjourned meeting. If there is no quorum
present at the adjourned meeting, the original meeting shall be deemed to have
terminated forthwith after its adjournment. Any business may be brought before
or dealt with at any adjourned meeting which might have been brought before or
dealt with at the original meeting in accordance with the notice calling the
same.
-19-
<PAGE>
10.22. Signed Resolutions: Subject to the Act,
(a) a resolution in writing signed by all the shareholders
entitled to vote on that resolution at a meeting of
shareholders is as valid as if it had been passed at a meeting
of shareholders; and
(b) a resolution in writing dealing with all matters required by
the Act to be dealt with at a meeting of shareholders, and
signed by all the shareholders entitled to vote at that
meeting, satisfies all the requirements of the Act relating to
meetings of shareholders.
Any such resolution may be signed in counterparts and if signed as of
any date shall be deemed to have been passed on such date.
ARTICLE ELEVEN
NOTICES
11.01. To Shareholders, Directors: Any notice or document required or permitted
to be sent by the Corporation to a shareholder or director may be mailed by
prepaid Canadian mail in a sealed envelope addressed to, or may be delivered
personally to, such person at his recorded address, or may be sent by any other
means permitted under the Act. If so mailed, the notice or document shall be
deemed to have been received by the addressee on the fifth clear day after
mailing. If notices or documents so mailed to a shareholder are returned on
three consecutive occasions because he cannot be found, the Corporation need not
send any further notices or documents to such shareholder until he informs the
Corporation in writing of his new address.
11.02. To Others: Any notice or document required or permitted to be sent by the
Corporation to any other person may be
(a) delivered personally to such person,
(b) addressed to such person and delivered to his recorded
address,
(c) mailed by prepaid Canadian mail in a sealed envelope addressed
to such person at his recorded address, or
(d) addressed to such person and sent to his recorded address by
telecopy, telegram, telex or any other means of legible
communication then in business use in Canada. A notice or
document so mailed or sent shall be deemed to have been
received by the addressee when deposited in a post office or
public letter box (if mailed) or when transmitted by the
Corporation on its equipment or delivered to the appropriate
communication
-20-
<PAGE>
agency or its representative for dispatch, as the case may be
(if sent by telecopy, telegram, telex or other means of
legible communication).
11.03. Changes in Recorded Address: The secretary may change the recorded
address of any person in accordance with any information the secretary believes
to be reliable.
11.04. Computation of Days: In computing any period of days or clear days under
the by-laws or the Act, the period shall be deemed to commence on the day
following the event that begins the period and shall be deemed to end at
midnight on the last day of the period except that if the last day of the period
falls on any day which is not a business day, the period shall end at midnight
of the day next following that is a business day.
11.05. Omissions and Errors: The accidental omission to give any notice to any
person, or the non- receipt of any notice by any person or any immaterial error
in any notice shall not invalidate any action taken at any meeting held pursuant
to such notice or otherwise founded thereon.
11.06. Unregistered Shareholders: Subject to the Act, every person who becomes
entitled to any share shall be bound by every notice in respect of such share
which was duly given to any predecessor in title prior to such person's name and
address being entered on the securities register of the Corporation.
11.07. Waiver of Notice: Any person entitled to attend a meeting of shareholders
or directors or a committee thereof may in any manner and at any time waive
notice thereof, and attendance of any shareholder or his proxy holder or
authorized representative or of any other person at any meeting is a waiver of
notice thereof by such shareholder or other person except where the attendance
is for the express purpose of objecting to the transaction of any business on
the grounds that the meeting is not lawfully called. In addition, where any
notice or document is required to be given under the articles or by-laws or the
Act, the notice may be waived or the time for sending the notice or document may
be waived or abridged at any time with the consent in writing of the person
entitled thereto. Any meeting may be held without notice or on shorter notice
than that provided for in the by-laws if all persons not receiving the notice to
which they are entitled waive notice of or accept short notice of the holding of
such meeting.
Enactment
RESOLVED that the foregoing by-law is made a by-law of the Corporation.
-21-
[CHASE LOGO]
September 26, 1996
GGS Management, Inc.
GGS Management Holdings, Inc.
c/o Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: David L. Bates, Esq.
Re: Consent and Amendment
Gentlemen:
We refer to the Credit Agreement dated as of April 30, 1996 (as
amended, supplemented and otherwise modified and in effect on the date hereof,
the "Credit Agreement"; terms defined in the Credit Agreement to have their
respective defined meanings when used herein) between GGS Management, Inc. (the
"Company") certain banks (the "Banks") and The Chase Manhattan Bank (successor
by merger to The Chase Manhattan Bank (National Association)), as agent for the
Banks (the "Administrative Agent").
In connection with a public offering by SIG of up to 3,450,000 shares
of its common stock pursuant to Form S-1 dated September __, 1996, we understand
that (1) the parties to the Stockholder Agreement wish to amend and restate such
Stockholder Agreement in substantially the form of Exhibit A attached hereto
(the "Amended and Restated Stockholder Agreement") so that the Company and GGS
may be consolidated with SIG for financial reporting purposes and (2) the
parties to the GGS Stock Purchase Agreement wish to enter into a Third Amendment
to the Stock Purchase Agreement in substantially the form of Exhibit B attached
hereto (the "Third Amendment").
<PAGE>
- 2 -
With the consent of the Majority Banks, we consent to GGS entering the
Amended and Restated Stockholder Agreement and the Third Amendment on the
condition that simultaneously therewith, the Credit Agreement shall,
automatically and without any further action by the parties hereto, be amended
in the following respects:
1. The first sentence of Section 8.08 of the Credit Agreement shall be
amended by deleting therefrom the text from and including the words "except that
Pafco may pay to SIG a dividend" to and including the words "and Goran".
2. Section 8.12 of the Credit Agreement shall be amended by deleting
the words "clauses (e) and (f)" and replacing them with "clause (b)".
The foregoing consent shall become effective upon receipt by the
Administrative Agent of a copy of this letter duly executed on behalf of the
Company and GGS as below provided. This letter agreement shall be governed by
and construed in accordance with, the law of the State of New York.
Very truly yours,
THE CHASE MANHATTAN BANK,
as Administrative Agent
By /s/ J. David Parker, Jr.
------------------------
J. David Parker
Vice President
CONSENT:
GGS MANAGEMENT, INC.
By /s/ A Y Zuror
- - - ------------------------
Title: President
GGS MANAGEMENT HOLDINGS, INC.
By /s/ A Y Zuror
- - - ------------------------
Title: President
[CHASE LOGO]
<PAGE>
December 31, 1996
GGS Management, Inc.
GGS Management Holdings, Inc.
c/o Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: David L. Bates, Esq.
Re: Second Amendment
Gentlemen:
We refer to the Credit Agreement dated as of April 30, 1996 (as amended
by a Consent and Amendment dated as of October 31, 1996, the "Credit Agreement";
terms defined in the Credit Agreement to have their respective defined meanings
when used herein) between GGS Management, Inc. (the "Company") certain banks
(the "Banks") and The Chase Manhattan Bank (successor by merger to The Chase
Manhattan Bank (National Association)), as agent for the Banks (the
"Administrative Agent").
You have requested that the Credit Agreement be amended to provide for
an amendment of a certain mandatory prepayment provision in the Credit
Agreement. Having received the consent of the all the Banks, we agree that the
Credit Agreement is hereby amended in the following respect:
Subsection (a) of Section 2.08 of the Credit Agreement shall be amended
to add the following at the end thereof:
"; provided that, without making any such prepayment, the Company may
make an Equity Issuance for up to but not exceeding $6,000,000 in the
aggregate to GGS at any time from and including December 20, 1996 to
and including December 31, 1996 so long as all of such proceeds are
-3-
<PAGE>
contributed as Statutory Surplus to the Insurance Subsidiaries on or
before December 31, 1996."
The foregoing amendment shall become effective upon receipt by the
Administrative Agent of a copy of this letter duly executed on behalf of the
Company and GGS as below provided. This letter agreement shall be governed by
and construed in accordance with, the law of the State of New York.
THE CHASE MANHATTAN BANK,
as Administrative Agent
By /s/ J. David Parker, Jr.
------------------------
J. David Parker
Vice President
CONSENT:
GGS MANAGEMENT, INC.
By /s/
- - - ---------------------------------
Title: CFO
GGS MANAGEMENT HOLDINGS, INC.
By /s/ David L. Bates
- - - ---------------------------------
Title: VP & General Counsel
[Execution Copy]
AMENDMENT NO. 3
Amendment No. 3 dated as of December 31, 1996, between GGS
MANAGEMENT, INC., a corporation duly organized and validly
existing under the laws of the State of Delaware (the "Company");
each of thelenders that is a signatory hereto (individually, a "Bank" and
collectively, the "Banks"); and THE CHASE MANHATTAN BANK,
a New York banking company, as agent for the Banks (in such
capacity, together with its successors in such capacity, the "Administrative
Agent").
The Company, the Banks and the Administrative Agent (successor by
merger to The Chase Manhattan Bank (National Association)) are parties
to a Credit Agreement dated as of April 30, 1996 (as heretofore modified
and supplemented and in effect on the date hereof, the "Credit Agreement"),
providing, subject to the terms and conditions thereof, for loans to be
made by said Banks to the Company in an aggregate principal amount
not exceeding $48,000,000.
The Company, the Banks and the Administrative Agent wish to amend
the Credit Agreement in certain respects, and accordingly, the parties hereto
hereby agree as follows:
Section 1. Definitions. Except as otherwise defined in this Amendment
No. 3, terms defined in the Credit Agreement are used herein as defined
therein.
Section 2. Amendments. Subject to the satisfaction of the conditions
precedent specified in Section 4 below, but effective as of the date hereof,
the Credit Agreement shall be amended as follows:
2.01. References in the Credit Agreement (including references to the
Credit Agreement as amended hereby) to "this Agreement" (and indirect
references such as "hereunder", "hereby", "herein" and'hereof") shall be
deemed to be references to the Credit Agreement as amended hereby.
2.02. Section 1.01 of the Credit Agreement shall be amended by
adding the following new definitions and inserting the same in the
appropriate alphabetical locations, as follows:
"Guaranteed Note" shall mean the promissory note of GGS date
December 31, 1996 in the principal amount of $4,800,000 payable
to Superior on or before March 28, 1997, guaranteed in part by
SIG in accordance with terms thereof.
Amendment No. 3
<PAGE>
-2-
"1997 Equity Contribution" shall mean a common equity capital
contribution by SIG and GS Capital to GGS during the period from
and including March 17, 1997 to andincluding March 28, 1997,
aggregating not less than $4,800,000 and not more than $6,000,000,
a portion of which shall be used directly for the payment in full of the
principal of and accrued interest on Guaranteed Note on or before
March 28, 1997 and the remainder of which will be contributed to the
common equity of the Company.
2.03. The proviso to subsection (a) of Section 2.08 of the Credit
Agreement shall be amended to read in its entirety as follows:
"; provided that, no such prepayment need be made in respect
of any Equity Issuance to GGS resulting from either (x) the 1997 Equity
Contribution (or the use of the proceeds thereof) or (y) the issuance to
Superior of, or any payment made in respect of the Guaranteed Note;
and any such Equity Issuance and any payment made in respect of the
Guaranteed Note shall not be deemed to violate any provision of Section
8.15."
2.04. Section 8.07(b) of the Credit Agreement shall be amended
by adding the following proviso immediately after the first proviso of
said Section 8.07(b):
"; provided further, that, notwithstanding the forgoing, Superior
may make the Investment referred to in the proviso to subsection
(a) of Section 2.08 hereof."
2.05. Section 8.09(e) of the Credit Agreement shall be amended
to read in its entirety as follows:
"(e) Maximum Statutory Net Premiums Written. The Company
shall not permit its Insurance Subsidiaries (on a combined basis) to have
Statutory Net Premiums Written during any period of four consecutive
fiscal quarters of such Insurance Subsidiaries (including any portion of
such period prior to the Closing Date when they were not Subsidiaries
of the Company) to exceed 3 times the combined Statutory Surplus of
Pafco and Superior as at the end of such period, provided that for the
period of four consecutive fiscal quarters ending September 30, 1996
and December 31, 1996 and March 31, 1997, the Company shall not
permits its Insurance Subsidiaries (on a combined basis) to have
Statutory Net Premiums Written during such period to
Amendment No. 3
<PAGE>
-3-
exceed 3.15 times the combined Statutory Surplus of Pafco and
Superior as at the end of such period."
2.06. Section 8.10 of the Credit Agreement shall be amended to
read in its entirety as follows:
"8.10 Risk-Based Capital Ratio. The Company will not on any
date permit the Risk Based Capital Ratio (a) of Pafco to be less than
2 to 1 or (b) of Superior to be less than (x) 2.70 to 1 prior to June
30, 1997 or (y) 3 to 1 on or after June 30, 1997."
Section 3. Representations and Warranties. The Company
represents and warrants to the Banks that the representations and
warranties set forth in Section 7.01, 7.04, 7.05 and 7.06 of the
Credit Agreement are true and correct on the date hereof as if made
on and as of the date hereof and as if each reference in said Sections
to "the Agreement" included reference to the Credit Agreement as
amended by this Amendment No. 3.
Section 4. Conditions Precedent. As provided in Section 2 above,
the amendments to the Credit Agreement set forth in said Section 2
shall become effective, as of the date hereof, upon the satisfactions of
the following conditions precedent:
4.01. Execution by All Parties. This Amendment No. 3 shall have
been executed and delivered by each of the parties hereto.
4.02 1997 Equity Contribution. Evidence that the 1997 Equity
Contribution shall have occurred, and the Administrative Agent shall
have receivec copies of each of the documents and instruments
pursuant to which the 1997 Equity Contribution shall have occurred.
4.03 Repayment of Guaranteed Note. Evidence that the
Guaranteed Note has been paid in full in cash.
4.04. Stock Certificates. Pursuant to the Pledge Agreements, the
Administrative Agent shall have received in connection with the
Equity Issuances referred to in the proviso to subsection (a) of
Section 2.08 of the Credit Agreement (a) all stock certificates (if
any) received in consideration for any Equity Issuance by the Company,
accompanied by stock powers executed in blank and (b) all stock
certificates (if any) received in consideration for any Equity Issuance by
Superior, accompanied by stock powers executed in blank.
Amendment No. 3
<PAGE>
-4-
4.05. Amendment Fee; Expenses. Chase shall have received
payment by the Company, in immediate available funds, of (a)
an amendment fee as separately agreed to by the Company and
Chase in the Fee Letter date of even date herewith and (b) all
reasonable out-of-pocket costs and expenses of Chase (including,
without limitation, the reasonable fees and expenses of Milbank,
Tweed, Hadley & McCloy, special New York counsel of Chase)
from October 29, 1996 to the execution and delivery of this
Amendment No. 3 in connection with the preparation,
negotiation, execution and delivery of this Amendment No. 3.
4.06. Other Documents. The Administrative Agent shall have
received such other documents as the Administrative Agent or any
Bank or special New York counsel to Chase may reasonably request.
The Administrative Agent shall notify the Company and the Banks of
the date on which the conditions specified in this Section 4 have
been satisfied. Such letter shall constitute conclusive evidence that
such conditions have been satisfied.
Section 5. Miscellaneous. Except as herein provided, the Credit
Agreement shall remain unchanged and in full force and effect. This
Amendment No. 3 may be executed in any number of counterparts,
all of which taken together shall constitute one and the same
amendatory instrument and any of the parties hereto may execute
this Amendment No. 3 by signing any such counterpart. This
Amendment No. 3 shall be governed by, and construed in accordance
with, the law of the State of New. York.
Amendment No. 3
<PAGE>
-5-
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 3 to be duly executed and delivered as of the day
and year first above written.
GGS MANAGMENT, INC.
By: /s/ David L. Bates
Title: Vice President,
General Counsel &
Secretary
<PAGE>
-6-
THE CHASE MANHATTAN BANK
By: /s/ Peter Platten
Title: Vice President
DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCH
By:
Title:
DEUTSCHE BANK
By:
Title:
COMERICA BANK
By:
Title:
Amendment No. 3
<PAGE>
-6-
THE CHASE MANHATTAN BANK
By:
Title:
DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCH
By: /s/ John S. Runnion
Title: Vice President
/s/ John Sweeney
Title: Vice President
DEUTSCHE BANK
By:
Title:
COMERICA BANK
By:
Title:
Amendment No. 3
<PAGE>
-6-
THE CHASE MANHATTAN BANK
By:
Title:
DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCH
By:
Title:
DEUTSCHE BANK AG, NEW YORK AND/
OR CAYMAN ISLANDS BRANCHS
By: /s/ Eckhard Osenberg
Title: Assistant Vice
President
/s/ John S. McGill
Title: Vice President
COMERICA BANK
By:
Title:
Amendment No. 3<PAGE>
THE CHASE MANHATTAN BANK
By:
Title:
DRESDNER BANK AG NEW YORK AND
GRAND CAYMAN BRANCH
By:
Title:
DEUTSCHE BANK
By:
Title:
COMERICA BANK
By: /s/ Phillip A. Coosaia
Title: Vice President
Amendment No. 3
GORAN CAPITAL INC. - Consolidated
Analysis of Earnings Per Share
As at December 31, 1996
December 31, December 31,
1996 1995
TSE Trading Activity
Period Volume Value Average
Covered # (US $) Price (US$) (US $)
January to December
1996 1,684,061 $23,551,580 $ 13.98 $6.20
Proceeds from Exercise
of Warrants and Options
(US $) $3,789,130 $1,353,460
Shares Repurchased -
Treasury Method 270,943 218,396
Shares Outstanding -
Weighted Average 5,286,270 5,012,005
Add: Options &
Warrants Outstanding 709,149 774,035
Less: Treasury Method
- - - - Shares Repurchased (207,943) (218,396)
Shares Outstanding for
U.S. GAAP Purposes 5,724,476 5,567,644
Net Earnings in
Accordance with U.S.
GAAP $31,294,636 $6,665,935
Earnings Per Share - U.S.
GAAP (Primary and
Fully Diluted) $5.47 $1.20
<PAGE>
[Goran logo, which appears throughout
entire annual report on upper outside
corner]
Corporate Profile
Goran Capital Inc. owns subsidiaries engaged in a number of business
activities. The most important of these is the property and casualty
insurance business conducted in 31 U.S. states, Canada and Barbados, on
both a direct and reinsurance basis through a number of subsidiaries
collectively referred to in this report as Goran. Goran owns 67% of
Symons International Group, Inc. which began trading on the NASDAQ on
November 5, 1996 under the symbol SIGC. Symons owns 100% of IGF
Insurance Company of Des Moines, Iowa which is the 5th largest crop
insurer in the United State. Symons owns 52% of GGS Management
Holdings, Inc. which owns 100% of Superior Insurance Company of
Atlanta, Georgia and Pafco General Insurance Company of Indianapolis,
Indiana. These insurers provide nonstandard automobile insurance and
together are the 16th largest writers of such insurance in the United States.
On April 30, 1996 Goran Capital, through its affiliation with GS Capital
Partners II, L.P., purchased Superior Insurance Company. The Canadian
subsidiaries, Granite Reinsurance Company Ltd. and Symons International
Group, Inc. - Florida underwrites finite (limited risk) reinsurance in
Bermuda, the United States and Canada and offers commercial insurance
coverage.
The investment portfolios of the insurance subsidiaries include debt and
government instruments. The majority of holdings of the portfolios are
publicly traded and most of the holdings of the debt portfolio have ratings
greater than A+. Goran is a public company listed in The Toronto Stock
Exchange under the symbol GNC and NASDAQ under the symbol GNCNF.
Table of Contents
Financial Highlights 1
Chairman's Report 2
Management's Discussion and Analysis 5
Consolidated Financial Statements 14
Notes to Consolidated Financial Statements 17
Auditors' Report 35
Corporate Directory 36
Subsidiaries and Branch Offices IBC
Shareholder Information IBC
[Bar Graph omitted]
<PAGE>
Financial Highlights
(dollars in thousands, except per share amounts)
For The Years Ended
December 31,
1996 1995 1994 1993 1992
Gross Premium
Revenue 307,634 151,717 126,978 114,135 128,440
Net Earnings,
Before Unusual Item 13,127 7,171 3,940 1,397 4,413
Earnings Per Share
Before Unusual Item 2.48 1.43 0.81 0.29 0.94
Shareholders' Equity 47,258 12,622 5,067 1,088 (739)
Book Value Per Share 8.74 2.49 1.03 0.22 (0.15)
Market Value Per Share 20.08 8.57 5.20 3.55 2.08
(1) In 1996 Goran recorded a gain of $18,169 or $3.44 per share on the
sale of SIG stock as part of SIG's initial public offering. The gain is
recorded as an unusual item.
<PAGE>
CORPORATE STRUCTURE
Goran Capital, Inc.
Toronto, Ontario
("Goran" or the "Company")
|
|
__________________________________________________________________
| | | |
100% Owned 67% Owned 100% Owned 100% Owned
Symons Symons International Granite Reinsurance Granite
International Group, Inc., Company, Ltd. Insurance
Group, Inc. Indianapolis, Indiana Indianapolis, Indiana Company
Florida ("SIG") ("Granite Re") ("Granite")
|
|
_____________________|________________________
| |
100% Owned 52% Owned Funds Affiliated
IGF Holdings, Inc. GGS Management ----48%-----With Goldman
("IGFH") Holdings, Inc. Sachs & Co.
| ("GGSH" or ("GS Funds")
| "GGS Holdings")
100% Owned |
IGF Insurance |
Company 100% Owned
("IGF") GGS Management, Inc.
("GGS Management")
|
_________________________|______________________
| |
100% Owned 100% Owned
PAFCO General Superior Insurance
Insurance Company Company
("Pafco") ("Superior")
|
___________________________|
| |
100% Owned 100% Owned
Superior Guaranty Superior American
Insurance Company Insurance Company
<PAGE>
CHAIRMAN'S LETTER
REPORT TO SHAREHOLDERS
It's that time of the year when I sit down at my word processor and try to
make like I know it all, by telling you where we have been and where we
are going. At least what I think is going to be the results of our travel.
In latter years I have done pretty well, even though my superego has been
advising me to temper my comments and not be overly optimistic. A
difficult position to take when the signposts indicate we are on a winning
track.
A good place to start this, or so it seems to me, is to briefly review last
year's Chairman's Report. From that we can judge how well your company
met the projections I outlined at the time.
I said we were budgeting for Gross Income in 1996 to double over
1995. The results presented in the following tables shows that we did.
I indicated that the overall result, taking into consideration profit and
growth, would be outstanding. I believe they have been. Nonstandard
auto improved its pre-tax income by $9,400,000 (U.S.) while crop
insurance pre-tax is up by about 60%. Net income for all operations has
increased from $7,171,000 (U.S.) to $13,127,000 (U.S.)
You will note from the following financial information that we hit our
targets of double growth for 1995 to 1996. While we don't expect to
double again in 1997, we do expect to hit our corporate goal to exceed
25% compound annual growth both top and bottom line.
You may recall in last year's report I referred to a major transaction
initiated on January 31, 1996, whereby in conjunction with Goldman Sachs
we entered into an agreement with Fortis to purchase from them the
Superior Insurance Group. Acquiring insurance companies involves
obtaining clearance from the regulators and it was May 1, 1996 before we
took over the Superior Group of companies. Immediately following this
date we began to implement changes in procedures to conform with our
underwriting methods and management style. The premium income has
since grown at a significant rate. For 1996, auto premiums reached
$225,027,000 ($187,176,000 U.S.) compared with $66,157,000
($49,005,000 U.S.) for 1995. Pafco, the company we started from scratch
in 1987, contributed about $95,000,000 ($70,000,000 U.S.) with the
balance (approximately $159,000,000 ($117,000,000 U.S.)) coming from
the Superior acquisition over the eight months since we secured it. We
have seen a reduction in our combined loss ratio of 111.3% for 1995 to
101.4% for 1996 mainly due to improved underwriting and major
reductions in the cost of doing business.
I thought it was meaningful that the premium income of Superior for 1995,
the year before we acquired it, was $127,921,000 ($94,756,000 U.S.) with
a profit of $2,226,000 ($1,649,000 U.S.).
- - - -2-
<PAGE>
CHAIRMAN'S LETTER
1995 1996
Canadian U.S. Canadian U.S.
Dollars Dollars Dollars Dollars
Gross Premiums
Written $208,216,000 $151,727,000 $419,151,000 $307,634,000
Shareholders'
Equity $ 17,232,000 $ 12,622,000 $ 64,724,000 $ 47,258,000
Net Income $ 9,841,000 $ 7,171,000 $ 17,886,000 $ 13,127,000
A look at the information provided in the table above shows a significant
improvement in the company's performance since we took over.
This would be a good story if I left it right here but there is more. It is not
sufficient to write great gobs of premium unless that income is producing
profit. Through a series of changes that management effected the loss and
expense ratio of the company was reduced by 9.9%. The final piece de
resistance to this episode, at least for now, is that the pre-tax income from
our nonstandard auto division went from $(2,685,000) ($(1,989,000) U.S.)
in 1995 to $10,129,000 ($7,434,000 U.S.) in 1996. Expanding premium
income requires expanded capital for most insurers. In taking on the
acquisition of Superior we needed to not only raise funds to pay for it but
we had to consider the increase in capital that would be needed to write a
fast growing volume of business. To some degree we accomplished that
when we took into our nonstandard auto business GS Capital Partners II,
L.P. for 48%. We, of course, have to be responsible for our share of
further capital needs, either to accommodate requirements of GGS
Management Holdings, Inc., the nonstandard holding company, for
premium writing purposes or for future acquisitions in that field. GGS
includes in its group of companies, the Superior companies and Pafco
General Insurance Company.
On November 5,1996 we took our U.S. holding company, Symons
International Group, Inc., public on NASDAQ, selling 3 million shares out
of a total of 10 million shares outstanding and then sold 450,000 shares to
the underwriters of the issue for the over-allotment that they had
contracted to pick up. The shares had an initial price of $12.50 (U.S.) and
after expenses we realized approximately $38,000,000 (U.S.) from the
transaction. Price at this writing was $17,500,000 (U.S.). This transaction
allowed us to reduce debt and to create funds for future capital needs.
Over the last three years the star performer of our group has been our crop
insurance company, IGF Insurance Company of Des Moines, Iowa. It has
grown from a small rural insurer with $30,000,000 ($22,222,000 U.S.) of
premium, in November 1990, to $150,000,000 ($110,000,000 U.S.) at the
end of 1996, and is now the fifth largest company in this field.
Crop insurance is the fastest growing segment of commercial insurance, the
result of the government withdrawing as a provider of coverage, and
nonstandard auto insurance is the fastest growing segment of personal
insurance. No, our growth hasn't been done with mirrors. There are sound
principles working to assist us in our endeavors.
The effect of our increasing profitability and raising of public funds has had
a profound consequence on two segments of our financial lives. Because
of these factors, we have been able to reduce our debt/equity ratio and
increase the Shareholder's Equity substantially.
Putting together an initial public offering (IPO), requires an astounding
amount of work. We had been there before when we first went public with
Goran's predecessor company, Pafco Financial Holdings. In the period
leading up to November 5, when Symons International Group, Inc.,
became a "public" entity, the members of our staff were called on to do
yeomen service. The gathering and assembling of the financial information
was of particular significance for what is an IPO but a financial and
accounting
-3-
<PAGE>
CHAIRMAN'S LETTER
For The Years Ended December 31,
1993 1994 1995 1996
Book Value Per Share
CDN $0.30 $1.39 $3.36 $11.97
US $0.22 $1.03 $2.49 $ 8.74
Long Term Debt to
Equity 16.1 to 1 2.86 to 1 .99 to 1 .53 to 11
1Excluding minority interest portion of $48 million term debt
performance. The members of our Accounting Department, now headed
by Gary Hutchcraft, worked long hours to meet the needs of the
underwriters. Our U.S. auditors, Coopers & Lybrand, assisted us and were
available for the tedious chore of sanctifying the information we assembled.
Our attorneys, Barnes & Thornburg, were most helpful in directing our
efforts so as to avoid pitfalls that crop up in these matters. The issue was
successful and the public have realized a substantial gain in their investment
since November 5, 1996.
I would be remiss if I didn't make mention of the gentlemen who did such
an effective job in the period of the "dog and pony shows" which pre-sold
the issue. Team No. 1 was made up of Alan Symons and Dennis Daggett,
the President of IGF. Team Number 2 included Doug Symons and Tom
Gowdy, the second man at IGF. The fact that the issue was oversold bears
testimony to the effective way that these two teams presented the facts to
the financial organizations they visited. During this three week period, they
made presentations in 16 different cities.
Needless to say, the year has been one of trial and success. The President
and CEO of Goran, Alan Symons, has worked long hours and most
effectively to bring in an outstanding year and one that has been accepted
by the knowledgeable public as it moved our share price from $8.75(U.S.)
in January to $19.13(U.S.) in the ensuing 12 months. He instigated the
moves that resulted in our making a deal for Superior, which in my
opinion, is going to play a leading role in our growth on the way to a $1
Billion of gross premiums by the year 2000. The "boys" behemoths would
better describe them, Tom Gowdy and Dennis Daggett, have come through
with another stellar performance in their efforts to take IGF to the top in
the crop field. I have mentioned the efforts of Doug Symons and Gary
Hutchcraft before and the roles they played in certain of our endeavors, but
there are a number of others that should be given equal billing. I can only
mention that we have assembled a first rate team who in my opinion will
continue to produce above average results.
We have a much larger representation on the Boards of the two public
companies and you will find their names listed in the latter page of this
report. They have all put in a lot of time to assist us in our decisions and I
wish to thank them for their judicious assistance in the past year.
We now have a staff of 709 persons which has grown from 460 over the
past two years. I mention this for it is an indication of our growth which I
believe will go on to bigger and better things in the years ahead.
Last, I wish to thank the shareholders who have shown their faith in us.
We recognize that the shareholder is sacrosanct, for all of our senior people
are shareholders. We do it for you and we do it for ourselves. I trust that
we will all have a wonderful trip.
/s/G. Gordon Symons
Chairman of the Board
February 19, 1997
- - - -4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Condition and Results of Operations
Results of Operations
[Large Goran logo]
1996 proved to be a major financial turning point for Goran Capital Inc.
("Goran") and its subsidiaries. Three actions during 1996 changed the
future forever for Goran:
A. The investment by Goldman Sachs affiliate GS Capital Partners II,
L.P. ("Goldman Sachs") for 48% of our nonstandard unit and the resulting
acquisition of Superior Insurance Company ("Superior") on May 1, 1996,
brought Goran into the big leagues of nonstandard automobile insurance.
We are now the 16th largest nonstandard automobile insurance provider in
the United States.
B. The quantum leaps and superb profits of IGF Insurance Company
("IGF"), our crop insurance company, thrust IGF into the No. 5 spot in the
United States for crop insurance. The profit for 1996 at IGF finally put
IGF's capital to a level that will allow it to grow significantly.
C. The IPO of Goran's U.S. holding company, Symons International
Group, Inc., ("SIG") reduced overall long-term debt to a debt to equity
ratio of .53:1, excluding minority interest portion of $48 million term debt,
it increased the capital of IGF by $9 million and it awakened the public to
the Goran story.
The Company's 1996 gross premium written increased to $307.6 million
from $151.7 million in 1995. The increase in premiums in 1996 over 1995
resulted from growth in both the crop and nonstandard automobile
insurance segments. Gross premiums written for crop insurance grew
$39.7 million in 1996 from $70.4 million in 1995, with premium growth
coming from both the multi-peril crop insurance ("MPCI") and the crop
hail business. The nonstandard automobile segment gross written
premiums grew to $187.2 million in 1996 from $49.0 million in 1995 due
to the acquisition of Superior and elimination of quota share reinsurance.
All other lines of business experienced gross written premium changes from
1995 to 1996 as follows: Finite reinsurance premiums decreased by $32.7
million to $2.1 million and surplus lines premiums increased by $2.0 million
to $9.0 million.
In 1996, net premiums written (gross written less reinsurance to
government FCIC program and third party reinsurers) increased by 155%
from $86.3 million in 1995 to $220.4 million in 1996. This increase
resulted from higher premium volumes on a gross basis as described above,
combined with a reduced dependence on quota share reinsurance in both
the nonstandard automobile lines (reduced from approximately 25% in
1995 to 0% in 1996) and on crop hail reinsurance. In 1996, Goran's net
premiums earned grew to $214.3 million from $76.1 million in 1995.
Since the earning of premium follows the term of the respective policies,
net premiums earned trails net premiums written.
-5-
<PAGE>
For example, in a growing book of business, net premiums earned will also
grow but will lag behind the written premium.
In 1996, investment income grew to $7.8 million from $3.5 million in 1995,
an increase of approximately 122%. Of this increase, $4.7 million was the
result of investment income subsequent to the acquisition of Superior with
the remainder due to an increase in the portfolio at Pafco General
Insurance Company ("Pafco").
Other income, primarily billing fees, increased to $8.5 million in 1996 from
$2.3 million in 1995, the acquisition of Superior generated billing fees of
$4.7 million subsequent to the acquisition in 1996 with increased billing
fees due to higher volume at Pafco providing the remainder.
Net claims incurred increased to $151.4 million in 1996 from $54.2 million
in 1995, which increase is more than offset by the increase in net premiums
earned. The loss ratio decreased from 71.2% in 1995 to 70.6% in 1996
primarily as a result of improved loss ratios from the crop hail business,
which were 74.3% in 1995 and 55.3% in 1996. The loss ratio for the
nonstandard automobile business was 73.7% in 1996 compared to 73.8%
in 1995.
Net commissions expense is composed of three components: (i)
commission expense paid to the Company's agents; (ii) commission income
from reinsurers, including a 31% commission earned by the Company's
crop operations with respect to MPCI; and (iii) underwriting gain or loss
on the Company's MPCI business reported by the Company as an
adjustment to the Company's commission income on this business.
Commissions and operating expenses of $50.4 million in 1996 compared
with $16.4 million in 1995, with such expenses increasing proportionately
with net premiums earned in the respective years with an expense ratio on
this basis of 21.5% in 1995 and 23.5% in 1996. The expense ratio for the
nonstandard automobile division decreased to 29.6% in 1996 from 37.5%
in 1995.
Interest expense in 1996 was $5.0 million compared to $1.8 million in
1995. Increased interest expense in 1996 was due primarily to $2.8 million
incurred with the acquisition of Superior from April 30, 1996, increased
interest costs at IGF due to growth, offset by the payoff of the Company's
debenture holders in November 1996 from the proceeds of the SIG
offering.
In 1996, income tax expense of $8.1 million relates to a tax provision on
income emanating from the U.S. operations compared to a tax provision in
1995 of $2.5 million.
Financial Condition
The Company's assets have grown to $381.3 million in 1996, up from
$160.8 million in 1995. Assets of $165.8 million were obtained in
connection with the Superior acquisition. The largest component of assets
is investments in bonds and stocks. A breakdown of these investments is
highlighted in the Notes to Consolidated Financial Statements.
The Company's second largest asset category is accounts receivable. This
primarily represents monies held on behalf of our insurance and reinsurance
subsidiaries by major third party reinsurance or insurance companies to
support outstanding claims and unearned premiums. Receivables from
insurance companies were $33.9 million in 1996, compared to $34.8
million in 1995. Total receivables represented 26.6% of total assets in
1996 and 29.4% in 1995. Also included in the above receivables is
premium recorded but not yet received from the insured. This is business
that has been taken on but the premium has not been paid to us at the date
of this statement.
Deferred acquisition costs is the amount paid to agents and premium tax
that would be refunded to us should all our policies in force be canceled on
December 31. The offset is the unearned premium. In 1996 deferred
acquisition costs increased to $13.9 million from $7.6 million in 1995. This
increase in deferred costs reflects increases in unearned premiums to $91.2
million in 1996 from $33.2 million in 1995.
The total liabilities of the Company were $334.1 million in 1996, compared
to $148.2 million in 1995. Outstanding claims increased in 1996 to $127.0
million from $87.7 million
-6-
<PAGE>
in 1995, reflecting the acquisition of Superior and an increase in volume in
1996 over 1995, partially offset by a lower loss ratio from 71.2% in 1995
to 70.6% in 1996.
Management believes the capital and surplus of IGF is sufficient to support
its current level of premiums written. Management expects that additional
capital will be necessary to support the growth in nonstandard automobile
premiums or reinsurance will be utilized. Should reinsurance not be
utilized, such capital is expected to be provided by the insurers'
management company, GGS Management, Inc. and through additional debt
leverage. The Company is currently in the process of negotiating with its
lenders and expects its additional financing needs to be approximately
$12.0 million in 1997 should this course be taken.
Shareholders' equity has continued to grow, reaching $47.3 million at
year-end 1996, compared to $12.6 million at the end of 1995. While
shareholders' equity is now $47.3 million, it does not reflect the equity
upon which Goran conducts its various insurance operations. The
underlying insurance subsidiaries had statutory surplus at December 31,
1996 of: Pafco, $18.1 million; Superior, $57.1 million; IGF, $29.5 million
and Granite Re, $15.6 million. This amounts to a total $120.3 million. It is
on these equity bases that the Company's insurance business is written.
Goran's long term debt increased to $48.0 million in 1996 from $11.1
million in 1995. This increase was the result of the acquisition debt for
Superior offset by the payoff of the debentures from the proceeds of the
SIG offering. Although total debt increased, the acquisition debt provides
better leverage for profitable operations that can be repaid from such
operations. <PAGE>
[photographs of building down right margin of page]
Overview
U.S. Operations
SIG is now a 67% owned subsidiary of Goran. Last year, it was a wholly
owned subsidiary but on November 5, 1996, we took SIG public and listed
it on NASDAQ at $12.50 a share and sold 3,450,000 shares. Today,
Goran owns 7,000,000 shares of SIG. The subsidiaries of SIG write
various lines of insurance, including nonstandard automobile and crop
insurance. SIG operates the following companies:
Pafco General Insurance Company ("Pafco"), Indianapolis, Indiana,
(nonstandard automobile)
Superior Insurance Company ("Superior"), Tampa, Florida (nonstandard
automobile)
Superior American Insurance Company ("Superior American"), Tampa,
Florida, (nonstandard automobile)
Superior Guaranty Insurance Company ("Superior Guaranty"), Tampa,
Florida, (nonstandard automobile)
IGF Insurance Company ("IGF"), Des Moines, Iowa - IGF maintains five
branches throughout the U.S. (crop insurance)
The results of each of these subsidiaries are discussed below, following a
general discussion on the consolidated results of the U.S. operations. For
the benefit of the reader, it is felt that the entity discussions should center
on the specific product lines written by each organization (i.e. nonstandard
which encompasses Pafco and the three Superior companies, and crop,
which is IGF).
Consolidated Results of SIG
Gross premium volume for the U.S. operations increased 145.1% to
$305.5 million in 1996 versus $124.6 million in 1995. Both product lines
showed significant increases in 1996.
Net written premiums for 1996 were $209.6 million compared to $53.4
million in 1995. This was an increase of 292.1% resulting from the
acquisition of Superior, reduction in Pafco's dependence on quota share
reinsurance and growth in crop revenues. This allowed SIG to retain more
of the gross premiums being written by its nonstandard automobile
segment as well as its crop insurance business.
IGF's crop insurance business continued its significant growth during 1996
as a result of the Crop Insurance Reform Act signed into law in October
1994 (the "1994 Reform Act") and the Freedom to Farm Act of 1996 (the
"1996 Farm Act"). These two bills
-8-
<PAGE>
[photographs of a building down right margin and across top of page]
enabled the crop insurance industry to increase its premium writings from a
global of $900 million to $1.5 billion and further growth is anticipated
through the introduction of new products like crop revenue coverage ("CRC")
and named perils coverage. With increased premium production and normal
crop growing seasons, the MPCI business produced good underwriting profits
although not as good on an underwriting gain as 1995 (but still very
satisfactory). The crop hail business continued to improve and the Company
outpaced the entire industry due to its unique in-house adjusted program.
Volume for crop hail grew by $11.0 million, or 64.8% in 1996. IGF has
broadened its geographical spread to encompass 31 states and through
diversification in crops, thus spreading its risk and reducing its exposure
to any one peril. IGF also utilizes a unique stop loss reinsurance program
through major reinsurers that minimizes the effects of adverse weather
conditions in the Company's results.
Nonstandard automobile insurance operations experienced a large increase
of premium as a result of restructuring Pafco's operations and streamlining
of operations. Pafco's volume increased from $49.0 million to $70.0
million from 1995 to 1996. In 1995, Superior produced $95.0 million prior
to our owning it. For 1996, we were able to increase the overall volume to
$159.0 million (we only take the benefit of that increase from May 1st
through December 31st which amounted to $117.0 million). The Company
believes that in order for nonstandard auto to be successful it has to be a
low cost provider. SIG is an agency writer and therefore the combination
of working with its independent agents and automation enables SIG to
reduce operating costs which directly effect the bottom line. The
acquisition of Superior also brought with it financial partners, financial
affiliates through Goldman Sachs which participates for 48% of the
activities in our nonstandard automobile division with the controlling 52%
held by SIG. Accordingly, we consolidate the results of our nonstandard
automobile operation and account for Goldman Sachs' participation as
minority interest. The formation of GGS Management Holdings Inc.
("GGSH") where Goldman Sachs' holds their 48% interest and SIG holds
its 52% interest is designed to be an acquisition and internal growth
vehicle. Pro- forma growth in nonstandard automobile for 1996 grew by
31% over 1995, assuming ownership of Superior since January 1, 1995.
Pafco General Insurance Company
[Pafco logo]
Pafco underwrites nonstandard automobile business through its
headquarters in Indianapolis, Indiana. A portion of the business is placed
through IGF
-9-
<PAGE>
[photographs of a building down right margin and across top of page]
in order to utilize licenses it has in Missouri, Arkansas and
Illinois. Pafco's gross written premiums in 1996, excluding crop insurance
fronted for IGF, were $70.4 million as compared to $49.0 million in 1995.
Net premiums also grew significantly to $68.3 million in 1996 as compared
to $34.0 million in 1995. The growth in net premiums was a result of an
elimination of quota share reinsurance on the nonstandard automobile
business. The pre-tax operating results for 1996 improved to $3.0 million
compared to a loss of $2.0 million for 1995. The improvements in
operating results for 1996 was a result of a decrease in the loss and
expense ratio from 111.3% to 103.1% due to better loss experience and
efficiencies in the claims process.
Pafco's statutory capital and surplus in 1996 increased to $18.1 million up
from $11.9 million in 1995.
Superior Insurance Company and Subsidiaries
Superior and its subsidiaries, Superior American Insurance Company and
Superior Guaranty Insurance Company, underwrite nonstandard
automobile business through its offices in Atlanta, Georgia, and Tampa,
Florida. Superior's gross written premiums in 1996 were $159.0 million of
which $117.0 million were written subsequent to the acquisition on April
30, 1996. Gross written premiums in 1995 were $95.0 million. The
increase in premiums was a result of greater marketing efforts and the use
of multi-tiered products. Pre-tax operating results for 1996 were $14.7
million of which $9.0 million was realized subsequent to the acquisition.
Included in operating results prior to the acquisition was a $1.3 million
reduction in claim reserves. Pre-tax operating results for 1995 were $5.8
million. The improvement in operating results in 1996 was a result of a
decrease in the loss and expense ratio from 107.6% to 99.5% due to
economies of scale, underwriting, and claims efficiencies and technological
advancements.
Superior's statutory capital and surplus was $57.1 million at December 31,
1996 compared to $49.3 million at December 31, 1995.
IGF Insurance Company
[IGF Logo]
IGF writes principally MPCI and crop hail insurance and provides licenses
for Pafco's nonstandard automobile insurance in three states. Although
premiums for this coverage are included in IGF, the net profit or loss is
transferred to Pafco through reinsurance programs. Gross premiums
written for crop insurance in 1996 were $110.1 million as compared to
$70.4 million in 1995. IGF's 1996 performance increased significantly as a
result of gains in its crop insurance
-10-
<PAGE>
[photographs of a building down right margin and across top of page]
business which reflect favorable growing conditions.
The 1994 Reform Act and the 1996 Farm Act provided opportunity
for the crop insurance industry to increase its premium volumes.
IGF benefited from these Acts and also grew at a rate faster than
most of its principal competitors due to the marketing efforts of
its management team.
IGF exceeded industry results on its MPCI and crop hail business, because
of its unique underwriting criteria. IGF continued to benefit from its
change in 1994 to an in-house adjusting force, which resulted in enhanced
effectiveness on adjusting crop claims. By hiring full-time employees to
perform this function, IGF has benefited by tighter claims controls and cost
savings.
IGF's statutory capital and surplus increased in 1996 to $29.5 million from
$9.2 million in 1995. The increase in surplus in 1996 related to increases in
underwriting profits and a $9.0 million contribution from the proceeds of
the offering.
Symons International Group, Inc. - Florida ("SIGF")
[SIGF logo]
Goran's wholly-owned subsidiary, Symons International Group, Inc. -
Florida's a specialized surplus lines underwriting unit. Goran writes third
party property and casualty coverage using Pafco, IGF and other insurance
companies under contract with SIGF. The volume of business grew by
22% however, the underwriting profits were not as good as 1995. SIGF
produced an overall loss to the Company of $1.2 million compared to a
profit for 1995. Through the implementation of automation, focus on
strong underwriting controls, and reorganizing the product lines it is
anticipated SIGF will return to profits for 1997.
Non-U.S. Operations
Granite Insurance Company ("Granite")
[Granite logo]
Granite is a Canadian federally licensed insurance company which is
presently servicing its investment portfolio and a very few outstanding
claims. Granite stopped writing business on December 31, 1989 and sold
its book of Canadian business in June 1990. The outstanding claims
continue to be settled in accordance with actuarial estimates with some
redundancies showing in the most recent year. Granite's invested assets
reduced to $4.5 million from $5.5 million in 1995. This is the result of
settlement of claims and the run-off of outstanding claims. Total
outstanding claims decreased to $1.9 million in 1996 from
-11-
<PAGE>
[photographs of a building down right margin of page]
$4.7 million in 1995. It is expected that the run-off of outstanding
claims will continue at least until 1998. Granite's net earnings were $50,000
in 1996, compared to $200,000 in 1995. This is reflective of the reduction
in invested assets, which in turn reduces earnings from investment yields.
Investment income in 1996 and 1995 was $500,000.
Granite Reinsurance Company Limited ("Granite Re")
[Granite Re logo]
Granite Re is managed by Atlantic Security of Bermuda and Colybrand in
Barbados. Granite Re underwrites finite risk reinsurance, stop loss
reinsurance and quota share reinsurance. This reinsurance involves a
defined maximum risk at the time of entering into a contract. The
Company participates in various programs in Bermuda, United States and
Canada. On December 31, 1995 its Canadian quota share terminated and
is now in run -off which is expected to yield investment revenue and
underwriting gains for the next five to six years. The loss portfolio transfer
program that it took on June 30, 1990, is now winding down in accordance
with management's forecast and is producing profits as anticipated.
During 1995 and 1996, Granite Re participated in certain stop loss
programs for Goran's crop subsidiary, IGF. These covers were in
accordance with third party placements where Granite Re took a portion
after terms having been established by substantial third party reinsurers.
Granite Re also participated on numerous small contracts with third parties.
On January 1, 1996, it assumed all of the outstanding losses and the book
of business of Pafco's premium writings from the surplus lines operation in
Florida. Accordingly, Granite Re's gross written premiums are starting to
increase again. Gross premiums written during the 12 months ended
November 30, 1996 (Granite Re has a year-end different from Goran) were
$12.3 million compared to $34.8 million for the corresponding period in
1995. Net income was $2.6 million in 1996 compared to $4.0 million in
1995.
During 1996, as a result of the proceeds from the initial public offering of
SIG, Granite Re realized a repayment of an outstanding loan from SIG.
Granite Re, during 1996, lent Goran $5.5 million which was used by Goran
to retire its Eurobond note. Total capital and surplus of Granite Re
increased to $15.8 million in 1996 from $13.2 million in 1995. The
Company initially started July 1, 1990 with a capital base of $825,000.
Granite Re intends to continue to broaden its base to include captive
reinsurance, finite reinsurance, and its existing programs as outlined above.
The programs currently underwritten by Granite Re generate a loss
portfolio that is matched with cash.
-12-
<PAGE>
[photographs of a building down right margin and across top of page]
Such portfolios take about eight to nine years to run- off, thus generating
investment returns and underwriting gains during the life of the run-off.
New business underwritten in 1995 and 1996 is added to the portfolio
of outstanding losses and invested assets, thus perpetuating the growth
of Granite Re through fees, investment income and underwriting profits.
-13-
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
As at December 31 (in thousands of US dollars)
1996 1995
Assets
Cash and Investments (Note 5) $206,671 $54,366
Accounts Receivable
Premiums Receivable 63,874 11,233
Due From Insurance Companies 33,905 34,837
Due From Associated Companies 140 ---
Accrued and Other Receivables 3,330 1,231
101,249 47,301
Reinsurance Recoverable on
Outstanding Claims 33,113 41,667
Prepaid Reinsurance Premiums 14,983 6,263
Capital Assets (Note 6) 4,801 2,088
Deferred Policy Acquisition Costs 13,860 7,641
Deferred Income Taxes --- 73
Goodwill (Notes 7 and 13) 1,330 ---
Other Assets (Notes 7 and 13) 5,335 1,417
$381,342 $160,816
Liabilities and Shareholders'
Equity (Note 11)
Accounts Payable
Due to Insurance Companies $ 5,755 $ 1,986
Due to Associated Companies --- 188
Accrued and Other Payables 21,051 8,310
26,806 10,484
Outstanding Claims (Notes 2(e) and 4) 127,045 87,655
Unearned Premiums (Notes 4) 91,207 33,159
Bank Loans (Note 8) 48,000 5,811
Debentures (Note 9) --- 11,085
Minority Interest in Subsidiaries 41,410 ---
334,084 148,194
Contingent Liabilities and
Committments (Note 15) 47,258 12,622
$381,342 $160,816
See accompanying notes to Consolidated Financial Statements
Approved on behalf of the board
/s/ /s/
Director Director
- - - -14-
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31 (in thousands of
U.S. dollars, except per share data)
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of US dollars except per share data)
1996 1995
REVENUE
Gross Premiums Written $307,634 $151,717
Net Premiums Earned $214,346 $ 76,102
Net Investment and Other
Income (Notes 4 and 13(a) 16,406 5,872
Total Revenue 230,752 81,974
EXPENSES
Net Claims Incurred 151,384 54,193
Commissions and Operating
Expenses (Note 17(b)) 50,352 16,352
Interest Expense 4,961 1,761
Total Expenses 206,697 72,306
Earnings Before Undernoted Items 24,055 9,668
Provision for Income Taxes (Note 12) 8,127 2,497
Minority Interest 2,801 ---
Earnings Before Unusual Item 13,127 7,171
Unusual Item (Note 3) 18,169 ---
Net Earnings After Unusual Item $31,296 $7,171
Earnings Per Share Before Unusual Item $2.48 $1.43
Earnings Per Share $5.92 $1.43
Earnings Per Share - Fully Diluted $5.28 $1.26
See accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
1996 1995
Retained Earnings/(Deficit),
Beginning of Year ($3,895) ($11,066)
Net Earnings for the Year 31,296 7,171
Retained Earnings/(Deficit),
End of Year $27,401 ($3,895)
See accompanying Notes to Consolidated Financial Statements
-15-
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31 (in thousands of U.S. dollars)
CONSOLIDATED STATEMENTS OF CHANGES IN CASH RESOURCES
1996 1995
Cash Provided By (Used In):
Operating Activities
Net Earnings $ 31,296 $ 7,171
Items Not Involving Cash:
Amortization (note 13) 2,438 693
Minority Interest Share in Net Earnings 2,801 (16)
Loss on Sale of Investments 637 198
Gain on Sale of Capital Assets (4) (7)
Working Capital Provided by Operating
Activities 37,168 8,039
Changes in Working Capital Relating to
Operations (Note 18) 30,897 9,637
Financing Activities
Reduction of Debentures (11,085) (1,462)
Increase of Borrowed Funds 42,189 220
Increase of Minority Interest 38,225 ---
Increase in Contributed Surplus 2,775 ---
Issue of Share Capital 599 303
72,703 (939)
Investing Activities
Acquisition of Superior (66,590) ---
Net Purchase of Marketable Securities (11,996) (4,147)
Net Purchase of Capital Assets (2,459) (1,681)
Other, Net 563 155
(80,482) (5,673)
Increase in Cash Resources During the Year 23,118 3,025
Cash Resources, Beginning of Year 10,613 7,588
Case Resources, End of Year $33,731 $10,613
Cash Resources are Comprised of:
Cash 4,679 4,171
Short-Term Investments 29,052 6,442
$33,731 $10,613
See accompanying Notes to Consolidated Financial Statements
- - - -16-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
1. Organization
Goran Capital Inc. ("Goran" or the "Company") is the parent company of
the Goran group of companies. The consolidated financial statements
include the accounts of all subsidiary companies of Goran, as follows:
1. Symons International Group, Inc. ("SIG") is a 67% owned
subsidiary of Goran. SIG is primarily involved in the sale of nonstandard
automobile insurance and crop insurance. Its products are marketed
through independent agents and brokers, within a 31 state area, primarily in
the Midwest and Southern United States. SIG's subsidiaries are as
follows:
GGS Management Holdings, Inc. ("GGSH") - a holding company for the
nonstandard automobile operations which includes GGS Management,
Inc., Pafco General Insurance Company and the Superior Insurance
Company entities - 52% owned;
GGS Management, Inc. ("GGS") - a management company for the
nonstandard automobile operations domiciled in Delaware- 52% owned;
Superior Insurance Company ("Superior") - an insurance company
domiciled in Florida - 52% owned;
Superior American Insurance Company ("Superior American") - an
insurance company domiciled in Florida - 52% owned;
Superior Guaranty Insurance Company ("Superior Guaranty") - an
insurance company domiciled in Florida - 52% owned; and
Pafco General Insurance Company ("Pafco") - an insurance company
domiciled in Indiana - 52% owned;
IGF Holdings, Inc. ("IGFH") - a holding company for the crop operations
which includes IGF and Hail Plus Corp - 100% owned;
IGF Insurance Company ("IGF") - an insurance company domiciled in
Indiana - 100% owned; and
Hail Plus Corp - an Iowa-based premium finance company - 100% owned.
2. Granite Reinsurance Company Ltd. ("Granite Re") - a finite risk
reinsurance company based in Barbados. (100% owned)
3. Granite Insurance Company ("Granite") - a Canadian federally
licensed insurance company which ceased writing new insurance policies
on January 1, 1990. (100% owned)
4. Symons International Group, Inc. of Ft. Lauderdale, Florida
("SIGF") - a Florida based surplus lines insurance agency. (100% owned)
On January 31, 1996, Goran and SIG entered into an agreement with GS
Capital Partners II, L.P. ("Goldman Sachs") to create a company, GGSH,
to be owned 52% by SIG and 48% by Goldman Sachs. GGSH created
GGS, a management company for the nonstandard automobile operations
which includes Pafco and the Superior entities.
-17-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
On April 30, 1996, GGSH acquired the Superior entities through a
purchase business combination. The Company's consolidated results of
operations for the year ended December 31, 1996 include the results of
operations of the Superior entities subsequent to April 30, 1996, the date
of the acquisition.
On January 1, 1996, SIG sold its excess and surplus lines insurance
operations, SIGF to the Company for book value of $2. Accordingly, no
gain or loss was recognized on this transaction in 1996.
2. Summary of Significant Accounting Policies
These consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in Canada ("Canadian
GAAP").
a) Basis of Consolidation
The consolidated financial statements include the accounts of Goran and its
subsidiary companies.
All significant intercompany transactions and balances have been
eliminated.
b) Premiums
Premiums are taken into income evenly over the lives of the related
policies.
c) Commissions
Commission expenses and related reinsurance commission recoveries are
recorded at the effective date of the respective insurance policy.
d) Deferred Policy Acquisition Costs
Deferred policy acquisition costs comprise of agents' commissions,
premium taxes and certain general expenses which are related directly to
the acquisition of premiums. These costs, to the extent that they are
considered recoverable, are deferred and amortized over the same period
that the related premiums are taken into income.
e) Outstanding Claims
The reserve for outstanding claims includes estimates for reported unpaid
losses and losses incurred but not reported. Reserves are established using
case-basis valuations and statistical analysis as claims are reported. Those
estimates are subject to the effects of trends in loss severity and frequency.
While management believes the reserves are adequate, the provision for
losses are necessarily based on estimates and are subject to considerable
variability. Changes in the estimated reserves are charged and credited to
operations as additional information on the estimated amount of a claim
becomes known during the course of its settlement.
The reserve for outstanding claims has been reported on by independent
actuaries. The Company's policy regarding the recognition of the time
value of money on outstanding claims is as follows:
- - - -18-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
i) Direct claims
The reserve includes the recognition of the time value of money on direct
claims liabilities. Using an interest rate of 7.5% (1995 - 7.5%) net claims
incurred have been increased by $66 (1995 - decreased by $161) and
outstanding claims at December 31, 1996 reduced by $1,261 (1995 -
$1,327).
ii) Assumed claims
The Company has not recognized the time value of money with respect to
assumed claims liabilities over which it does not have direct control over
the timing of settlement of the liabilities. If the Company had discounted
these claims using an interest rate of 7.5% (1995 - 7.5%) net claims
incurred would have been increased by $730 (1995 - increased by $1,147 )
and outstanding claims at December 31, 1996 would have been reduced by
$1,618 (1995 - $2,348).
f) Investments
Investments in bonds, mortgages and debentures are carried at amortized
cost providing for the amortization of the discount or premium to maturity
date. Investments in short-term investments, real estate, and equities are
carried at cost. Gains and losses on disposal of investments are taken into
income when realized. When there has been a loss in value of an
investment that is other than a temporary decline, the investment is written
down to recognize the loss.
g) Capital Assets
Capital assets are recorded at cost, net of accumulated amortization.
Amortization is provided at rates sufficient to amortize the costs over the
estimated useful lives of the assets.
h) Foreign Currency Translation
Foreign currency transaction gains and losses are included in the statement
of earnings. Goran and each of its subsidiaries have been determined to
be self-sustaining foreign operations and are translated using the current
rate method whereby all assets and liabilities are translated into U.S.
dollars at the year end rate of exchange and revenue and expense items
are translated at the average rate of exchange for the year. The resulting
unrealized translation gain or loss is deferred and shown separately
in shareholders' equity. These adjustments are not included in operations
until realized through a reduction in the Company's net investment in such
operations.
i) Use of Estimates
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts
reported in the financial statements and accompanying notes. Such
estimates and assumptions could change in future as more information
becomes known which could impact the amounts reported and disclosed
herein.
j) Comparative Figures
Certain comparative figures have been reclassified to conform to the basis
of presentation adopted in 1996.
-19-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
3. Corporate Reorganization, Acquisition and Initial Public Offering
In April 1996, Pafco contributed all of the outstanding shares of capital
stock of IGF to IGFH, a wholly- owned and newly formed subsidiary of
Pafco, and the Board of Directors of IGFH declared an $11,000
distribution to Pafco in the form of cash or $7,500 and a note payable of
$3,500 ("Pafco Note"). IGFH borrowed the $7,500 portion of the
distribution from a bank ("IGFH Note"). The notes were paid in full from
the proceeds of the Offering. Following the distribution, Pafco distributed
all of the outstanding common stock of IGFH to SIG. Although SIG
believes the plan of reorganization or spin off did not result in gain or loss,
no assurance can be given that the Internal Revenue Service will not
challenge the transaction.
On January 31, 1996, the Company and SIG entered into an agreement
("Agreement") with Goldman Sachs to create GGSH, to be owned 52% by
the Company and 48% owned by the Goldman Sachs. In accordance with
the Agreement, on April 30, 1996, the Company contributed certain capital
assets and Pafco with a combined book value, determined in accordance
with generally accepted accounting principles, of $17,186, to GGSH.
Goldman Sachs contributed $21,200 to GGSH, in accordance with the
Agreement. In return for the cash contribution of $21,200, Goldman Sachs
received a minority interest share in GGSH at the date of contribution of
$18,425, resulting in a $2,775 increase to contributed surplus from the sale
of Pafco common stock and certain assets.
In connection with the above transactions, GGSH acquired (the
"Acquisition") all of the outstanding shares of common stock of Superior
and its wholly-owned subsidiaries, domiciled in Florida, (collectively
referred to as "Superior") for cash of $66,550. In conjunction with the
Acquisition, the Company's funding was through a senior bank facility of
$48,000 in addition to the cash contribution from Goldman Sachs.
Assets Acquired:
Cash and Investments $118,665
Accounts Receivable 34,933
Deferred Policy Acquisition Costs 7,925
Other Assets 4,303
Total 165,826
Liabilities Assumed:
Outstanding Claims 44,423
Unearned Premiums 45,280
Accrued and Other Payables 10,863
Total 100,566
Net Assets Acquired 65,260
Purchase Price 66,590
Goodwill $1,330
- - - -20-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars, except per share data)
Goodwill is amortized over a 25-year period on a straight-line basis based
upon management's estimate of the expected benefit period.
SIG's results from operations for the year ended December 31, 1996
include the results of Superior subsequent to April 30, 1996.
On November 5, 1996, SIG sold 3,000,000 shares at $12.50 per share in an
initial public offering ("IPO") of common stock. An additional 450,000
shares were sold in December 1996 representing the exercise of the
overallotment option. SIG generated net proceeds after underwriter's
discount and expenses, of $37,969 from the offering, the proceeds of which
were used to repay the IGFH and Pafco Notes, repay indebtedness to
Goran and Granite Re of approximately $7,500 and pay Goran a dividend
of $3,500. The Company used its proceeds to pay off the debentures (see
Note 9).
Assuming that these transactions took place (including the IPO) at January
1, 1995 or at January 1, 1996, the pro-forma effect of these transactions
would result in summarized company consolidated statements of operations
as follows:
1996 1995
(unaudited)
Revenues $274,837 $189,233
Net Earnings $ 33,487 $ 9,435
Net Earnings Per Common Share $ 6.33 $ 1.88
The pro-forma results are not necessarily indicative of what actually would
have occurred if these transactions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results.
As a result of the IPO, the Company effectively disposed of a 33% interest
in SIG. The change in the Company's share of SIG's net identifiable assets
at the time of the IPO, represented by the Company's 67% proportionate
interest in the net IPO proceeds over the 33% proportionate share of the
book value of SIG disposed, amounts to a gain of $18,169 and is reported
as unusual income.
4. Reinsurance
a) The Company's insurance subsidiaries follow a policy of
underwriting and reinsuring contracts of insurance which limits their
liability to a maximum amount on any one claim for nonstandard
automobile of $220 (1995 - $220) in Canada, and $250 (1995 - $250) in
the U.S., with the result that unearned premiums and outstanding claims
are stated net of reinsurance. The crop division reinsures losses through
stop loss in excess of 80% loss ratio for crop hail and 100% loss ratio for
MPCI. As the primary insurers, the Company's insurance subsidiaries
maintain the principal liability to the policyholder.
b) The effect of reinsurance on the activities of the Group can be
summarized as follows:
1996 Gross Ceded Net
Premiums Written $307,634 $ (87,202) $220,432
Premiums Earned 308,650 (94,304) 214,346
Incurred Losses and
Loss Adjustment Expenses 242,992 (91,608) 151,384
Commission Expense 48,601 (44,096) 4,505
(Note 17(b))
Outstanding Claims 127,045 (33,113) 93,932
Unearned Premiums 91,207 (14,983) 76,224
-21-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
1995 Gross Ceded Net
Premiums Written $151,717 $ (65,357) $ 86,360
Premiums Earned 145,366 (69,264) 76,102
Incurred Losses and
Loss Adjustment Expenses 148,001 (93,808) 54,193
Commission Expense 25,069 (25,950) (881)
(Note 17(b))
Outstanding Claims 87,655 (41,667) 45,988
Unearned Premiums 33,159 (6,263) 26,896
c) On June 30, 1991 Granite Re assumed an outstanding claims
portfolio of $22,630, with loss dates of May 31, 1990 and prior, and
received a bond and short-term investment portfolio with a value of
$22,546. The December 31, 1996 balances in the claims portfolio and the
investment portfolio are $1,353 (1995 - $3,509) and $1,884 (1995 -
$4,761) respectively.
This portfolio has been deposited with a Canadian trust company to
support the liabilities assumed. The invested funds are used to settle claims
liabilities as they become due.
5. Cash and Investments
1996 1995
Book Value Market Value Book Value Market Value
Cash $ 4,679 $ 4,679 $ 4,171 $ 4,171
Short-Term
Investments 29,052 29,052 6,442 6,442
Equities 28,075 28,729 6,421 6,069
Bonds and
Debentures 137,812 138,383 27,949 28,080
Mortgages 2,430 2,430 3,583 3,583
Real Estate 4,548 4,548 3,922 3,922
Other Loan
receivable 75 75 1,878 1,878
Total Cash &
Investments $206,671 $207,896 $54,366 $54,145
a) At December 31, 1996, cash and investments of approximately
$41,659 (1995 - $20,510) are on deposit or held in trust by cedents, and
to a limited amount regulatory authorities, to secure certain of the
outstanding claims of the Company.
b) The Company realized a net gain of $637 (1995 - $198) from the
sale of investments during the year, and recorded an unrealized loss of
$NIL (1995 - $58) on equities. The carrying value of equities and bonds
held at December 31, 1996 includes a provision of $69 (1995 - $357) for
investments considered to have a decline in value that is other than
temporary. Where market value is not readily determinable, book value is
used as an approximation.
c) As part of the sale of a subsidiary in 1990, the Company and its
subsidiaries invested in junior subordinated participating debentures of the
purchaser maturing on January 1, 1996 equivalent to $2,007 bearing
interest at a rate of 10% per annum, and preferred shares of a subsidiary of
the purchaser. The debentures and shares were redeemed by the issuer
during 1995.
- - - -22-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
6. Capital Assets
1996 1995
Accumulated
Cost Amortization Net Net
Furniture, $8,709 $3,921 $4,788 $2,074
Fixtures and
Equipment
Automobiles 70 57 13 15
Total $8,779 $3,978 $4,801 $2,088
See also Note 13.
7. Goodwill and Intangible Assets
Included in other assets are intangible assets composed of deferred debt
issuance costs of $1,232 (1995 - $155 ) and organizational costs (GGSH)
of $1,527 (1995 - $NIL). Deferred debt issuance costs are amortized over
the term of the debt (six years). Organizational costs are amortized over
five years. Amortization of intangible assets were $510 and $144 in 1996
and 1995, respectively.
Goodwill is composed of $1,330 (1995 - $NIL) arising from the acquisition
of Superior. Goodwill is amortized on a straight-line basis over twenty-five
years. Amortization of goodwill was $95 and $63 in 1996 and 1995, respectively.
8. Bank Loans
a) IGF maintained a secured revolving line of credit, bearing interest
at prime plus 25 basis points, in the amount of $7,000 at December 31,
1996.
Interest on this line of credit was at the New York prime rate (8.25% at
December 31, 1996) plus 0.25% adjusted daily. This line is collateralized
by the crop-related uncollected premiums, reinsurance recoverable on paid
losses, Federal Crop Insurance Corporation (FCIC) annual settlement and
FCIC premium tax recoverables, and a first lien on the real estate owned by
IGF. The line requires IGF to maintain its primary banking relationship
with the issuing bank, limits dividend payments and capital purchases and
requires the maintenance of certain financial ratios. At December 31,
1996, IGF was in compliance with all covenants associated with the line,
except the covenant pertaining to certain investments as a percentage of
total admitted assets, for which IGF obtained a waiver. The weighted
average interest rate on the line of credit was 8.6% and 9.7% during 1996
and 1995, respectively.
At December 31, 1996, IGF had outstanding borrowings in the amount of
$NIL (1995 - $5,811).
b) The term debt at GGS, with an outstanding principal balance of
$48,000, matures on April 30, 2002, and will be repaid in 11 consecutive
semiannual installments, the first of which will occur on the first
anniversary of the closing date. The first installment of principal
repayments will be $3,128 and $2,886 in 1997, respectively, with the
remaining annual
-23-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars, except share data)
installments over the term of the debt to be paid as follows:
1998 - $6,494; 1999 - $7,938; 2000 - $9,742; 2001 - $11,612;
and 2002 - $6,200. Interest on the term debt is payable quarterly at
LIBOR plus 2.75%. In 1996, SIG entered into an interest rate swap
agreement to protect SIG against interest rate volatility. As a result, SIG
fixed its interest rate on the term debt at 8.31% through November 1996,
8.85% through January 1997, 9.08% through April 1997, 9.24% through
July 1997 and 8.80% through October 1999. The term debt is
collateralized by a pledge of all of the tangible and intangible assets of
GGS, including all of the outstanding shares of capital stock of Pafco and
Superior. This term debt is not guaranteed by SIG or Goran.
As of December 31, 1996, GGS was in default of three covenants in the
term debt. The commercial bank lenders under the term debt have either
amended the agreement to eliminate the default or have agreed in
writing such default has been cured. The first covenant required Pafco
and Superior to maintain a combined ratio of statutory net premiums
written to surplus of 3:1. While there can be no assurance that GGS will
have in the future sufficient cash flow after satisfaction of its debt service
requirements to permit GGS to infuse sufficient capital into its insurance
subsidiaries to permit them to maintain a ratio of net premiums written to
surplus not in excess of 3:1, the Company believes that it or GGS will be
able either to contribute additional capital to Pafco and Superior or, if
necessary, to obtain reinsurance, reduce premium writings or obtain
additional financing in order to permit them to satisfy this covenant in
future years.
The second covenant violation relates to insufficient funds posted by
Granite Re to cover its obligations under reinsurance treaties with Pafco.
Granite Re posted sufficient funds early in March 1997 and GGS does
not expect future violations of this covenant to occur.
The third covenant violation relates to Superior's risk based capital ratio
being less than 3:1 due to growth in premium writings. The commercial
bank lenders have amended the agreement to cure this violation.
9. Debentures
The debentures were paid in full in 1996 from the proceeds of the SIG
offering. At December 31, 1996, the Company had secured and unsecured
notes in the amount of $11,085.
10. Capital Stock
The Company's authorized share capital consists of:
First Preferred Shares
An unlimited number of first preferred shares of which none are
outstanding at December 31, 1996 (1995 - NIL).
Common Shares
An unlimited number of common shares of which 5,405,820 are
outstanding as at December 31, 1996 (1995 - 5,060,229).
During the year, pursuant to the exercise of warrants and options, the
Company issued 341,591 (1995 - 141,450) common shares for aggregate
consideration in the amount of $599 (1995 - $303).
- - - -24-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars, except share data)
The Company has reserved for issue 709,149 (1995 - 774,035) common
shares consisting of:
a) 182,250 (1995 - 337,625) shares issuable on the exercise of
warrants for the purchase of common shares at $2.19 per share, issued to
former debenture holders; and
b) 526,899 (1995 - 436,410) shares pursuant to the employee
incentive share option plan as follows:
Number of Shares Exercise Price Expiry Date
157,500 1.15 September 15, 1997
47,049 1.81 March 8, 1998
48,000 3.83 July 14, 1999
52,364 5.29 April 25, 2000
8,000 8.03 December 7, 2000
213,986 12.05 May 13, 2001
526,899
c) On November 1, 1996 SIG adopted the SIG 1996 Stock Option
Plan. The SIG 1996 Stock Option Plan provides authority to grant
nonqualified stock options and incentive stock options to officers and key
employees of SIG and its subsidiaries and nonqualified stock options to
nonemployee directors of SIG and Goran. A total of 1,000,000 shares of
common stock have been reserved for issuance under the SIG 1996 Stock
Option Plan. On November 1, 1996, SIG issued 830,000 stock options to
the Company's nonemployee directors and certain Goran directors and
certain officers, and certain other key employees of SIG and Goran. The
options were granted an exercise price equal to the initial public offering
price of SIG's common stock. SIG has granted (i) options to purchase
20,000 shares of commons stock to the nonemployee directors of SIG, (ii)
options to purchase 791,000 shares of common stock to officers and key
employees of SIG and its subsidiaries, (iii) options to purchase 6,000
shares of common stock to certain nonemployee directors of Goran and
(iv) options to purchase 13,000 shares of common stock to certain
employees of Goran and its subsidiaries who have provided valuable
service or assistance for the benefit of SIG and its subsidiaries. The
options granted to the Company's Chairman vest and become exercisable
in full of the first anniversary of the grant date. All of the remaining
outstanding stock options vest and become exercisable in three equal
installments on the first, second and third anniversaries of the date of grant.
GGS Holdings Stock Option Plan. The Board of Directors of GGSH
adopted the GGS Management Holdings, Inc. 1996 Stock Option Plan (the
"GGS Stock Option Plan"), effective as of April 30, 1996. Issued and
outstanding shares of GGSH's common stock (on a fully diluted basis
assuming exercise in full of all options) may be made the subject of options
granted under the GGS Stock Option Plan. A total of 111,111 shares of
common stock of GGSH have actually been reserved for issuance under
the GGS Stock Option Plan, which authorizes the grant of nonqualified and
incentive stock options to such officers and other key employees as may be
designated by the Board of Directors of GGSH. Stock options of 55,972
were granted in 1996. Stock options granted under the GGS Stock Option
Plan will be exercisable at such times and at such exercise prices as the
Board of Directors of GGSH shall determine, but in any event not prior to
the earlier of (i) an initial public offering of GGSH, and (ii) a GGSH Sale,
as defined, and not later than ten years from the date of the grant. Options
granted under the GGS Stock Option Plan vest at a rate of 20% per year
for five years after the date of the grant. The exercise price of options
granted as of April 30, 1996 is, with respect to 50% of the shares subject
to each such option, $44.17 per share. The exercise price per share for the
remaining 50% is $44.17, subject to a compound annual increase in the
exercise price of 10% over the five year vesting period. The exercise price
of any options granted under the GGS Stock Option Plan after
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
April 30, 1996, will be subject to a similar formula, with 50% of the shares
subject to any such option having an exercise price of $44.17 and the other
50% having an exercise price which increases on each anniversary of the date
of the grant over the five year vesting period. No option granted under the
GGS Stock Option Plan is transferable by the option holder other than by
the laws of descent and distribution. Shares received upon exercise of such
an option are not transferable except as provided in the Stockholders
Agreement among the Company and Goldman Sachs.
11. Shareholders' Equity
Shareholders' equity is comprised of the following components:
1996 1995
Capital Stock $17,416 $16,875
Contributed Surplus 2,775 ---
Retained Earnings (Deficit) 27,401 (3,895)
Cumulative Translation
Adjustment (334) (358)
Shareholders' Equity $47,258 $12,622
12. Income Taxes
The provision for (recovery of) income taxes is analyzed as follows:
1996 1995
Consolidated Net Earnings Before
Income Taxes $39,423 $9,668
Income Taxes at Canadian
Statutory Rates 17,480 4,287
Effect on Taxes Resulting From:
Tax Exempt Income (1,078) (1,571)
US Statutory Rate Differential (1,339) (750)
Application of Losses Carried
Forward and Reserves (6,042) (399)
Non-taxable portion of Gain (2,014) ---
Operating Loss for Which No
Current Income Tax Benefit is
Recognized 1,023 785
Deferred Income Taxes 73 145
Other, Net 24 ---
$8,127 $2,497
At December 31, 1996, the Company's Canadian subsidiary had reserves,
unclaimed for income tax purposes, of $1,027 (1995 - $2,161). In addition,
the Company and its consolidated subsidiaries have operating loss carry
forwards of approximately $12,591 for tax purposes which expire primarily
after 1996. The Company also has net capital losses carried forward of
approximately $8,097 which can be applied to reduce income taxes on any
future taxable capital gains. The potential tax benefit of the reserves and
losses carried forward have been recorded in these financial statements to
the extent of the tax benefit of $6,042 realized as a reduction of deferred
tax liability that would otherwise have been incurred on the unusual
income.
- - - -26-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
13. Amortization
The Company recorded amortization for the year as follows:
1996 1995
Amortization of:
Goodwill $ 95 $ 63
Capital Assets 1,811 483
Investments 22 3
Other Assets 510 144
$2,438 $693
14. Related Party Transactions
a) In 1989, the Company wrote off a loan of $5,135 owed by a
subsidiary of Symons International Group Ltd. ("SIGL"). SIGL, the
majority shareholder of Goran, guaranteed this loan and pledged 1.2
million escrowed common shares of Goran (the "escrowed shares") as
security for the loan. During 1994 SIGL entered into agreements with
Goran whereby as consideration for the release of 766,600 of the escrowed
shares, SIGL repaid $1,465 of the loan. The balance due to Goran of
$3,670 continues to be guaranteed by SIGL and is secured by the 433,400
remaining escrowed shares.
b) Included in other receivables are $595 (1995 - $563) due from
certain shareholders and directors which relate to the purchase of common
shares of the Company. Approximately half of the amounts due bear
interest and are subject to principal repayment schedules. The Company
also provided, indirectly, an officer with a second mortgage on a residence
in the amount of $278 which bears interest at 7% (1995 - $278) which was
repaid in full in February 1997.
15. Contingent Liabilities and Commitments
a) The Company, and its subsidiaries, are named as defendants in
various lawsuits relating to their business. Legal actions arise from claims
made under insurance policies issued by the subsidiaries. These actions
were considered by the Company in establishing its loss reserves. The
Company believes that the ultimate disposition of these lawsuits will not
materially affect the Company's operations or financial position.
b) IGF is responsible for the administration of a run-off book of
business. The Federal Crop Insurance Corporation ("FCIC") has requested
that IGF take responsibility for the claim liabilities under its administration
of these policies and IGF has requested reimbursement of certain expenses
from the FCIC with respect to this run-off activity. It is the Company's
opinion, and that of its legal counsel, that there is no liability on the part
of the Company for claim liabilities of other companies under IGF's
administration.
c) SIG received a commitment from a commercial bank which
provided funds to certain executives and a director of SIG to purchase
69,500 shares in the Directed Share Program in SIG's Offering. SIG
agreed to guarantee 100% of the aggregate principal amount, including
unpaid accrued interest, extended by the commercial bank under this
commitment. The amount of SIG's guarantee under this commitment is
approximately $869.
-27-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
d) IGF has entered into a purchase agreement to acquire an office
building in Des Moines, Iowa, to be used as its crop insurance division
home office. The purchase price was $2.6 million, of which $2.4 million
was escrowed on February 1, 1997. The terms include a floating closing
date whereby the transaction will close on the earlier of February 1, 1998
or thirty days after the closing of IGF's currently occupied home office
building, also located in Des Moines. The purchase of the new building is
not contingent on the sale of the current building.
16. Segmented Information
<TABLE>
<CAPTION>
1996 Canada United States United States Other Foreign Eliminations Consolidated
Crop Nonstandard
Auto
<S> <C> <C> <C> <C> <C> <C>
Gross Written
Premiums $ --- $110,059 $195,440 $12,753 ($10,618) $307,634
Net Premiums
Earned $ 98 $ 23,013 $168,746 $22,685 $ 0 $214,346
Segmented
Operating
Profit $ 983 $ 12,141 $ 58,159 $ 9,813 $ (1,728) $ 79,368
General
Expenses 3,149 2,110 52,312 7,382 (1,513) 63,440
Minority
Interest --- --- 2,801 ---- --- 2,801
Unusual Income 18,169 --- --- ---- --- 18,169
Net Earnings $16,003 $10,031 $ 3,046 $ 2,431 $ (215) $31,296
Identifiable
Assets $ 5,784 $72,916 $267,253 $ 45,197 $ (9,808) $381,342
<CAPTION>
1995 Canada United States United States Other Foreign Eliminations Consolidated
Crop Nonstandard
Auto
<S> <C> <C> <C> <C> <C> <C>
Gross Written
Premiums $ --- $ 67,828 $ 54,260 $34,837 ($ 5,208) $151,717
Net Premiums
Earned $ (84) $ 11,608 $ 38,034 $26,544 $ --- $ 76,102
Segmented
Operating
Profit $ 1,900 $ 447 $ 13,910 $12,898 $ (1,374) $ 27,781
General
Expenses 3,746 (7,122) 15,934 9,356 (1,304) 20,610
Net Earnings
(Loss) (1,846) 7,569 $ (2,204) $ 3,542 $ (70) $ 7,171
Identifiable
Assets $ 6,884 $59,733 $ 47,372 $ 55,921 $ (9,094) $160,816
</TABLE>
The Canadian results are comprised of the operations of Goran as an entity
which incurred a loss of $2,084 (1995 - loss of $1,472), the run-off
insurance activities of Granite which incurred a loss of $82 (1995 - loss of
$374) and the gain of $18,169 (1995-$NIL) resulting from the SIG IPO.
Segmented operating profit is composed of premiums earned, plus
investment and other income net of claims incurred.
- - - -28-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
General expenses are composed of commissions and operating expenses,
interest and income taxes.
The United States results are comprised of the consolidated operations of
SIG and SIGF
Other foreign results are comprised of the operations of Granite Re.
See also Note 1.
17. Regulatory Matters
a) Goran's insurance subsidiaries are subject to certain requirements
and restrictions in accordance with the regulations of their respective
jurisdictions. Statutory regulations require that the subsidiaries maintain a
minimum amount of capital to support outstanding insurance in force and
new premium writing. This requirement and other regulations in the
respective jurisdictions, restricts the amount of dividends payable in any
year by the subsidiaries to the parent. The statutory surplus of the
Company's active insurance subsidiaries at December 31, 1996 amounted
to $120,229 (1995 - $34,436).
Subsequent to Board of Directors and regulatory approval, IGF declared
and paid in December, 1995 an extraordinary dividend to Pafco in the
amount of $2,000 on the convertible preferred stock owned by Pafco. In
December, 1995, upon Board of Directors and regulatory approval, Pafco
declared and paid to SIG a $1,500 dividend on the common stock owned
by SIG.
b) Superior, Pafco and IGF, domiciled in Florida and Indiana, prepare
their statutory financial statements in accordance with accounting practices
prescribed or permitted by the Indiana Department of Insurance ("IDOI")
or the Florida Department of Insurance ("FDOI"). Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
IGF received written approval from IDOI to reflect its business transacted
with the FCIC as a 100% cession with any net underwriting results
recognized in ceding commissions for statutory accounting purposes,
which differs from prescribed statutory accounting practices. As of
December 31, 1996, that permitted practice had no effect on statutory
surplus or net earnings.
The net underwriting results, included in commissions and operating
expenses, for the years ended December 31, 1996 and 1995 were a gain of
$12,277 and $9,653, respectively.
18. Changes in Working Capital Relating to Operations
1996 1995
Increase in Accounts Receivable $(19,448) $(6,252)
Decrease (Increase) in Reinsurance
Recoverable on Outstanding Claims 8,464 (25,930)
Decrease (Increase) in Prepaid
Reinsurance Premiums (8,785) 916
Decrease (Increase) in Deferred
Policy Acquisition Costs 1,649 (3,058)
Decrease in Deferred Income Taxes 73 147
Increase in Other Assets (2,433) (470)
Increase (Decrease) in Accounts Payable 5,576 (2,291)
Increase (Decrease) in Outstanding Claims (4,545) 29,289
Increase in Unearned Premiums 13,178 9,247
$(6,271) $1,598
-29-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
19. Reconciliation of Canadian GAAP and United States Generally
Accepted Accounting Principles ("U.S. GAAP") and Additional
Information
The consolidated financial statements are prepared in accordance with
Canadian GAAP. Material differences between Canadian and U.S. GAAP
are described below:
(a) Earnings and retained earnings
1996 1995
Net Earnings in Accordance
with Canadian GAAP $31,296 $7,171
Add Effect of Difference in
Accounting for:
Deferred Income Taxes (see
Note (d)) (64) (344)
Outstanding Claims (see Note (e)) 62 (161)
Net Earnings in Accordance with
US GAAP $31,294 $6,666
Applying U.S. GAAP, deferred income tax assets would be increased by
$1,357 and $1,466, outstanding claims would be increased by $1,261 and
$1,327, and cumulative translation adjustment would be increased by $41
and $36 as at December 31, 1996 and 1995, respectively. As a result of
these adjustments, retained earnings would be increased by $96 and $139
as at December 31, 1996 and 1995, respectively. The effect of the above
noted differences on other individual balance sheet items and on working
capital is not significant.
(b) Earnings per share
Earnings per share, as determined in accordance with U.S. GAAP are set
out below. Primary earnings per share are computed based on the
weighted average number of common shares outstanding during the year
plus common share equivalents consisting of stock options and warrants.
Primary and fully diluted earnings per share are calculated using the
Treasury Stock method and assume conversion of securities when the
result is dilutive.
The following average number of shares were used for the compilation of
primary and fully diluted earnings per share:
1996 1995
Primary 5,724,476 5,567,644
Fully Diluted 5,724,476 5,567,644
Earnings per share, as determined in accordance with U.S. GAAP, are as
follows:
1996 1995
Primary Earnings Per Share $5.47 $1.20
Fully Diluted Earnings Per Share $5.47 $1.20
- - - -30-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
(c) Supplemental cash flow information
Cash paid for interest and income taxes is summarized as follows:
1996 1995
Cash Paid for Interest $4,005 $1,548
Cash Paid for Income Taxes,
Net of Refunds $9,825 $1,953
(d) Income taxes
The difference in accounting for deferred income taxes reflects the
adoption for U.S. GAAP, effective January 1, 1993, of Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting
for Income Taxes." This standard requires an asset and liability approach
that takes into account changes in tax rates when valuing the deferred tax
amounts to be reported in the balance sheet.
Deferred tax assets recognized under Canadian GAAP, which require
realization beyond a reasonable doubt in order to record the assets,
amounted to $NIL and $73 at December 31, 1996 and 1995, respectively,
and pertained to Canadian operations only.
The adoption of SFAS No. 109 results in additional deferred tax assets
recognized for deductible temporary differences and loss carry-forwards in
the amount of $3,531 and $2,581 net of valuation allowances of $NIL and
$69 and deferred tax liabilities recognized for taxable temporary differences
in the amount of $2,174 and $1,114 at December 31, 1996 and 1995,
respectively.
(e) Outstanding claims
The difference in accounting for outstanding claims reflects the application
for U.S. GAAP of SEC Staff Accounting Bulletin No. 62, "Discounting by
Property/Casualty Insurance Companies". This standard does not allow
discounting of unpaid claim liabilities by public companies, except in
specific circumstances that are not applicable to the Company.
(f) Receivables from sale of capital stock
The SEC Staff Accounting Bulletins require that accounts or notes
receivable arising from transactions involving capital stock should be
presented as deductions from shareholders' equity and not as assets.
Accordingly, in order to comply with U.S. GAAP, shareholders' equity
would be reduced by $595 and $563 as at December 31, 1996 and 1995,
respectively, to reflect the loans due from certain shareholders which relate
to the purchase of common shares of the Company.
-31-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995 (in thousands of US dollars)
(g) Unrealized loss on investments
U.S. GAAP require that unrealized losses on investment portfolios be
included as a component in determining shareholders' equity. In addition,
SFAS No. 115 permits prospective recognition of unrealized gains on
investment portfolios for year-ends commencing after December 15, 1993.
As a result, shareholders' equity would be increased by $1,225 and reduced
by $221 as at December 31, 1996 and 1995, respectively. As the Company
classifies its debt and equity securities as available for sale, the adoption of
SFAS No. 115 in 1994 has no effect on net earnings.
(h) Changes in shareholders' equity
A reconciliation of shareholders' equity from Canadian GAAP to U.S.
GAAP is as follows:
1996 1995
Shareholders' Equity in
Accordance with Canadian GAAP $47,258 $12,622
Add (Deduct) Effect of Difference
in Accounting For:
Deferred Income Taxes (See Note (a)) 1,357 1,466
Outstanding Claims (See Note (a)) (1,261) (1,327)
Receivables From Sale of
Capital Stock (See note (f)) (595) (563)
Unrealized Gain (Loss) on
Investments (See Note (g)) $1,225 $(221)
Shareholders' Equity in Accordance
with U.S. GAAP $47,984 $11,977
- - - -32-
<PAGE>
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report which are not historical facts,
including but not limited to, statements concerning (i) the impact of federal
and state laws and regulations on the Company's business and results of
operations, (ii) the competitive advantage afforded to the Company's crop
insurance operations by approaches adopted by management in the areas of
information, technology, claims handling and underwriting, (iii) the sufficiency
of the Company's cash flow to meet the operating expenses, debt service
obligations and capital needs of the Company and its subsidiaries, and (iv) the
impact of declining MPCI Buy-up Expense Reimbursements on the Company's results
of operations, are forward-looking statements. The company desires to take
advantage of the "safe harbor" afforded such statements under the Private
Securities Litigation Reform Act of 1995 when they are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those in the forward-looking statements. Such
cautionary statements which discuss certain risks associated with the Company's
business including the variability of the results of operations of the Company's
crop insurance business as a result of weather and natural perils, the highly
competitive nature of both the Company's crop insurance and nonstandard
automobile insurance business and the effects of state and federal regulation,
the capital intensive nature of the property and casualty business and potential
limitations on the ability of the Company to raise additional capital set forth
under the heading "Forward-Looking Statements -- Safe Harbor Provisions" in Item
1 - Business in the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1996.
MANAGEMENT RESPONSIBILITY
Management recognizes its responsibility for conducting the Company's affairs in
the best interests of all its shareholders. The consolidated financial
statements and related information in this Annual Report are the responsibility
of management. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which involve the use
of judgement and estimates in applying the accounting principles selected. Other
financial information in this Annual Report is consistent with that in the
consolidated financial statements.
The Company maintains systems of internal controls which are designed to provide
reasonable assurance that accounting records are reliable and to safe-guard the
Compnay's assets. The independent accounting firm of Coopers & Lybrand L.L.P.
has audited and reported on the Company's financial statements. Their opinion is
based upon audits conducted by them in accordance that the consolidated
financial statements are free of material misstatements.
The Audit Committee of the Board of Directors, the members of which include
outside directors, meets with the independent external auditors and management
representative to review the internal accounting controls, the consolidated
financial statements and other financial reporting matters. In addition to
having unrestricted access to the books and records of the Company, the
independent external auditors also have unrestricted access to the Audit
Committee. The Audit Committee reports its findings and makes recommendations to
the Board of Directors.
Alan G. Symons
Chief Executive Officer
/s/ Gary P. Hutchraft
Gary P. Hutchraft
Vice Presidnet and Chief Financial Officer
March 21, 1997
- - - -33-
<PAGE>
AUDITORS' REPORT
To the Shareholders of
Goran Capital Inc.
[Large Goran Logo]
We have audited the consolidated balance sheets of Goran Capital Inc. as
at December 31, 1996 and 1995 and the consolidated statements of
earnings, retained earnings (deficit) and changes in cash resources for the
years then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on
lity is to express an opinion onadoption for U.S. GAAP, effective January 1,
1993, of Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes." This standard requires an asset and liability
approach that takes into account changes in tax rates when valuing the
deferred tax amounts to be reported in the balance sheet.
Deferred tax assets recognized under Canadian GAAP, which require
realization beyond a reasonable doubt in order to record the assets,
amounted to $NIL and $73 at December 31, 1996 and 1995, respectively,
and pertained to Canadian operations only.
The adoption of SFAS No. 109 results in additional deferred tax assets
recognized for deductible temporary differences and loss carry-forwards in
the amount of $3,531 and $2,581 net of valuation allowances of $NIL and
ion for the years then ended in accordance with generally
accepted accounting principles.
Toronto, Ontario
March 21, 1997 Chartered Accountants
<PAGE>
MARKET INFORMATION
The Company's common shares began trading on the Toronto Stock
Exchange under the symbol "GNC" in 1986. The Company's common
shares began trading on the NASDAQ National Market under the symbol
"GNCNF" on November 8, 1994.
As of December 31, 1996 there were approximately 105 Common
shareholders of record, including many brokers holding shares for the
individual clients. The number of individual shareholders on the same date
is estimated at 900. The number of common shares outstanding on
December 31, 1996 totaled 5,405,820. Information relating to the
common shares is available through the NASDAQ National Market system
and the Toronto Stock Exchange. The following table sets forth the high
and low closing sale prices for the common shares for each quarter of 1995
and 1996.
Toronto Stock Exchange 1996 1995
Quarter Ended High Low High Low
March 31 14.02 8.76 6.19 4.92
June 30 14.05 10.59 6.10 5.37
September 30 19.35 11.32 7.10 6.10
December 31 20.26 16.79 8.74 7.47
NASDAQ 1996 1995
Quarter Ended High Low High Low
March 31 13.125 8.625 6.250 3.800
June 30 13.125 10.750 6.125 5.125
September 30 19.375 11.125 7.125 5.250
December 31 22.000 17.000 8.750 6.625
Dividend Policy
Since 1988, the Company has not paid a dividend on its stock. The
Company has no present intention to pay dividends on its common stock.
<PAGE>
Directors
G. Gordon Symons
Hamilton, Bermuda
Chairman of the Board
Goran Capital Inc.
J. Ross Schofield
Toronto, Ontario
President
Schofield Insurance Brokers
David B. Shapira
Toronto, Ontario
President
Medbers Limited
Douglas H. Symons
Indianapolis, Indiana
Vice President and Chief Operating Officer
*James G. Torrance, Q.C.
Toronto, Ontario
Partner Emeritus
Smith, Lyons, Barristers & Solicitors
*John K. McKeating
Toronto, Ontario
Partner
Vision 2120, Inc.
*Alan G. Symons
Toronto, Ontario
President and Chief Executive Officer
Goran Capital Inc.
*Members of Audit Committee
Officers
G. Gordon Symons
Chairman of the Board
Alan G. Symons
President and Chief Executive Officer
Douglas H. Symons
Vice-President and
Chief Operating Officer
<PAGE>
Gary P. Hutchcraft, C.P.A.
Vice President and Chief Financial Officer
David L. Bates, J.D., C.P.A.
Vice President and General Counsel
Professionals and Agents
Actuaries
Tillinghast
Philadelphia, Pennsylvania
J.S. Cheng & Partners Inc.
Toronto, Ontario
Trustee and Registrar
Montreal Trust Company of Canada
Toronto, Ontario
Auditors
Schwartz Levitsky Feldman
Chartered Accountants
Toronto, Ontario
Coopers and Lybrand, L.L.P.
Indianapolis, Indiana
Managers - Granite Reinsurance Company Ltd.
Atlantic Security Ltd.
Hamilton, Bermuda
<PAGE>
Subsidiaries and Branch Offices
Head Office Canada
Goran Capital Inc.
181 University Avenue
Box 11, Ste 1101
Toronto, Ontario
Canada M5H 3M7
Tel: 416-594-1155
Fax: 416-594-0711
Head Office U.S.
Goran Capital Inc.
4720 Kingsway Drive
Indianapolis, IN 46205
Tel: 317-259-6400
Fax: 317-259-6395
Shareholder Information
Stock Exchange Listings
The common shares are listed on The Toronto Stock Exchange (GNC) and
on NASDAQ (GNCNF).
Annual Meeting
The Annual Meeting of Shareholders will be held on May 21,
1997 at 181 University Avenue, Ste 1101, Toronto, Ontario.
Shareholder Inquiries
Inquiries should be directed to:
Alan G. Symons
President and Chief Executive Officer
Goran Capital Inc.
Tel: 416-594-1155 (Canada)
317-259-6302 (U.S.)
Subsidiaries and Branches
Granite Insurance Company
181 University Avenue,
Box 11, Ste 1101
Toronto, Ontario Canada M5H 3M7
Tel: 416-594-1155
Fax: 416-594-0711
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, IN 46205
Tel: 317-259-6300
Fax: 317-259-6395
Pafco General Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Tel: 317-259-6300
Fax: 317-259-6395
Symons International Group, Inc.
(Florida)
5900 North Andrews Drive
Suite 800
Fort Lauderdale, Florida 33309
Tel: 954-772-5061
Fax: 954-772-9873
Superior Insurance Company
280 Interstate North Circle N.W.
Atlanta, Georgia
Tel: 770-952-4885
Fax: 770-9567504
Superior Insurance Company
3030 N. Rocky Point Drive, Ste 770
Tampa, Florida 33607
Tel: 813-281-2444
Fax: 813-281-8036
Superior Insurance Company
1745 W. Orangewood Road
Orange, CA 92868
Tel: 714-978-6811
Fax: 714-978-0353
IGF Insurance Company
2882 106th Street
Des Moines, Iowa 50322
Tel: 515-276-2766
Fax: 515-276-8305
IGF North
208 S. Main
Stanley, North Dakota 58784
Tel: 701-628-3536
Fax: 701-628-3537
IGF South
101 Business Park Drive
Jackson, Mississippi
Tel: 601-957-9780
Fax: 601-957-9793
IGF East
4720 Kingsway Drive
Indianapolis, IN 46205
Tel: 317-253-9998
Fax: 317-253-9870
IGF West
407 Campus Drive
Garden City, Kansas 67846
Tel: 316-276-4111
Fax: 316-275-6453
IGF California
1750 Bullard Avenue, Ste 106
Fresno, CA 93710
Tel: 209-432-0196
Fax: 209-432-0294
Granite Reinsurance Company Ltd.
Bishop's Court Hill
St. Michael, Barbados, W.I.
(Managers: Atlantic Security Ltd.)
Tel: 441-295-5425
Fax: 441-295-5444
<PAGE>
[Goran logo]
GORAN CAPITAL INC.
181 Unviersity Avenue 4720 Kingsway Drive
Box 11, Suite 1101 Indianapolis, Indiana
Toronto, Ontario 46205
Canada M5H 3M7
Telephone 416-594-1155 Tel: 317-259-6400
Fax 416-594-0711 Fax: 317-259-6395
Chairman's Letter
We've been around for 32 years in Canada and the U.S. I'd like to tell you
about some of the significant milestones we have passed.
December 31, 1976, ended our twelfth year since the inception of the
originating company in our group. We concluded that year by writing
$20 million of gross premiums and had a profit of $600,000, record figures
for our company, which, at the time, had offices in four locations;
Vancouver, Toronto, Montreal and Fort Lauderdale. As exciting as the
year was, it was of consequence to only a small group of people, for we
were a "private" company at the time, with a staff of forty.
In 1978 we formed Symons General Insurance Company and followed
that with the acquisition of Pafco Insurance Company in 1983. In less than
three years we took Pafco Financial Holdings "public" on the Toronto
Stock Exchange, with a market valuation of twenty times the net price
we paid for the underlying company, Pafco Insurance Company Ltd.
In 1985 we acquired the Ontario General Insurance Company which we
later sold to take advantage of certain financial aspects in the company.
In 1987 we began focusing on our development in the United States.
We purchased the "desirable" business of a company in Indianapolis
which specialized, as did Pafco Insurance Company of Canada, in the writing
of non-standard automobile insurance. To underwrite this and other
business, we licensed Pafco General Insurance Company of Indiana and then
expanded its operations to other states, obtaining licensing where it was
advantageous to do so.
In June of 1990, in a move to strengthen our Untied States operations, we
sold The Canadian Pafco Insurance Company and the Canadian book of
insurance business in Granite Insurance Company, formerly Symons
General Insurance Company. Concurrently we formed Granite Reinsurance
Company of Barbados to provide a finite reinsurance facility.
Granite Reinsurance concluded 1995 with a gross premium income of
$47,810,000 and a profit of $4,862,000 for the year. Originally established
with a paid in capital of $125,000 and a contribution of $700,000 to
surplus from Granite Insurance Company. Granite Re ended
<PAGE>
1995 with a net worth of $18,087,000, which, apart from the contributions to
capital noted above, was self funded from the operations of the company.
In November of 1990, we acquired IGF Insurance Company of Des
Moines, a crop insurer, for $6.1 million and have seen it develop to such
an extent that we were recently offered in excess of 6 times our original
acquisition price. This was declined by the Board of Directors because
it was considered to be inadequate as there are better means of capitalizing
its growth potential.
As you will read in this report, IGF increased its profits substantially in 1995
and doubled its gross revenues to $93,087,147 (U.S.). For the first quarter of
1996 we have seen this pattern of growth continue and, with the recently
enacted 1996 Farm Bill signed by President Clinton on April 5, 1996, we
expect this growth to accelerate.
This asset, IGF, has become increasingly important to our Group, not only for
the extraordinary growth of its income, but for the increasingly profitable
nature of that income.
A major business transaction was initiated on January 31, 1996, which
may well prove to be the most outstanding thing we have done to date. We
formed a partnership arrangement with Goldman Sachs Capital Partners II, an
affiliate of Goldman Sachs & Co., the highly regarded U.S. investment house,
creating GGS Management Holdings, Inc. This new company will become a major
player in the non-standard auto insurance business in the United States. The
Company entered into an agreement to acquire the Superior American Insurance
Company, Superior Guaranty Insurance Company and another corporation known
as Standard Plan, Inc. We merged our Pafco General Insurance Company to GGS
Management. (No, the initials aren't mine, they represent Goran, Goldman
Sachs.)
Superior writes in excess of $100 million in non-standard auto insurance, which,
along with similar business underwritten by Pafco General Insurance Company of
approximately $49 million, will make the new entity the 13th largest writer of
non-standard auto insurance in the U.S. This segment of the insurance business
exceeded $15 billion of premium nationwide in 1995.
The acquisition of Superior, et. al. was at a very attractive price of 5% over
GAAP book value, approximately $67 million. As a comparison to this, the sale of
our Canadian business in June of 1990 has approximated 200% over GAAP book
value, albeit over a period of five years.
Oh yes, we now operate in 13 locations throughout Canada, the U.S., Barbados and
Bermuda. It has been a fabulous year for the Company and I can't wait to
conclude a report on the activities for 1996. They could be even more
outstanding. As an example of our anticipated growth, we have set as a
target for 1996 to double gross sales of our products. This would require that
we exceed $400 million of business, a large step towards the stated aim of
Goran's President to reach annual sales of $500 million by the year 2000.
No company can succeed without a great deal of effort. We are no exception and
it would be less than fitting if I didn't mention that a lot of hard work
and long hours go into our results. We have progressed to such a degree that
I would have to fill most of a page if I were to single out those who have
made <PAGE>
sacrifices of their time to the improvement and development of the company. In
fact, I would probably have to include the names of all of our more than 400
employees.
During the year, we extended the Board of Goran to include Jim Torrance Q.C., a
former Director who again agreed to serve with the company, and John McKeating,
a new appointee. This brought the complement of the Board back to where it
should be, with more outside Directors than "insiders", a desirable position for
a public company.
We have had extensive meetings throughout the year, not unusual considering the
many activities of our group. The Board has given unstinting assistance to me
and I wish to thank them and praise them for their considered and practical
deliberations and advice.
/s/ G. Gordon Symons
G. Gordon Symons
Chairman of the Board
April 16, 1996
==============================================================
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: The statements contained in this letter are forward looking
statements that involve risks and uncertainties, including, but not limited
to, product demand and market acceptance risks, the effect of economic
conditions, the impact of competitive products and pricing, product develop-
ment, the results of financial efforts, acquisitions completed or
attempted, the effect of the Company's accounting policies, and other
risks detailed in the Company's Securities and Exchange Commission filings.
=============================================================
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management Discussion and Analysis of Financial Conditions and
Results of Operations for Superior Insurance Company and its
Subsidiaries, Superior American Insurance Company, Superior Guaranty
Insurance Company, and Standard Plan.
Superior Insurance Company and its subsidiaries were purchased by GGS
Management Company, a joint venture of SIG Inc. (52%) and Goldman Sachs
Investment Fund (48%) on April 30, 1996.
The following is a brief summary of the results of operations of Superior
and its subsidiaries. In 1995, the company's gross premiums written
decreased to $94,755,672 from $112,891,444 in 1994 and $115,674,036 in 1993.
The decrease in premium in 1995 resulted from the withdrawal from
several unprofitable territories including Texas. The Company reorganized
following a poor year in 1994, and returned to profit in 1995. The results
from 1993 to 1994 showed a slight reduction of approximately $3,000,000 of
premiums mainly due to a very competitive market.
Net Premiums Written
The net premiums written are not materially different from gross
premiums written in any years, as the company does not reinsure proportional
coverage. The Company only buys excess of loss reinsurance protection.
Net Premiums Earned
Net premiums earned in 1995 were $97,614,483 compared with $112,822,969 in 1994
and $118,100,000 in 1993. When a company's volume reduces, the earned
premium is slightly greater than the written premium, and the opposite
is true when a company is growing.
Net Investment Income
Investment income in 1995 was $8,406,613 compared with $6,632,374 in
1994. The increase in investment income principally was from realized
gains on its investment portfolio as a result of a positive bond market at
December 1995. The investment income in 1994 of $6,632,374 compares with
$11,728,516 in 1993. The significant reduction was a result of substantially
reduced assets through dividends to its parent company in 1993 and 1994
(collectively of approximately $21,000,000). In addition, as the loss ratio
increased in 1994, the available cash for investment reduced substantially
and interest rates reduced between 1993 and 1994, thus reducing the overall
investment yields.
Other Income
Other income increased in 1995 to $2,325,628 up from $1,321,419 in 1994. This
compares with $4,731,990 in 1993. The distinct changes in the year-to-year Other
Income is affected by writeoffs of bad debts on premiums outstanding, which were
substantial in 1994, billing fee income which was affected by a ruling in the
state of Florida in 1994 and a reduction in premiums in 1995. Other income is
principally billing fee income which usually represents between 3 1/2%
<PAGE>
and 4% of gross written premiums. So, other income follows the premium volume
plus with minus bad debt recovery writeoff.
Combined Loss Ratios
The determination of profitability of property and liability insurance companies
is best determined by its combined loss ratio. This is a ratio of the net
premiums earned as a ratio of all claims and operating expenses. The combined
loss ratio in 1995 for the Company was 107.6%. This compared with 116.3% for
1994. The dramatic improvement was a direct result of reducing expenses, closure
of 6 regional offices, improvement in insurance rates and product distribution
and the withdrawal from unprofitable Texas, the increase in rates and dual
products in Florida, and continued emphasis in building business in the
profitable state of California, brought the loss ratio from 77.3% in 1994 down
to 68.1% in 1995. The 1993 combined ratio was 103.4%. This ballooned
to 116.3% in 1994 as a result of the expense ratios dramatically
increasing due to additional offices, increased cost of telephones,
computers and payroll. The loss ratio ballooned to 77.3% in 1994 compared to
67% in 1993 as a direct result of bad faith claims, which were not protected by
reinsurance then (these are now protected). The increase in loss ratio was
also contributed to by the lack of new rate increases in its prime terri-
tories, increased claims and generally, an overall inability to control the
claims department during the period until June 1995 when Superior hired a new
senior claims executive.
Net Income
The net income after tax for Superior, was $4,100,000 for 1995. This
compares with a loss of $4,500,000 for 1994. The improvement in 1995, as
mentioned earlier, is a result of reduction in expenses and a reduction in loss
ratio. The loss of $4.5M in 1994 compares with a profit of $11,000,000 in 1993.
The cause of this loss was explained in the previous paragraph. Included in the
change in profit, was a reduction in investment income from $11,700,000 to
$6,600,000 from 1993 to 1994.
Liquidity and Capital Resources
The capital surplus of Superior has been greater than is necessary for non
standard automobile. Insurance companies. The Company has operated at
less than 3:1 premium writing to capital and surplus. In 1995, the statutory
capital and surplus was $49,276,000 compared to net premiums of $94,800,000 a
ratio of 1.92 of premiums to 1 of surplus. The assets of the Company are
invested conservatively in liquid bonds and a limited amount of equities. The
surplus of the Company changed from 1995 when an additional $5,699,473 was
added to the surplus through earnings, compared to a reduction in surplus in
1994 of $13,078,722. Through dividend and losses, $12,000,000 of this
reduction in surplus was a dividend to the parent company. This compares to
an addition to surplus in 1993 of $389,925 after giving effect to a
$10,000,000 dividend to the parent company in 1993. The parent company
of Superior has dividends of $42,000,000 through the period of 1991 to 1994.
The Company has available for dividend for the 1995 year, earned surplus in
excess of $5,000,000.
<PAGE>
Summary
Superior is a non standard automobile operation, operating principally
from offices located in Tampa, Florida, Anaheim, California, and Atlanta,
Georgia. It also writes business in Virginia, Ohio, and Texas and a smaller
amount in other states. The Company writes non standard automobile,
with limits and driver classes similar to Pafco operations. The location of
business fits well with Pafco's with no duplication of states.
<PAGE>
Financial Condition and
Results of Operations
Results of Operations
- - - --------------------------------------------------------------------------------
Once again, Goran's gross premium and net income reached record levels
in 1995. The Company's 1995 gross premium written increased to
$208,216,310 from $173,413,709 in 1994. More than half of the
increase in premium in 1995 over 1994 resulted from growth in the
crop insurance business, gross premium written grew $18.9 million in
1995 as compared to 1994, with premium growth coming from
both the multi peril and the hail business. The crop premium volume in
1995 of $93.3 million recognized a gain in U.S. government subsidies of $28.2
million compared to $16.3 million of subsidies in 1994 included in a total crop
premium of $74.4 million for 1994. Gross written premiums for 1994 was
restated to include the subsidy of $16.3 million on a basis consistent with
that of 1995. All other lines of business experienced gross written premium
increases from 1994 to 1995 as follows: finite reinsurance premiums increased
by $8.1 million to $40.7 million, nonstandard automobile premiums increased
by $5.1 million to $67.3 million and surplus lines premiums increased by
$2.7 million to $7.0 million.
In 1995, net premiums written (gross written less reinsurance to government FCIC
program and third party reinsurers) increased by 48.3% from $79.9 million in
1994 to $118.5 million in 1995. This increase resulted from higher premium
volumes on a gross basis as described above, combined with a reduced
dependence on quota share reinsurance in both the nonstandard automobile lines
(reduced from approximately 38% in 1994 to 25% in 1995) and on hail
reinsurance. The quota share reinsurance that was placed with third party
reinsurers in 1994 was taken over internally for 1995.
<PAGE>
In 1995, the Groups net premiums earned grew to $104.4 million from
$75.0 million in 1994. The earning of premium follows the term of the
respective policies, net premiums earned trails net premiums written. For
example, in a growing book of business, net premiums earned will also grow but
will lag behind the written premium.
In 1995, investment income grew to $4.8 million from $4.6 million in
1994, an increase of approximately 5%. The increase of the Company's investment
portfolio in 1995 was partially offset by reduced investment yields in 1995 as
interest rates trended lower. Investment income in 1993 of $5.6 million reduced
to an investment income of $4.6 million in 1994 due to lower yields, and
lower investment assets in 1994 in Granite Reinsurance due to settlement of
claims.
Other income includes billing fees and bad debt provisions, decreased to
$3.2 million in 1995 from $4.4 million in 1994, which later amount included a
payment of $2 million of a written down note from the Company's parent,
Symons International Group Ltd. Without this unusual income in 1994, other
income would have increased from $2.4 million in 1994 to $3.2 million in 1995.
Approximately half of the increase resulted from increased billing fee revenue
from a combination of increased nonstandard automobile volume along with an
increased billing fee rate implemented in the last half of 1995. In addition
other income increased in 1995 due to increased commissions from business
written in the Company's surplus lines operations.
Net claims incurred increased to $74.4 million in 1995 from $58.2 million in
1994, which increase is more than offset by the increase in net premiums
earned. The loss ratio decreased from 77.5% in 1994 to 71.2% in 1995
primarily as a result of improved loss ratios from the finite reinsurance
<PAGE>
division which were 71.3% in 1994 and 59.1% in 1995, as well as
increased profitability in the Company's crop hail business in 1995 compared
with 1994.
Net commissions expense is composed of three components: (i) commission expense
paid to the Company's agents; (ii) commission income from reinsurers,
including a 31% commission earned by the Company's crop operations with
respect to multi peril crop insurance; and (iii) underwriting gain or loss on
the Company's multi peril crop insurance business reported by the Company
as an adjustment to the Company's commission income on this business.
In 1995 the Company recorded a net commission recovery of $1.2 million
compared to a net commission expense of $2.0 million in 1994. Commissions
paid to the Company's agents in 1995 of $34.4 million remained relatively
constant with that paid in 1994 of $35.0 million.
Ceded commission income in 1995 of $35.6 million increased from $33.0
million in 1994. Included in these amounts is an underwriting gain adjustment
from the multi peril crop line of business of $13.2 million in 1995 and $4.5
million in 1994. The effect of the increased multi peril underwriting gain
included in commission income is partly offset by reduced ceding commissions on
nonstandard automobile quota share reinsurance in 1995 versus 1994.
Operating expenses of $23.7 million in 1995 compared with $15.1 million
in 1994, with such expenses increasing proportionately with net premiums earned
in the respective years with an expense ratio on this basis of 20.2% in 1994 and
22.6% in 1995. Included in 1995's operating expenses is an accrual for bad
debt expenses of $1.9 million with respect to the nonstandard automobile book
of
<PAGE>
business, of which $960,000 relates to an adjustment of 1993 and 1994
balances. During 1995, the Company identified such uncollected amounts and
implemented a full collection department to curtail such write-offs in the
future. Without the write-off in 1995 of bad debt expense relating to prior
years, the expense ratio for 1995 would have been 21.7%.
Interest expense in 1995 was $2.4 million compared to$2.5 million in
1994. Interest savings in 1995 and 1994 resulting from principal repayments to
the Company's debenture holders and the retirement of the Company's term
loan by SIG in June 1995.
In 1995, income tax expense of $3.4 million relates to a tax provision on
income emanating from the U.S. operations. By comparison, a tax provision in
1994 of $939,000 was accounted for by an amortization of deferred income
taxes of $300,000 with the balance of the provision emanating from a tax
provision on the income from U.S. operations.
Financial Condition
The Company's assets have grown to $154,112,461 in 1995, up from
$130,372,717 in 1994 and $112,852,129 in 1993. The largest component of
assets is investments in bonds and stocks. A breakdown of these
investments is highlighted in the Notes to Consolidated Financial Statements.
The Company's second largest asset category is accounts receivable.
This primarily represents monies held on behalf of our insurance and
reinsurance subsidiaries by major third party reinsurance
<PAGE>
or insurance companies to support outstanding claims and unearned
premiums. The majority of these funds earn interest and are held
in trust for Granite Re. Receivables from insurance companies
were $47,559,037 in 1995, up from $34,391,569 in 1994 due to
increased volume and the corresponding increased reinsurance
claims reserves, and 1994 was up from $24,922,897 in 1993, also due
to increased insurance claims reserves that follows increased business.
Total receivables represented 42% of total assets in 1995 and 43%
in 1994. Also included in the above receivables is premium recorded
but not yet received from the insured. This is business that has been
taken on but the premium has not been paid to us at the date of this
statement.
Deferred acquisition costs is the amount paid to agents and premium tax
that would be refunded to us should all our policies in force be canceled on
December 31. The offset is the unearned premium. In 1995 increased to
$10.4 million from $6.3 million in 1994. This increase in deferred costs
reflects increases in unearned premiums to $36.7 million in 1995 from
$22.8 million in 1994.
The total liabilities of the Company were $136,880,727 in 1995, compared to
$123,264,530 in 1994. Outstanding claims increased in 1995 to $62.8
million from $58.2 million in 1994, reflecting an increase in volume in
1995 over 1994, partially offset by a lower loss ratio from 77.5% in 1994
to 71.2% in 1995. Management believes the capital and surplus of the
Company is currently sufficient to support its current level of premiums
written. However, from time to time the Company may consider raising
additional capital to pursue acquisition opportunities or to finance
internal growth.
<PAGE>
Shareholders' equity has continued to grow, reaching $17,231,734 at
year-end 1995, compared to $7,108,187 at the end of 1994. While
shareholders' equity is now $17,231,734, it does not reflect the equity
upon which Goran conducts its various insurance operations. The
underlying insurance subsidiaries had statutory surplus at December
31, 1995 of: Pafco, $11,967,800 (U.S.); IGF, $9,219,463 (U.S.);
Granite Re, $18,086,777; and Granite, $3,792,638. This amounts
to a total $50.8 million. It is on these equity bases that the Company's
insurance business is written as a ratio to capital and surplus of $50.8
million is 2.33 to 1.00, which is well below the industry threshold of
3.00 to 1.00.
Goran's long term debt decreased to $15,132,250 in 1995 from
$18,530,800 in 1993. The repayment of debt resulted from scheduled
principle payments to the Company's debenture holders in the amount
of $1,995,750 at December 31, 1995 and the scheduled retirement of
SIG's term loan with a fixed payment of $1,000,000 during 1995. During
1995, debenture holders exercised warrants at $3 per common share,
yielded a total of $393,750. The number of outstanding warrants
at December 31, 1995 was 337,625. These warrants do not trade.
During 1995, IGF continued to profit by borrowing funds under a
revolving line of credit to finance premium receivables from the farmers.
By utilizing this lower cost of credit, revolving line of credit, IGF stops
the running of 15% interest payable to FCIC while continuing to earn
15% interest on the receivables from the farmer.
<PAGE>
Overview
U.S. Operations
Symons International Group, Inc. ("SIG") is a wholly owned subsidiary of
Goran Capital, Inc. SIG is a holding company located in Indianapolis, Indiana.
Its subsidiaries write various lines of insurance. SIG owns 100% and
operates the following companies:
Pafco General Insurance Company ("Pafco"), Indianapolis, IN
(nonstandard automobile)
IGF Insurance Company ("IGF"), Des Moines, IA and has 5 branch
offices throughout the U.S.A (crop insurance)
Symons International Group, Inc. (Florida) ("SIGF"), Ft Lauderdale,
FL (surplus lines insurance)
The results of each of these subsidiaries are discussed below, following
a general discussion on the consolidated results of the U.S. operations. For
the benefit of the reader, it is felt that the entity discussions should
center on the specific product lines written by each organization. Pafco
would refer to the nonstandard automobile insurance business of Goran which is
written predominantly by Pafco; however, the licenses of IGF are used in certain
states where we write non standard automobile but Pafco does not have a
license. The crop insurance business is written by IGF, however, the licenses
of Pafco are used in certain jurisdictions to facilitate business where IGF is
not licensed itself. The remaining aspects of the U.S. operations is surplus
lines property and casualty
<PAGE>
business written through SIG Florida, predominantly on a surplus lines basis.
Consolidated Results of SIG
Gross premium volume for the U.S. operations increased 18.4% to
$122,088,007 (U.S.) in 1995 versus $103,133,564 (U.S.). All three
product lines showed increases in 1995 with a significant increase
coming from the crop insurance business.
Net written premiums for 1995 were $53,447,000 (U.S.) compared to
$35,139,000 (U.S.) in 1994. This was an increase of 52.1% resulting
primarily from the Company's decision to reduce its dependence on quota
share reinsurance. This allowed the Company to retain more of the gross
premiums being written by its nonstandard automobile segment as well as
its crop insurance business. IGF's crop insurance business enjoyed
significant growth and profitability during 1995. The Crop Insurance
Reform Act signed into law in October 1994 enabled the crop insurance
industry to increase its premium writings, and IGF materially grew its
premium volume as well. With increased premium production and normal
crop growing season, the multi peril crop business produced good
underwriting profits. The crop hail business also produced profits along
with a growth in premium writings from $9 million in 1994 to $16 million
in 1995. IGF focused on increasing its crop hail premium writings in
order to spread its risk. The Company utilizes stop loss reinsurance
minimize the effect of adverse weather conditions on the Company's
results.
The recently enacted "Freedom to Farm" bill will allow IGF to
experience increased growth for 1996,
<PAGE>
as the government withdraws from the delivery basis catastrophe
insurance coverage and the insurance industry takes this over.
Nonstandard automobile insurance operations experienced a slight
growth in premium volume during 1995, reversing a two year period of
decline. During 1995 the operations focused on simplifying its processes
and on improving service to customers. Although premium production
grew, competition remained strong. The competitive market kept the
company from meaningless growth and rate increase resulting in a higher
than expected loss ratio for the year. In addition, severe winter storm
activity at the end of the year added to the loss ratio. The
expense ratio of non standard automobile was much higher than
budgeted as the company geared up for the growth and improved
business for 1996. The first quarter of 1996 is benefiting by these
expenses in 1995 as premiums is growing and less ratios reducing.
SIG Florida continued the growth it enjoyed in both 1993 and 1994 by
recording gross premiums written on behalf of Pafco of $6,792,490
(U.S.) in 1995 as compared to $5,159,795 (U.S.) in 1994. The Florida
operation continues to prosper from the growth in the surplus lines
market opportunities in the southeast United States, and the addition of
sound management and marketing staff, SIG Florida also generates
commission income on products sold for third party companies.
Pafco General Insurance Company ("Pafco")
[PAFCO LOGO]
Pafco underwrites nonstandard automobile business through its
headquarters in Indianapolis, Indiana. A portion of the business is placed
through IGF in order to utilize licenses it has in Missouri, Arkansas and
Illinois. Pafco's gross written premiums in 1995, excluding crop insurance
fronted for
<PAGE>
IGF, were $44,577,000 (U.S.) as compared to $39,795,000 (U.S.) in 1994.
In spite of a moderate growth in gross premiums, net premiums grew
significantly to $34,018,000 (U.S.) in 1995 as compared to $24,713,000
(U.S.) in 1994. The growth in net premiums was principally a result of a
further reduction in quota share reinsurance on the nonstandard
automobile business. The net operating results of $(250,000) for 1995
compared to $(350,000) for 1994 are inclusive of dividend income from
IGF Insurance Company in 1995 of $2,000,000 (U.S.) and $350,000
(U.S.) in 1994. 1995 saw the Company focus its attention on
improving its service to its agents and the ease by which both agents and
our customers are able to do business with Pafco. This has borne fruit in
the first quarter of 1996 with material increase in volume and improved
combined loss ratio.
Pafco's statutory capital and surplus in 1995 increased to $11,967,800
(U.S.) up from $7,848,000 (U.S.) in 1994. The strong performance of
the crop insurance business on IGF increased the value of Pafco's
investment in IGF significantly.
IGF Insurance Company ("IGF")
[IGF LOGO]
IGF writes principally MPCI and crop hail insurance and provides
licenses for Pafco's automobile insurance in three states. Although
premiums for this coverage are included in IGF, the net profit or loss is
transferred to Pafco through reinsurance programs. Gross premiums
written in 1995 were $78,216,551 (U.S.) as compared to $64,239,124
(U.S.) in 1994. IGF's 1995 performance increased significantly as a
result of gains in its crop insurance business which reflect favorable
growing conditions. The Crop Insurance Reform Act enacted in October
1994 provided opportunity for the crop insurance industry to increase its
premium volumes. IGF benefited from this Act and also grew
<PAGE>
at a rate faster than most of its principal competitors due to the
marketing efforts of its management team.
IGF exceeded industry results on its multi peril and crop hail business,
because of its unique underwriting criteria. IGF continued to benefit from
its change in 1994 to an in-house adjusting force, which resulted in
enhanced effectiveness on adjusting crop claims. By hiring full time
employees to perform this function, IGF has benefited by tighter claims
controls and cost savings. IGF's statutory capital and surplus increased in
1995 to $9,219,463 (U.S.) from $4,875,465 (U.S.) in 1994. The
increase in surplus 1995 related to crop insurance increase in business
and underwriting profits.
In 1995, IGF concluded its repurchase of the balance of its outstanding
common shares which were principally held by small investors who
purchased stock when IGF was created in 1972. At year-end 1995,
Goran owned 100% of the Company versus 98.8% in 1994. Symons
International Group, Inc. (Florida) ("SIGF") Through its specialized
surplus lines underwriting unit, Goran writes third party property and
casualty insurance coverage in Pafco and other insurance
companies under contract with SIG Florida. The volume of business
continues to increase and operating results have further improved as a
result of decreased competition in the southeast United States in this
market segment and addition of quality underwriters. Further automation
in 1995 has enhanced the processing capabilities in the office in order to
accommodate its growth in premium writing.
<PAGE>
Non-U.S. Operations
Goran's business outside the United States is conducted through the
following wholly-owned subsidiaries:
Granite Insurance Company (Toronto, Canada) ("Granite") (sold
its business in 1990 in runoff)
Granite Reinsurance Company Limited (Barbados and Bermuda)
("Granite Re") (Finite reinsurance)
Granite Insurance Company ("Granite")
[Granite Insurance LOGO]
Granite is a Canadian federally licensed insurance company which is
presently servicing its investment portfolio and its very few outstanding
claims. Granite stopped writing business on December 31, 1989 and
sold its book of Canadian business in June 1990. The outstanding claims
continue to be settled in accordance with actuarial estimates and
management's expectations. During 1995, Granite's invested assets
reduced to $7,456,155 from $10,195,091 in 1994. This was the result of
settlements of claims and the runoff of outstanding claims.
Total outstanding claims decreased to $2,950,000 in 1995 from
$4,411,000 in 1994. It is expected that the run off of outstanding claims
will continue at least until 1998. Granite's net earnings were $270,156 in
1995, compared to $826,423 in 1994 reflecting the reduction of invested
assets, which in turn reduces earnings from investment yields.
[PAGE CONTAINS PHOTOGRAPHS OF AUTOMOBILES IN THE
MIDDLE MARGIN]
<PAGE>
Investment income in 1995 was $683,637 compared to $986,683 in 1994.
Granite Reinsurance Company Limited ("Granite Re")
[Granite Reinsurance LOGO]
Granite Re is managed by Jardine Pinehurst Management Company Ltd.
of Bermuda. Granite Re underwrites finite risk reinsurance and stop loss
reinsurance. This reinsurance involves a defined maximum risk at the
time of entering into a contract. The Company participates in various
programs of reinsurance in Bermuda, the United States and Canada.
Reinsurance normally requires that a substantial premium be paid upon
the purchase of cover. Such premiums are invested in high grade
bonds, some of which are pledged to support the liabilities assumed
under the reinsurance program. The amount pledged is reflected in the
Notes To Consolidated Financial Statements. One of Granite Re
Canadian Treaties has expired and will not be renewed. The runoff will
provide continuous revenue for years to come but gross written
premiums of about $30,000,000 will cease and will be replaced with new
programs over the next few years. Gross premiums written during the 12
months ended November 30, 1995 were $34,802,851 (U.S.) compared to
$23,844,330 (U.S.) during the 11 months ended November 30, 1994.
Net income rose to $3,975,350 (U.S.) in 1995 compared to $1,887,687
(U.S.) in 1994. This increased profitability resulted primarily from
a reduced loss ratio on the Company's finite book from 71.6% in 1994 to
59.1% in 1995, combined with increased premium volumes in 1995.
Granite Re began operation on July 1, 1990, with a capital base of
$125,000 (U.S.) And $700,000 (U.S.) In 1992. The impact of profitable
underwriting since the inception of the Company is reflected in the
growth of its shareholders' equity to $13,248,445 (U.S.) in 1995 from
$9,343,095 (U.S.) in
[PAGE CONTAINS PHOTOGRAPHS OF FARM SCENERY IN THE
MIDDLE MARGIN]
<PAGE>
1994. Granite Re will continue to focus selling reinsurance that limits its
liability to a defined amount. In addition, Granite Re intends to broaden
its base to include captive reinsurance, which will generate fees for the
Company on a risk free basis. Such programs are risk free because they
generally require that users furnish full collateral funds, which the
reinsurer then reinvests. Granite Re thereby expects funds available for
reinvestment to increase, generating greater investment returns.
The programs currently underwritten by Granite Re generate a loss
portfolio that is matched with cash. Such portfolios take about eight
years to runoff, thus generating investment returns and underwriting
gains during the life of the runoff. Meanwhile, new business written in
1995 and beyond will be added to the portfolio of outstanding losses and
invested assets, perpetuating the growth of Granite Re through fees,
investment income and underwriting profits.
<PAGE>
GORAN CAPITAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
<PAGE>
GORAN CAPITAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
TABLE OF CONTENTS
Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Deficit 4
Consolidated Statements of Changes in Cash Resources 4
Notes to Consolidated Financial Statements 5 - 18
<PAGE>
AUDITORS' REPORT
To the Shareholders of
Goran Capital Inc.
We have audited the consolidated balance sheets of Goran Capital Inc.
as at December 31, 1995 and 1994 and the consolidated statements of
operations, deficit and changes in cash resources for the years then ended.
These financial statements are the responsibility of the company's
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 an
audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31,
1995 and 1994 and the results of its operations and the changes in its
financial position for the years then ended in accordance with
generally accepted accounting principles.
/s/ Schwartz Levitsky Feldman
Toronto, Ontario
March 18, 1996 Chartered Accountants
Except as to notes 2(h) and 20,
which are March 11, 1997
<PAGE>
- - - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- - - --------------------------------------------------------------------------------
AS AT DECEMBER 31
(In thousands of U.S. dollars)
Assets 1995 1994
-------- --------
Cash and investments (note 4) $ 54,366 $ 46,328
-------- --------
Accounts receivable
Premiums receivable 11,233 13,948
Due from insurance companies 34,837 24,516
Accrued and other receivables 1,231 1,485
-------- --------
47,301 39,949
Reinsurance recoverable on outstanding claims 41,667 15,315
Prepaid reinsurance premiums 6,263 6,987
Capital assets (note 5) 2,088 861
Other assets (notes 6 and 12) 1,417 1,063
Deferred policy acquisition costs 7,641 4,460
Deferred income taxes 73 214
Goodwill -- 62
-------- --------
Total Assets $160,816 $115,239
Liabilities
Accounts payable
Due to insurance companies $ 1,986 $ 8,441
Due to associated companies 188 135
Accrued and other payables 8,310 3,858
-------- --------
10,484 12,434
Outstanding claims (notes 2(e) and 3) 87,655 56,801
Unearned premiums (note 3) 33,159 23,270
Bank loans (note 7) 5,811 5,441
Debentures (note 8) 11,085 12,210
Minority interest in subsidiary -- 16
-------- --------
Total Liabilities 148,194 110,172
Shareholders' Equity (note 10) 12,622 5,067
-------- --------
Total Liabilities and
Shareholders' Equity $160,816 $115,239
/s/ /s/
Director Director
Approved on behalf of the board
2
<PAGE>
- - - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- - - --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31
(In thousands of U.S. dollars, except per share data)
1995 1994
--------- ---------
Revenue
Gross premiums written $ 151,717 $ 126,978
Net premiums earned $ 76,102 $ 54,944
Net investment and other income (note 4 and 13(a)) 5,872 6,624
--------- ---------
81,974 61,568
--------- ---------
Expenses
Net claims incurred 54,193 42,595
Commissions and operating expenses (note 16(b)) 16,352
12,516
Interest expense 1,761 1,843
--------- ---------
72,306 56,954
--------- ---------
Income before undernoted items 9,668 4,614
Provision for income taxes (note 11) 2,497 688
Minority interest -- (14)
--------- ---------
Net income $ 7,171 $ 3,940
========= =========
Earnings per share - basic $ 1.43 $ 0.81
========= =========
Earnings per share - fully diluted $ 1.26 $ 0.71
========= =========
<PAGE>
- - - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF DEFICIT
- - - --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31
(In thousands of U.S. dollars)
1995 1994
-------- --------
Retained earnings (deficit), beginning of year $(11,066) $(15,006)
Net income for the year 7,171 3,940
-------- --------
Retained earnings (deficit), end of year $ (3,895) $(11,066)
- - - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN CASH
RESOURCES
- - - --------------------------------------------------------------------------------
(In thousands of U.S. dollars)
1995 1994
-------- --------
Cash provided by (used in):
Operating activities
Net income $ 7,171 $ 3,940
Items not involving cash 11,010 7,058
Changes in working capital relating to operations (8,544) (12,422)
-------- --------
9,637 (1,424)
-------- --------
Financing activities
Reduction of debentures (1,462) (1,047)
Increase of borrowed funds 220 722
Issue of share capital 303 34
-------- --------
(939) (291)
-------- --------
Investing activities
Net (purchase) sale of marketable securities (4,147) 2,118
Net purchase of capital assets (1,681) (628)
Foreign currency translation adjustment 155 (402)
-------- --------
(5,673) 1,088
-------- --------
Increase (decrease) in cash resources during the year 3,025 (627)
Cash resources, beginning of year 7,588 8,215
-------- --------
Cash resources, end of year $ 10,613 $ 7,588
Cash resources are comprised of:
Cash (bank overdraft) $ 4,171 $ (116)
Short-term investments 6,442 7,704
-------- --------
$ 10,613 $ 7,588
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars)
- - - --------------------------------------------------------------------------------
1. Organization
- - - --------------------------------------------------------------------------------
Goran Capital Inc. ("Goran") is the parent company of the Goran
group of companies.
The consolidated financial statements include the accounts of all
subsidiary companies of Goran, which are 100% owned, as follows:
1. Symons International Group, Inc. ("SIG Inc.") including its
subsidiary companies for which SIG Inc. acts as a manager, as
follows:
a) Pafco General Insurance Company ("PGIC") - an
Indiana based insurance company;
b) IGF Insurance Company ("IGF") - an Indiana based
insurance company;
c) Pafco Premium Finance Company - an Indiana based
premium finance company;
d) Hailplus, Corp. - an Iowa based premium finance
company; and
e) Symons International Group, Inc. of Ft. Lauderdale,
Florida ("SIG-FL") - a Florida based managing general
insurance agency.
2. Granite Reinsurance Company Ltd. ("Granite") - a finite risk
reinsurance company based in Barbados.
3. Granite Insurance Company ("GIC") - a Canadian federally
licensed insurance company which ceased writing new
insurance policies on January 1, 1990.
- - - --------------------------------------------------------------------------------
2. Summary of significant accounting policies
- - - --------------------------------------------------------------------------------
These consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in Canada
("Canadian GAAP").
a) Basis of consolidation
The consolidated financial statements include the accounts of Goran and
its subsidiary companies, all of which are 100% owned.
All significant intercompany transactions and balances have been
eliminated.
b) Premiums
Premiums are taken into income evenly over the lives of the related
policies.
c) Commissions
Commission expenses and related reinsurance commission recoveries
are recorded at the effective date of the respective insurance
policy.
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars)
- - - --------------------------------------------------------------------------------
2. Summary of significant accounting policies (cont'd)
- - - --------------------------------------------------------------------------------
d) Deferred policy acquisition costs
Deferred policy acquisition costs comprise of agents' commissions,
premium taxes and certain general expenses which are related
directly to the acquisition of premiums. These costs, to the extent
that they are considered recoverable, are deferred and amortized
over the same period that the related premiums are taken into
income.
e) Outstanding claims
The reserve for outstanding claims has been reported on by
independent actuaries. The Company's policy regarding the
recognition of the time value of money on outstanding claims is as
follows:
i) Direct claims
The reserve includes the recognition of the time value of
money on direct claims liabilities. Using an interest rate of 7.5%
(1994 - 7.5%) net claims incurred have been decreased by $161 (1994 -
increased by $88) and outstanding claims at December 31, 1995 reduced
by $1,327 (1994 - $1,134).
ii) Assumed claims
The Company has not recognized the time value of money with
respect to assumed claims liabilities over which it does not have direct
control over the timing of settlement of the liabilities. If the Company had
discounted these claims using an interest rate of 7.5% (1994 - 7.5%) net
claims incurred would have been increased by $1,147 (1994 reduced
by $1,264) and outstanding claims at December 31, 1995 would have
been reduced by $2,348 (1994 - $3,401).
f) Investments
Investments in bonds, mortgages and debentures are carried at
amortized cost providing for the amortization of the discount or
premium to maturity date. Investments in short-term investments,
real estate, and equities are carried at cost. Gains and losses on
disposal of investments are taken into income when realized.
When there has been a loss in value of an investment that is other than
a temporary decline, the investment is written down to recognize
the loss.
g) Capital assets
Capital assets are recorded at cost, net of accumulated
amortization. Amortization is provided at rates sufficient to
amortize the costs over the estimated useful lives of the assets.
h) Foreign currency translation
Foreign currency transaction gains and losses are included in the
statement of operations.
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars)
- - - --------------------------------------------------------------------------------
2. Summary of significant accounting policies (cont'd)
- - - --------------------------------------------------------------------------------
h) Goran and each of its subsidiaries have been determined to be
self-sustaining operations and are translated using the current rate
method whereby all assets and liabilities are translated into U.S. dollars at
the year end rate of exchange and revenue and expense items are
translated at the average rate of exchange for the year. The resulting
unrealized translation gain or loss is deferred and shown separately in
shareholders' equity. These adjustments are not included in operations
until realized through a reduction in the Company's net investment in such
operations.
- - - --------------------------------------------------------------------------------
3. Reinsurance
- - - --------------------------------------------------------------------------------
a) The Company's insurance subsidiaries follow a policy of
underwriting and reinsuring contracts of insurance which limits
their liability to a maximum amount on any one claim of $220 (1994
- - - - $214) in Canada, and $250 (1994 - $350) in the USA, with the
result that unearned premiums and outstanding claims are stated
net of reinsurance. As the primary insurers, the Company's insurance
subsidiaries maintain the principal liability to the policyholder.
b) The effect of reinsurance on the activities of the Group can be
summarized as follows:
1995 Gross Ceded Net
---- ----- ----- ---
Premiums written $151,717 $(65,357) $86,360
Premiums earned 145,366 (69,264) 76,102
Incurred losses and loss
adjustment expenses 148,001 (93,808) 54,193
Commission expense
(note 16(b)) 25,069 (25,950) (881)
Outstanding claims 87,655 (41,667) 45,988
Unearned premiums 33,159 (6,264) 26,895
1994 Gross Ceded Net
---- ----- ----- ---
Premiums written $126,978 $(68,503) $58,475
Premiums earned 120,241 (65,297) 54,944
Incurred losses and loss
adjustment expenses 76,321 (33,726) 42,595
Commission expense
(note 16(b)) 25,617 (24,174) 1,443
Outstanding claims 56,801 (15,315) 41,486
Unearned premiums 23,270 (6,987) 16,283
c) On June 30, 1991 Granite assumed an outstanding claims
portfolio of $22,630, with loss dates of May 31, 1990 and prior, and
received a bond and short-term investment portfolio with a value of
$22,546. The December 31, 1995 balances in the claims portfolio and
the investment portfolio are $3,509 (1994 - $5,535) and $4,761
(1994 - $8,333) respectively.
This portfolio has been deposited with a Canadian trust company
to support the liabilities assumed. The invested funds are used to
settle claims liabilities as they become due.
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars)
- - - --------------------------------------------------------------------------------
4. Cash and investments
- - - --------------------------------------------------------------------------------
1995 1994
------------------------- -------------------------
Book Value Market Value Book Value Market Value
Cash (overdraft) $ 4,171 $ 4,171 $ (116) $ (116)
Short-term investments 6,442 6,442 7,704 7,704
Equities 6,421 6,069 7,634 6,867
Bonds and debentures 27,949 28,080 21,557 20,971
Mortgages 3,583 3,583 3,713 3,683
Real estate 3,922 3,922 3,912 3,912
Other loan receivable 1,878 1,878 1,924 1,924
-------- -------- -------- --------
$ 54,366 $ 54,145 $ 46,328 $ 44,945
======== ======== ======== ========
a) At December 31, 1995, cash and investments of approximately
$20,510 (1994 - $20,031) are on deposit or held in trust by cedents,
and to a limited amount regulatory authorities, to secure certain of the
outstanding claims of the Company.
b) The Company realized a net gain of $198 (1994 - $358) from
the sale of investments during the year, and recorded an unrealized
loss of $58 (1994 - $161) on equities, and $Nil (1994 - $190) on
bonds. The carrying value of equities and bonds held at December
31, 1995 includes a provision of $357 (1994 - $950) for
investments considered to have a decline in value that is other than
temporary. Where market value is not readily determinable, book value is
used as an approximation.
c) The hotel property in Las Vegas that was acquired in 1992
was sold in 1994 for $4,533. PGIC took back an 8% first mortgage of
$3,000 from the purchaser, and realized a gain of $147.
d) As part of the sale of a subsidiary in 1990, the Company and its
subsidiaries invested in junior subordinated participating debentures
of the purchaser maturing on January 1, 1996 equivalent to $2,007,
bearing interest at a rate of 10% per annum, and preferred shares of a
subsidiary of the purchaser. The debentures and shares were redeemed
by the issuer during 1995.
- - - --------------------------------------------------------------------------------
5. Capital assets
- - - --------------------------------------------------------------------------------
1995 1994
---------------------------- --------
Accumulated
Cost Amortization Net Net
Furniture, fixtures and
equipment $3,686 $1,613 $2,073 $ 836
Automobiles 133 118 15 25
------ ------ ------ ------
Total $3,819 $1,731 $2,088 $ 861
====== ====== ====== ======
See also note 12.
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands U.S. dollars)
- - - --------------------------------------------------------------------------------
6. Other assets
- - - --------------------------------------------------------------------------------
Included in other assets are deferred charges relating to financing
activities and the acquisition of subsidiaries amounting to $155 (1994 -
$257).
- - - --------------------------------------------------------------------------------
7. Bank Loans
- - - --------------------------------------------------------------------------------
a) IGF maintained a secured revolving line of credit, bearing interest
at prime rate, in the amount of $6,000 at December 31, 1995, and is due
for renewal May 15, 1996.
At December 31, 1995, IGF had outstanding borrowings in the amount
of $5,811 (1994 - $4,191).
b) In December 1994, SIG Inc. obtained an unsecured line of credit,
bearing interest at prime rate plus 1% in the amount of $250. At December
31, 1995, SIG Inc. had outstanding borrowings in the amount of $ NIL
(1994 - $250).
c) As at December 31, 1995, the Company was in compliance with all
covenants under its bank loans.
- - - --------------------------------------------------------------------------------
8. Debentures
- - - --------------------------------------------------------------------------------
At December 31, 1995, the Company had secured and unsecured
notes in the amount of $11,085 (1994 - $12,210) outstanding.
The notes all bear an interest rate of 8% and mature on December
30, 1998. The Company has also agreed to secure these notes with a
general security agreement providing a fixed and floating charge over all
the assets of the Company and by a guarantee from Goran, whereby the
Company pledged the issued and outstanding common shares of
PGIC, GIC and Granite.
As at December 31, 1995, the Company was in compliance with,
or subsequently received waivers with respect to, all covenants pertaining
to the debentures.
The notes are due for principal repayment as follows:
December 30, 1996 $ 1,848
December 30, 1997 2,233
December 30, 1998 7,004
-------
$11,085
=======
The Company paid the principal payment of $1,462 due on December
30, 1995.
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars, except share data)
- - - --------------------------------------------------------------------------------
9. Capital Stock
- - - --------------------------------------------------------------------------------
The Company's authorized share capital consists of:
First Preferred Shares
An unlimited number of first preferred shares, of which none are
outstanding at December 31, 1995 (1994 - NIL).
Common Shares
An unlimited number of common shares, of which 5,060,229 are
outstanding as at December 31, 1995 (1994 - 4,933,779).
During the year, pursuant to the exercise of warrants and options,
the Company issued 141,450 (1994 - 49,375) common shares for
aggregate consideration in the amount of $305 (1994 - $34).
The Company has reserved for issue 774,035 (1994 - 915,485) common
shares consisting of:
a) 337,625 (1994 - 468,875) shares issuable on the exercise of
warrants for the purchase of common shares at $2.19 per share,
issued to debentureholders, and;
b) 436,410 (1994 - 446,610) shares pursuant to the employee
incentive share option plan as follows:
Number of Exercise
Shares Price Expiry Date
92,500 $0.37 July 31, 1996
224,166 $1.16 September 15, 1997
3,000 $1.48 December 7, 1997
63,099 $1.82 March 8, 1998
53,645 $3.85 July 14, 1999
--------
436,410
- - - --------------------------------------------------------------------------------
10. Shareholders' equity
- - - --------------------------------------------------------------------------------
Shareholders' equity is comprised of the following components:
1995 1994
-------- --------
Capital stock $ 16,875 $ 16,126
Deficit (3,895) (11,066)
Cumulative translation adjustment (358) 7
-------- --------
Shareholders' equity $ 12,622 $ 5,067
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of dollars)
- - - --------------------------------------------------------------------------------
11. Income taxes
- - - --------------------------------------------------------------------------------
The provision for (recovery of) income taxes is analyzed as follows:
1995 1994
------- -------
Consolidated net income before income taxes $ 9,668 $ 4,628
------- -------
Income taxes at Canadian statutory rates 4,287 2,052
Effect on taxes resulting from:
Tax exempt income (1,571) (1,070)
U.S. statutory rate differential (750) (155)
Application of losses carried forward
and reserves (399) (359)
Operating loss for which no current
income tax benefit is recognized 785 --
Deferred income taxes 145 220
------- -------
$ 2,497 $ 688
At December 31, 1995, the Company's Canadian subsidiary had
reserves, unclaimed for income tax purposes, of $2,161 (1994 -
$2,495). In addition, the Company and its consolidated subsidiaries
have operating loss carry forwards of approximately $13,768 for tax
purposes which expire primarily after 1996. The Company also has net
capital losses carried forward of approximately $8,057 which can be
applied to reduce income taxes on any future taxable capital gains. The
potential tax benefit of these reserves and loss carry forwards have not
been recorded in these financial statements.
- - - --------------------------------------------------------------------------------
12. Amortization
- - - --------------------------------------------------------------------------------
The Company recorded amortization for the year as follows:
1995 1994
----- -----
Amortization of:
Goodwill $ 63 $ 47
Capital assets 483 336
Investments 3 (39)
Other assets 144 222
----- -----
$ 693 $ 566
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars)
- - - --------------------------------------------------------------------------------
13. Related party transactions
- - - --------------------------------------------------------------------------------
a) In 1989, the Company wrote off a loan of $5,135 owed by
a subsidiary of Symons International Group Ltd. (SIGL). SIGL,
the majority shareholder of Goran, guaranteed this loan and pledged
1.2 million escrowed common shares of Goran (the "escrowed
shares") as security for the loan. During 1994 and subsequent to
year-end, SIGL entered into agreements with Goran whereby as
consideration for the release of 766,600 of the escrowed shares, SIGL
repaid $1,465 of the loan. The balance due to Goran of $3,670
continues to be guaranteed by SIGL and is secured by the 433,400
remaining escrowed shares. Pursuant to the agreements, it is the intention
of SIGL to repay the balance of the loan wihin the next 4 years. The
$1,465 loan repayment was recorded in 1994 as a recovery and included in
other income.
b) Included in other receivables are $563 (1994 - $593) due
from certain shareholders and directors which relate to the purchase
of common shares of the Company. Approximately half of the
amounts due bear interest and are subject to principal repayment
schedules. The Company also provided, indirectly, an officer with a
second mortgage on a residence in the amount of $278 which bears
interest at 7% (1994 - $278).
c) Included in cash and investments is a $1,700 loan to a third
party corporation ("TPC"), together with capitalized interest of
$178 (1994 - $201) for a total of $1,878 (1994 - $1,901). The
loan is secured by a guarantee and a collateral mortgage from a
corporation one third owned by an individual who is related to
the majority shareholder of SIGL. The TPC loaned the $1,700
to SIGL. The interest rate is 7.8% per annum. The interest accrued
at December 31, 1995, was NIL (1994 - NIL).
Additional security for the loan is held in the form of 250,000
common shares of Goran pledged by SIGL. The security is
guaranteed by a $350 guarantee by SIGL.
- - - --------------------------------------------------------------------------------
14. Contingent liabilities
- - - --------------------------------------------------------------------------------
a) The Company, and its subsidiaries, are named as defendants in
various lawsuits relating to their business. Legal actions arise
from claims made under insurance policies issued by the
subsidiaries. These actions were considered by the Company in
establishing its loss reserves. The Company believes that the
ultimate disposition of these lawsuits will not materially affect
the Company's operations or financial position.
b) IGF is responsible for the administration of a run-off book of
business. The Federal Crop Insurance Corporation ("FCIC")
has requested that IGF take responsibility for the claim
liabilities under its administration of these policies and IGF
has requested reimbursement of certain expenses from the
FCIC with respect to this run-off activity. It is the Company's
opinion, and that of its legal counsel, that there is no
liability on the part of the Company for claim liabilities of
other companies under IGF's administration.
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars)
- - - --------------------------------------------------------------------------------
15. Segmented information
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
United United
States States Other
Canada Crop Other P&C Foreign Elimination Consolidated
1995
<S> <C> <C> <C> <C> <C> <C>
Gross premiums
written $ -- $ 67,828 $ 54,260 $ 34,837 $(5,208) $ 151,717
========= ========= ========= ========= ========= =========
Net premiums
earned $ (84) $ 11,608 $ 38,034 $ 26,544 $ -- $ 76,102
========= ========= ========= ========= ========= =========
Segmented operating
profit $ 1,900 $ 447 $ 13,910 $ 12,898 $(1,374) $ 27,781
General expenses 3,746 (7,122) 15,934 9,356 (1,304) 20,610
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (1,846) $ 7,569 $ (2,024) $ 3,542 $ (70) $ 7,171
========= ========= ========= ========= ========= =========
Identifiable assets $ 6,884 $ 59,733 $ 47,372 $ 55,921 $(9,094) $ 160,816
========= ========= ========= ========= ========= =========
1994
Gross premiums
written $ -- $ 54,455 $ 48,679 $ 23,844 $ -- $ 126,978
========= ========= ========= ========= ========= =========
Net premiums
earned $ (61) $ 4,565 $ 27,561 $ 22,879 $ -- $ 54,944
========= ========= ========= ========= ========= =========
Segmented operating
profit $ 3,606 $ (2,286) $ 10,259 $ 8,812 $(1,418) $ 18,973
General expenses 3,069 (3,707) 10,775 6,328 (1,418) 15,047
Minority interest -- -- (14) -- -- (14)
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 537 $ 1,421 $ (502) $ 2,484 $ -- $ 3,940
========= ========= ========= ========= ========= =========
Identifiable assets $ 12,363 $ 29,085 $ 35,749 $ 45,033 $(6,991) $ 115,239
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars)
- - - --------------------------------------------------------------------------------
15. Segmented information (cont'd)
- - - --------------------------------------------------------------------------------
The Canadian results are comprised of the operations of Goran as
an entity which incurred a loss of $1,472 (1994 - profit of $400) and
the run-off insurance activities of GIC which incurred a loss of $374 (1994
- - - - profit of $137). Segmented operating profit is composed of
premiums earned, plus investment and other income net of claims incurred.
General expenses are composed of commissions and operating
expenses, interest and income taxes.
The United States results are comprised of the consolidated operations
of SIG Inc.
Other foreign results are comprised of the operations of Granite.
See also note 1.
- - - --------------------------------------------------------------------------------
16. Regulatory matters
- - - --------------------------------------------------------------------------------
a) Goran's insurance subsidiaries are subject to certain requirements
and restrictions in accordance with the regulations of their
respective jurisdictions. Statutory regulations require that the
subsidiaries maintain a minimum amount of capital to support
outstanding insurance in force and new premium writing. This
requirement and other regulations in the respective jurisdictions,
restricts the amount of dividends payable in any year by the
subsidiaries to the parent. The statutory surplus of the Company's
active insurance subsidiaries at December 31, 1995 amounted
to $34,436 (1994 - $23,616). Subsequent to Board of Directors
and regulatory approval, IGF declared and paid in December,
1995 an extraordinary dividend to PGIC in the amount of $2,000
on the convertible preferred stock owned by PGIC. In
December, 1995, upon Board of Directors and regulatory
approval, PGIC declared and paid to SIG Inc. a $1,500
dividend on the common stock owned by SIG Inc.
b) PGIC and IGF, domiciled in Indiana, prepare their statutory
financial statements in accordance with accounting practices
prescribed or permitted by the Indiana Department of Insurance
("IDOI"). Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance
Commissioners ("NAIC"), as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
IGF received written approval from IDOI to reflect its business
transacted with the Consolidated Farm Services Agency
("CFSA") as a 100% cession with any net underwriting results
recognized in ceding commissions for statutory accounting
purposes, which differs from prescribed statutory accounting
practices. As of December 31, 1995, that permitted transaction
had no effect on statutory surplus or net income.
The net underwriting results, included in commissions and
operating expenses, for the years ended December 31, 1995 and
1994 were a gain of $9,653 and $3,275, respectively.
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars)
16. Regulatory matters (cont'd)
c) During the year IGF and PGIC entered into a reinsurance
agreement in which IGF ceded $17,696 of multi peril crop business to
PGIC, who in turn ceded it to the CFSA. As a matter of course,
inter-company reinsurance agreements are filed with the IDOI
for their approval. IDOI approval has not yet been received with
respect to this agreement; however, management believes it will
be received in due course.
- - - --------------------------------------------------------------------------------
17. Events subsequent to December 31, 1995
- - - --------------------------------------------------------------------------------
Subsequent to December 31, 1995, the Company entered into an
agreement to purchase Superior Insurance Company ("Superior") for a
purchase price equal to 105% of the GAAP net book value of Superior
at the time of Closing. For 1995, Superior reported premiums in the
amount of $94,800, assets of $160,100 and a net book value of $61,600.
The acquisition is subject to normal regulatory approvals. Management
believes that such approvals will be forthcoming and that the transaction
is expected to close on or about April 30, 1996.
In addition, the Company has entered into agreements with Goldman,
Sachs & Co. to create a joint venture to acquire Superior. The
Company has agreed to contribute (i) its rights under the Superior
Purchase Agreement; (ii) 100% of the capital stock of PGIC at a minimum
book value of $14,000 and (iii) certain operational capital assets.
Investment funds affiliated with Goldman Sachs ("Goldman Entities")
agreed to contribute cash of approximately $20,000. With the cash
contributed by the Goldman Entities and the proceeds of a Senior Bank
Facility, the new company, GGS Management, Inc., will acquire
Superior. SIG Inc. will have a 52% interest in GGS Management, Inc.
through its ownership of shares in GGS Management Holdings, Inc.
- - - --------------------------------------------------------------------------------
18. Reconciliation of Canadian GAAP and United States generally
accepted accounting principles ("U.S. GAAP") and additional information
- - - --------------------------------------------------------------------------------
The consolidated financial statements are prepared in accordance
with Canadian GAAP. Material differences between Canadian and U.S.
GAAP are described below:
(a) Earnings and retained earnings
1995 1994
------- -------
Net earnings in accordance with
Canadian GAAP $ 7,171 $ 3,940
Add effect of difference in accounting for:
Deferred income taxes [see note (d)] (344) 1,180
Outstanding claims [see note (e)] (161) 88
------- -------
Net earnings in accordance with U.S. GAAP 6,666 5,208
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars, except share data)
- - - --------------------------------------------------------------------------------
18. Reconciliation of Canadian GAAP and United States generally
accepted accounting principles ("U.S. GAAP") and additional information
(cont'd)
- - - --------------------------------------------------------------------------------
(a) Earnings and retained earnings (cont'd)
Applying U.S. GAAP, deferred income tax assets would be
increased by $1,466 and $1,742, outstanding claims would be increased
by $1,327 and $1,134, and cumulative translation adjustment would
be increased by $36 and $84 as at December 31, 1995 and
1994, respectively. As a result of these adjustments, accumulated
deficit would be decreased by $139 and $608 as at December 31,
1995 and 1994, respectively. The effect of the above noted
differences on other individual balance sheet items and on working
capital is not significant.
(b) Earnings per share
Earnings per share, as determined in accordance with U.S. GAAP
are set out below. Primary earnings per share are computed based on
the weighted average number of common shares outstanding during
the year plus common share equivalents consisting of stock options
and warrants. Primary and fully diluted earnings per share are calculated
using the Treasury Stock method and assume conversion of securities when
the result is dilutive.
The following average number of shares were used for the
compilation of primary and fully diluted earnings per share:
1995 1994
---------- ----------
Primary $5,567,644 $5,399,463
Fully diluted 5,567,644 5,399,463
Earnings per share, as determined in accordance with U.S.
GAAP, are as follows:
1995 1994
---------- ----------
Primary earnings per share $1.20 $0.96
Fully diluted earnings per share 1.20 0.96
(c) Supplemental cash flow information
Cash paid for interest and income taxes is summarized as follows:
1995 1994
---------- ----------
Cash paid for interest 1,548 1,773
Cash paid for income taxes,
net of refunds 1,953 166
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars)
- - - --------------------------------------------------------------------------------
18. Reconciliation of Canadian GAAP and United States generally
accepted accounting principles (U.S. GAAP) and additional information
(cont'd)
- - - --------------------------------------------------------------------------------
(d) Income taxes
The difference in accounting for deferred income taxes reflects
the adoption for U.S. GAAP, effective January 1, 1993, of
Statement of Financial Accounting Standards No. 109 ("SFAS
No. 109"), "Accounting for Income Taxes." This standard
requires an asset and liability approach that takes into account
changes in tax rates when valuing the deferred tax amounts to be
reported in the balance sheet.
Deferred tax assets recognized under Canadian GAAP, which
require realization beyond a reasonable doubt in order to
record the assets, amounted to $73 and $214 at December 31,
1995 and 1994, respectively, and pertained to Canadian operations
only.
The adoption of SFAS No. 109 results in additional deferred tax
assets recognized for deductible temporary differences and loss
carry-forwards in the amount of $2,581 and $2,375 net of
valuation allowances of $69 and $260 and deferred tax liabilities
recognized for taxable temporary differences in the amount of
$1,114 and $633 at December 31, 1995 and 1994, respectively.
(e) Outstanding claims
The difference in accounting for outstanding claims reflects the
application for U.S. GAAP of SEC Staff Accounting Bulletin No.
62, "Discounting by Property/Casualty Insurance Companies".
This standard does not allow discounting of unpaid claim
liabilities by public companies, except in specific circumstances
that are not applicable to the Company.
(f) Receivables from sale of capital stock
The SEC Staff Accounting Bulletins require that accounts or
notes receivable arising from transactions involving capital
stock should be presented as deductions from shareholders'
equity and not as assets. Accordingly, in order to comply with
U.S. GAAP, shareholders' equity would be reduced by $563
and $593 as at December 31, 1995 and 1994, respectively, to
reflect the loans due from certain shareholders which relate to
the purchase of common shares of the Company.
(g) Unrealized loss on investments
U.S. GAAP require that unrealized losses on investment
portfolios be included as a component in determining
shareholders' equity. In addition, SFAS No. 115 permits
prospective recognition of unrealized gains on investment
portfolios for year-ends commencing after December 15, 1993.
As a result, shareholders' equity would be reduced by $221 and
$1,383 as at December 31, 1995 and 1994, respectively. As the
Company classifies its debt and equity securities as available for
sale, the adoption of SFAS No. 115 in 1994 has no effect on net
income.
<PAGE>
- - - --------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - - --------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
(In thousands of U.S. dollars)
- - - --------------------------------------------------------------------------------
18. Reconciliation of Canadian GAAP and United States generally
accepted accounting principles (U.S. GAAP) and additional information
(cont'd)
- - - --------------------------------------------------------------------------------
(h) Changes in shareholders' equity
A reconciliation of shareholders' equity from Canadian GAAP
to U.S. GAAP is as follows:
1995 1994
------- -------
Shareholders' equity in accordance
with Canadian GAAP 12,622 5,067
Add (deduct) effect of difference in accounting for:
Deferred income taxes (see note (a)) 1,466 1,742
Outstanding claims (see note (a)) (1,327) (1,134)
Receivables from sale of capital
stock (see note (f)) (563) (593)
Unrealized loss on investments
(see note(g)) (221) (1,383)
------- -------
Shareholders' equity in accordance with
U.S. GAAP 11,977 3,699
====== =====
- - - --------------------------------------------------------------------------------
19. Comparative figures
- - - --------------------------------------------------------------------------------
Certain comparative figures have been reclassified to conform to
the basis of presentation adopted in 1995.
- - - --------------------------------------------------------------------------------
20. Reporting currency
- - - --------------------------------------------------------------------------------
These financial statements, which are denominated in U.S. dollars,
reflect the conversion of the previously issued Canadian dollar
denominated financial statements, which were issued together with
an auditors' report thereon dated March 18, 1996.
GORAN CAPITAL INC.
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual and Special Meeting
of the Shareholders of Goran Capital Inc. (the "Corporation")
will be held at 181 University Avenue, Suite 1101, Toronto,
Ontario, on Wednesday, May 21, 1997, at 10:00 a.m., Toronto time,
for the following purposes:
1. To receive the Annual Report and financial statements
for the year ended December 31, 1996, and the report of the
auditor thereon;
2. To elect Directors;
3. To appoint an auditor and to authorize the Directors to
fix the auditor's remuneration;
4. To consider and, if deemed advisable, to confirm,
subject to such amendments, variations and additions as may be
approved at the Meeting, new Bylaw No. 1 enacted by the Directors
which repealed and replaced the former general Bylaw and which
relates generally to the transaction of the business and affairs
of the Corporation.
5. To transact such other business as may properly come
before the Meeting or any adjournment thereof.
The accompanying management information circular provides
additional information relating to the matters to be dealt with
at the Meeting and forms part of this Notice.
Shareholders who are unable to attend the Meeting are
requested to date, sign and return the accompanying Form of Proxy
in the envelope provided for that purpose.
DATED at Toronto, this 27th day of March, 1997.
BY ORDER OF THE BOARD
/s/ ALAN G. SYMONS
CEO and President<PAGE>
March 27, 1997
Dear Shareholder:
Re: Supplemental Mailing List
If you wish to have your name added to the supplemental mailing
list of Goran Capital Inc. so you may receive the Corporation's
quarterly reports which contain interim unaudited financial
statements, please fill in your name and address in the space
provided below and return to Adams & Aihoshi Shareholder Services
Ltd., 461 Alden Road, Unit 33, Markham, Ontario, L3R 3L4,
Telephone (905) 940-9535.
NAME:
Please print
ADDRESS:
CITY:
PROVINCE: POSTAL CODE:
I hereby confirm that I am the owner of shares issued by the
above-mentioned Corporation.
SIGNATURE:
DATE:
<PAGE>
GORAN CAPITAL INC.
MANAGEMENT PROXY CIRCULAR
Solicitation of Proxies
This Management Proxy Circular is furnished in connection
with the solicitation of proxies by the management of Goran
Capital Inc. (the "Corporation") for use at the Annual and
Special Meeting (the "Meeting") of Shareholders of the
Corporation to be held Wednesday, May 21, 1997, at 10:00 a.m., or
at any and all adjournments thereof, for the purposes set forth
in the accompanying notice of the Meeting. It is expected that
the solicitation will be primarily by mail, but proxies may also
be solicited personally, by telephone or by telecopier, by
directors, officers or regular employees of the Corporation. The
costs of such solicitation will be borne by the Corporation.
Revocation of Proxies
A shareholder who has given a proxy may revoke at any time
to the extent it has not been exercised. In addition to
revocation in any other manner permitted by law, a proxy may be
revoked by instrument in writing executed by the shareholder or
his attorney authorized in writing, and deposited either at the
registered office of the Corporation at any time up to 5:00 p.m.
(Toronto time) on the last business day preceding the day of the
Meeting, or any adjournment thereof, at which the Proxy is to be
used, or with the Chairman of the Meeting prior to the beginning
of the Meeting on the day of the Meeting, or any adjournment
thereof or in any other manner provided by law.
Voting of Shares Represented by Management Proxies
The persons named in the enclosed form of proxy will vote
the shares in respect of which they are appointed by proxy on any
ballot that may be called for in accordance with the instructions
thereon. In the absences of such specifications, such shares
will be voted in favour of each of the matters referred to
herein.
The enclosed form of proxy confers discretionary authority
upon the persons named therein with respect to amendments to or
variations of matters identified in the Notice of meeting and
with respect to other matters, if any, that may properly come
before the Meeting. At that date of this Circular, management of
the corporation knows of no such amendments, variations or other
matters to come before the Meeting. However, if any other
matters that are not known to management should properly come
before the Meeting, the proxy will be voted on such matters in
accordance with the best judgment of the named proxy.
Voting Securities
The only voting securities of the Corporation currently
outstanding and entitled to be voted at the Meeting are 5,569,652
common shares, each of which carries one vote.
In accordance with the provisions of the Canada Business
Corporations Act, the Corporation will prepare a list of the
holders of common shares at the close of business on the day
immediately preceding the day on which Notice of the Meeting is
given. Each person named in such list is entitled to vote the
shares shown opposite his name on such list at the Meeting except
to the extent that he has transferred ownership of any of his
shares after that date and the transferee of those shares
produces properly endorsed share certificates or otherwise
establishes that he owns the shares and demands not later than 10
days before the Meeting that his name be included in the list
before the Meeting, in which case the transferee is entitled to
vote his shares at the Meeting or any adjournment thereof.
Principal Holders of Voting Securities
To the knowledge of the directors and officers of the
Corporation, the following are the only persons who beneficially
own or exercise control or direction over more than 10% of the
outstanding common shares of the Corporation:
Number of Common Shares
Beneficially Owned Percentage
Controlled or of Outstanding
Name Directed (1) Common Shares
Symons International
Group Ltd.(2) 1,646,413 29.6%
G. Gordon Symons 890,167 16.0%
Alan G. Symons 449,183 8.1%
1Reflect ownership as verified by the persons listed as of March
14, 1997.
2Mr. G. Gordon Symons is the controlling shareholder of Symons
International Group Ltd., a private company.
Particulars of Matters to be Acted Upon
At the Meeting, shareholders will be asked to elect
directors, to appoint an auditor and to authorize the directors
to fix the auditor's remuneration, to confirm new Bylaw No. 1 for
the Corporation and to deal with other matters which may properly
come before the Meeting.
Election of Directors
The Articles of the Corporation currently provide for a
board consisting of a minimum of three and a maximum of ten
directors. The board currently consists of seven Directors until
otherwise determined by further resolution of the board of
directors of the Corporation.
Unless otherwise specified therein, proxies received in
favour of management nominees will be voted for the following
proposed nominees (or for substitute nominees in the event of
contingencies not known at present) whose term of office will
continue until the next Annual Meeting of Shareholders or until
they are removed or their successors are elected or appointed in
accordance with the Canada Business Corporations Act and the
bylaws of the Corporation.
Number of Common
Shares of the
Name and Position in Year First Corporation
Principal the Became Beneficially
Occupation Corporation Director Owned (1)
G. Gordon Chairman of 1986 890,167
Symons the Board
Chairman of the
Board
Goran Capital
Inc.
Alan G. CEO, President 1986 449,183
Symons (2) and Secretary
CEO, President
and Secretary
Goran Capital
Inc.
Douglas H. COO and Vice 1989 197,483
Symons President
President, Symons
International
Group, Inc.,
Chief Operating
Officer, Goran
Capital Inc.
Ross Schofield Director 1992 3,800
President
Schofield
Insurance Brokers
David B. Shapira Director 1989 100,000
President
Medbers, Inc.
James G. Director 1995 2,000
Torrance,
Q.C. (2)
Partner Emeritus
Smith, Lyons
Barristers &
Solicitors
John K. Director 1995 -0-
McKeating (2)
Partner
Vision 2120, Inc.
1Information as to the shareholdings of each nominee has
been provided by the nominee.
2Member of the Audit Committee.
Each of the foregoing nominees has held the principal
occupation indicated above during the past five years except:
(i) Alan G. Symons who prior to June 4, 1992, was the President
of both Symons Capital Fund Ltd. and Symons International Group
Ltd.; and (ii) David B. Shapira who prior to 1995 was the
President of Morse Jewellers Inc.
Directors' and Officers' Remuneration
The aggregate remuneration paid by the Corporation and its
subsidiaries to its five highest paid employees or Officers,
including the three inside Directors, during the financial year
ended December 31, 1996 was $1,643,492, all in the form of
salary, bonus and consulting fees.
In 1996, the Corporation's directors received (i) a flat
annual fee of $10,000 for each Director; and (ii) a $1,000
meeting fee for each board or committee meeting attended.
Interest of Insiders in Material Transactions
Reference is made to the 1996 Annual Report, sent to each
shareholder with this Management Proxy Circular, and to Note
14, Related Party Transactions.
Indebtedness of Officers and Directors of the Corporation
The following directors and officers of the Corporation were
indebted to the Corporation in amounts exceeding $10,000 during
the financial year ended December 31, 1996, on account of loans
to purchase common shares of the Corporation and its affiliates
certain of which were pursuant to the Employee Share Purchase
Plan (see below):
<PAGE>
Name and
Municipality of Date of Largest Blance Present
Residence Loan During Period Balance
G. Gordon Symons June 27, 1986 $148,000 $148,000
Bermuda June 30, 1986 $200,000 $200,000
May 31, 1988 $ 51,729 (US) $ 51,729 (US)
Alan G. Symons June 30, 1986 $ 40,172 $ 29,772
Indianapolis, February 25,
Indiana 1986 $ 27,309 (US) $ 27,309 (US)
Douglas H. Symons June 30, 1986 $ 15,000 $ 15,000
Indianapolis, February 25,
Indiana 1986 $ 2,219 (US) $ 2,219 (US)
The foregoing loans dated June 27, 1986 and June 30, 1986
made for the purchase of common shares of the Corporation require
that the shares acquired be pledged for the benefit of the
Corporation as security until these amounts are fully paid. The
other loans are each unsecured. The loans dated prior to 1988
are payable on demand and are interest free. The loans dated in
1988 are payable on demand and bear interest at 90 day T-Bill
rates.
Mr. G. Gordon Symons has an unsecured loan in the amount of
$70,000 not relating to the purchase of common shares of the
Corporation. This loan was taken out on January 2, 1988, is
payable on demand and is interest free. In November, 1990, the
Corporation loaned Douglas H. Symons $39,377 (U.S.) for
acquisition of a residence. This loan bears interest at prime
plus 1% and has accrued an unpaid interest of $21,168. In
February, 1997, Mr. G. Gordon Symons repaid in full the U.S.
mortgage note principal amount of $277,502 (U.S.) supported by a
residential collateral mortgage, originally taken out on October
3, 1988.
Executive Compensation
The Corporation had five Executive Officers during 1996. The
aggregate cash compensation paid by the Corporation and its
subsidiaries to the Corporation's Executive Officers including
salaries, fees, commissions and bonuses, during 1996 was
$1,643,492. The aggregate value of compensation, other than that
referred to above, paid to Executive Officers during 1996 does
not exceed $10,000 times the number of Executive Officers.
Table 1 sets forth certain compensation information, paid by
the Corporation and its subsidiaries, to the Corporation's Chief
Executive Officer and each of the Corporation's other Executive
Officers during the Corporation's three most recently completed
fiscal years.
<PAGE>
<TABLE>
TABLE 1: SUMMARY COMPENSATION TABLE
Annual Long-
Compensation Term Awards
Securities
Other Under Options
Salary Bonus Annual Granted (#) All Other
Name and US $ US $ Comp- Note C Compensation
Principal Note A Note A ensa- US $
Position Year US $
Note B
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
G. Gordon 1996 $171,000(h) $393,945 NIL 51,524 $170,799(E)
Symons 1995 $175,000 70,000 NIL 18,946 25,272(D)
Chairman 1994 $150,000 $ 36,611 NIL 15,000 21,425(D)
Alan G. 1996 $242,786(f) $143,333(g) NIL 51,399 Note B
Symons 1995 $148,077 $ 42,893 NIL 18,945 Note B
1994 $142,361 $ 55,810 NIL 15,000 Note B
Douglas H. 1996 $195,973(I) $ 50,000 NIL $54,333 Note B
Symons 1995 $149,982 $100,000 NIL $ 9,473 Note B
1994 $150,041 $ 14,000 NIL $15,000 Note B
Gary P. 1996 $ 55,418(I) $28,000(I) NIL 0 Note B
Hutchcraft 1995 $ N/R N/R NIL N/R N/R
Vice President 1994 $ N/R N/R NIL N/R N/R
and Treasurer
David L. Bates 1996 $ 95,162(I) $97,076(I) NIL $ 3,165 Note B
Vice President 1995 $ 63,237 -0- NIL $ -0- Note B
and General 1994 N/R N/R NIL N/R N/R
Counsel
</TABLE>
N/R Not required.
Note A Salary and bonus are stated in U.S. dollars as the
majority of payments are actually made in U.S. dollars.
Note B Aggregate amounts not greater than the lesser of
$50,000 and 10% of the total of the annual salary and bonus.
Note C No stock appreciation rights (SAR's), restricted
shares, or restricted share units were granted during any of the
past three completed fiscal years.
Note D Imputed interest on interest-free stock purchase loan.
Note E Consulting fees paid to companies owned by Mr. G.
Gordon Symons including $52,411 paid to such companies by the
Company's 67% owned subsidiary, Symons International Group, Inc.
Note F Includes $142,786 paid by Symons International Group,
Inc.
Note G Includes $133,333 paid by Symons International Group,
Inc.
Note H Amount paid by a subsidiary of the Company.
Note I Amount paid by Symons International Group, Inc.
<PAGE>
Employee Share Option Plan
The Corporation has a Share Option Plan (the "Plan").
Under the Plan, common shares equal to 10% of the number of
common shares outstanding from time to time have been reserved
for issuance. The terms, conditions and limitations of options
granted under the Plan are determined by the board of directors
of the Corporation with respect to each option, within certain
limitations. The exercise price per share shall be the closing
price on The Toronto Stock Exchange on the date of grant of the
option. The exercise price per share is payable in full on the
date of exercise. Options granted under the Plan are not
assignable.
During 1996, options to purchase a total of 213,986 common
shares were granted to Executive Officers and Directors pursuant
to the Plan, excluding options granted and subsequently canceled
during the year.
Including the options referred to above, there are
outstanding options to purchase a total of 527,399 common shares
as of December 31, 1996, at an average price of $8.29.
TABLE 2: OPTION GRANTS DURING 1996
Market Value
% of Total of Securities
Securities Option Underlying
Under Granted To Exercise Options on the
Options Employees or Base Date of Grant Expiration
Name Granted (#) 1996 Price ($/Security) Date
($/Security)
G. Gordon 51,524 24.1% $16.50 $16.50 May 12, 2006
Symons
Alan G. 51,399 24.0% $16.50 $16.50 May 12, 2006
Symons
Douglas 54,333 25.6% $16.50 $16.50 May 12, 2006
H. Symons
David L. 3,165 1.5% $16.50 $16.50 May 12, 2006
Bates
Dennis G. 20,000 9.4% $16.50 $16.50 May 12, 2006
Daggett
Thomas F. 20,000 9.4% $16.50 $16.50 May 12, 2006
Gowdy
TABLE 3: AGGREGATED OPTION EXERCISES
DURING 1996 AND FINANCIAL YEAR-END OPTION VALUES
Value of
Unexercised Unexercised In-
Securities Options at The-Money Options
Acquired Aggregate FY-End (#) Exercisable/
On Value Exercisable/ Unexercisable
Name Exercise Realized Unexercisable
G. Gordon Symons 92,500 $1,513,250 273,470/0 $6,129,230/0
Alan G. Symons 49,383 $ 761,856 85,344/0 $ 982,775/0
Douglas H. Symons 33,333 $ 493,995 94,855/0 $1,524,787/0
Composition of the Compensation Committee
The following Goran Directors served as members of the
Board's Compensation Committee during 1996: J. Ross Schofield,
Douglas H. Symons and James G. Torrance. At its meeting on March
19, 1997, the Board reconfigured the Compensation Committee to
consist of Messrs. Schofield, Shapira and and Douglas H. Symons.
Mr. Douglas H. Symons was Chief Operating Officer and Vice
President of the Corporation throughout 1996. The role of the
Compensation Committee is to review the total compensation of the
Corporation's Executive Officers in an effort to ensure that the
Corporation attracts and retains the talent commensurate with
its business objectives.
Report On Executive Compensation
The Corporation's Executive Compensation Policy (the
"Policy") considers an individual's experience, market conditions
(including industry surveys), individual performance and overall
financial performance of the Corporation. The Company's total
compensation program for officers includes base salaries, bonuses
and the grant of stock options pursuant to the Company's stock
option plan. The Company's primary objective is to achieve
above-average performance by providing the opportunity to earn
above-average total compensation (base salary, bonus, and value
derived from stock options) for above-average performance. Each
element of total compensation is designed to work in concert.
The total program is designed to attract, motivate, reward and
retain the management talent required to serve shareholder,
customer and employee interests. The Company believes that this
program also motivates the Company's officers to acquire and
retain appropriate levels of stock ownership. It is the opinion
of the Compensation Committee that the total compensation earned
by the Company's officers during 1996 achieves these objectives
and is fair and reasonable. At its meeting on March 19, 1997,
the Board of Directors of the Company voted to retain an
independent compensation consultant to review the Company's
executive compensation plan and to make recommendations
concerning the compensation levels and type necessary to achieve
the Company's stated objectives.
Compensation is comprised of base salary, annual cash
incentive (bonus) opportunities, and long-term incentive
opportunities in the form of stock options. Individual
performance is determined in relation to short and long-term
objectives that are established and maintained on an on-going
basis. Performance to these objectives is formally reviewed
annually and base salary adjusted as a result. Bonus rewards are
provided upon the attainment of corporate financial performance
objectives as well as the individual's direct responsibilities
and their attainment of budget and other objectives.
The Policy also strives to establish long-term incentives
to Executive Officers by aligning their interests with those of
the Corporation's shareholders through award opportunities that
can result in the ownership of the Corporation's common stock.
<PAGE>
COMPARISON OF FIVE YEAR CUMULATIVE
TOTAL RETURN OF GORAN CAPITAL INC.
WITH TSE 300
[Graph Omitted]
1991 1992 1993 1994 1995 1996
GNC $100 $886 $1,572 $2,443 $3,933 $9,108
TSE300 $100 $ 98 $ 134 $ 134 $ 155 $ 195
Performance Graph
The graph shown above compares the total cumulative
shareholder return for $100 invested in common shares of GNC on
December 31, 1990, with the cumulative total return of the TSE
300 Stock Index for the six most recently completed financial
years.
Appointment of Auditor
Unless otherwise instructed, the persons named in the
enclosed Form of Proxy intend to vote for the appointment of
Schwartz, Levitsky, Feldman, Chartered Accountants as auditor of
the Corporation to hold office until the next annual meeting of
shareholders. Schwartz Levitsky Feldman was first appointed
auditor of the Corporation in 1990.
The New Bylaw
At its meeting on March 19, 1997, the Board of Directors of
the Corporation approved and adopted a new Bylaw relating to the
transaction of the business and affairs of the Corporation. The
action of the board in approving and adopting a new Bylaw made it
effective immediately. However, absent confirmation by the
Shareholders, the new Bylaw lapses on the earlier of March 19,
1998 or the date of the Corporation's next shareholderm meeting.
The following is a summary of the principle provisions of the new
Bylaws, a copy of which will be furnished upon request.
Summary of Principal Bylaw Provisions
The Bylaws provide that, unless otherwise determined by
Board resolution, any contract or documents requiring execution
by the Corporation may be signed by any Director or Officer of
the Corporation and that a document so executed shall be binding
upon the Corporation without further authorization or formality.
The Board has the further power to specifically delineate which
of its Directors or Officers may execute certain contracts or
documents. Further, if so authorized by a resolution of the
Board, such signatures or the affixing of the corporate seal may
be done mechanically or electronically with the same binding
effect as if such were an original signature.
Except as otherwise determined by a resolution of the Board,
all persons authorized to sign contracts or documents on behalf
of the Corporation may execute and deliver instruments of proxy
or otherwise vote securities owned by the Corporation.
Subject to a contrary resolution of the Board, the Board
may, without shareholder authorization, borrow money on the
credit of the Corporation, issue, reissue, sell or pledge debt
obligations of the Corporation, give a guaranty on behalf of the
Corporation to secure performance of an obligation and mortgage,
hypothecate, pledge or otherwise create a security interest in
all or any property of the Corporation, owned or subsequently
acquired, to secure any obligation of the Corporation.
An individual may be a member of the Board of Directors of
the Corporation as long as such individual is 18 years of age or
greater, of sound mind, and is not bankrupt. The number of
Directors required to constitute a quorum for the transaction
of business at a meeting of the Board shall be 51% or
more of the Directors or the minimum number of Directors required
by the Articles. A Director shall serve a term of office from
the date of election until the close of the Annual Meeting of
Shareholders next following his election or appointment or until
his successor is elected or appointed. The resignation of any
Board member becomes effective at the time a written resignation
is sent to the Corporation, or at the time specified in the
resignation, whichever is later. Directors may be removed by the
Shareholders by a resolution at a special meeting and a vacancy
created by the removal of a Director may be filled at the meeting
of Shareholders at which the Director is removed.
Directors may attend meetings by telephone or other communication
facilities.
The Chairman of the Board shall be Chairman of any meeting
of Directors and any questions arising at a meeting of Directors
shall be decided by a majority of the votes cast at such meeting.
In the case of a tie, the Chairman of the meeting shall be
entitled to cast the deciding vote.
In lieu of a meeting, the Directors may act by a written
resolution signed by all Directors entitled to vote as if such
resolution had been presented at a meeting of the Directors.
The Board may appoint at least three (3) of its members,
from time to time, to act as the Audit Committee of the Board. A
majority of the members of the Audit Committee shall not be
Officers or employees of the Corporation. The Audit Committee
shall review the annual financial statements of the Corporation
and report thereon to the Directors before such financial
statements are approved by the Directors.
The Board may, by resolution, appoint from among their
number any one or more other committees.
From time to time, the Directors may appoint a Chairman of
the Board, a President, one or more Vice Presidents (to which
title may be added words indicating seniority or function), a
Secretary, a Treasurer, a Controller and such other Officers as
the Directors may by resolution determine. Any Officer so
appointed may be removed by the Directors at their pleasure
without prejudice to the rights of any such person.
In the event that a Director or Officer is party to a
material contract or proposed material contract with the
Corporation or has a material interest in any person who is a
party to a material contract or proposed material contract with
the Corporation, such Director or Officer shall disclose in
writing to the Corporation the facts of same and, if a Director,
shall not vote on any resolution to approve such contract or
transaction.
The Bylaws provide that every Director or Officer of the
Corporation shall be indemnified by the Corporation to the
maximum extent provided by applicable law.
Subject to the Articles of Incorporation, the Directors, by
resolution, may issue any or all of the unissued shares in the
capital of the Corporation to such persons and for such
consideration as the Directors may determine by resolution.
The Bylaws authorize, but do not require, the Board to
declare dividends of the Corporation and the Directors may, by
resolution, fix in advance a date preceding by not more than
fifty (50) clear days, the date for the payment of any dividend
or the making of any distribution or for the issue of any warrant
or other evidence of right to acquire securities of the
Corporation.
The Directors shall set the date and time for the Annual
Meeting of Shareholders and, by resolution, may call a special
meeting of the Shareholders. All meetings of Shareholders shall
be held at the Corporation's offices or at such other place
within Canada as the Directors from time to time may determine.
Notice of such meeting of Shareholders shall be given to the
Shareholders not less than twenty-one (21), nor more than fifty
(50) days before the date on which such meeting is to be held.
The Secretary of the Corporation is directed to send a form
of proxy and Management Information Circular to each Shareholder
concurrently with the notice of a meeting of Shareholders. The
quorum necessary for the transaction of business at any
shareholders' meeting shall be two (2) persons present and
entitled to vote not less than 51% of the Shares entitled to be
voted at the meeting. At each meeting of Shareholders, every
question shall be decided by a majority of the votes duly cast
thereon (including those cast by proxy).
Any Shareholder entitled to vote at a meeting of
Shareholders may submit to the Corporation a notice of any
proposal that such Shareholder wishes to raise at the meeting and
may discuss at the meeting any matter in respect of which he
would have been entitled under applicable law to submit a
proposal. Where so required by applicable law, the Management
Information Circular prepared in respect to the meeting shall sit
out or be accompanied by such a proposal.
Directors' Approval
The contents of this information circular and the sending
thereof have been approved by the Board of Directors of the
Corporation.
March 27, 1997
/s/ Alan G. Symons
President and CEO
<PAGE>
GORAN CAPITAL INC.
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
Symbols: TSE - GNC
NASDAQ - GNCNF
New Guidelines
In February, 1995, the Toronto Stock Exchange ("TSE")
announced that all companies with a year-end on or after June 30,
1995 would be required to describe their practices of corporate
governance with reference to TSE Guidelines previously published.
Goran conforms with the majority of these Guidelines except as
noted below:
"Corporate Governance" is the process and structure used to
direct and manage the business and affairs of the Corporation to
achieve shareholders' objectives. The shareholders of the
Corporation elect the directors who, in turn, are responsible for
overseeing all aspects of the operation of the Corporation,
appointing management and ensuring that the business is managed
properly, taking into account the interests of the shareholders.
The Guidelines suggest that the chairman of the board of
directors not be a member of management and state that members of
the board's nominating committee should be exclusively
non-management directors. In this respect, the Corporation does
not comply. The Corporation currently does not have a nominating
or corporate governance committee. Further, the knowledge and
experience of G. Gordon Symons, the founder of the Corporation
and its current chairman, are very important to the Corporation
and the board. Further, it is believed that the best interests
of the Corporation's shareholders, the Corporation and the board
would not be properly served with either Mr. Symons relinquishing
his management function or the board appointing a different
chairman.
The board of the Corporation is currently comprised of seven
members, four of whom are "unrelated" within the meaning of the
guidelines and this majority of unrelated directors allows the
board the independence of management which is a fundamental
cornerstone of the TSE Guidelines.
Another guideline states that position descriptions should
be developed for the board and for the chief executive officer
which delineate and define management's responsibilities. The
segregation of duties and responsibilities between the board and
its chief executive officer have been traditionally understood
but have not been formalized.
The Corporation has a significant shareholder and the
percentage of shares held by individuals or entities who are not
directly or indirectly related to the Corporation's significant
shareholder is less than 50%. Yet, the Corporation has a
majority of its directors who are unrelated directors. The
number of such directors more than fairly reflects the investment
in the Corporation by shareholders other than the significant
shareholder and those persons or entities directly or
indirectly related to the significant shareholder. Therefore,
the unrelated directors (and the board as a whole) are in a
position to fairly represent minority shareholders.
Mandate Of The Board
The responsibility of the Corporation's board of directors
is to oversee the conduct of the Corporation's business and to
supervise management. The board discharges its responsibilities
either directly or through its committees. The board met four
times during 1996 and also acted through the medium of unanimous
written consent.
The board has three committees. All of these committees
(except the executive committee) have a majority of members who
are unrelated directors.
During 1996, the audit committee was comprised of Alan G.
Symons, David B. Shapira, John K. McKeating and James G.
Torrance. At its meeting on March 19, 1997, the Board selected
Messrs. Torrance, McKeating and Alan G. Symons to serve on the
Board's Audit Committee. Its principal responsibilities are to
review annual audited financial statements prior to submission to
the board for approval, review the nature and scope of the annual
audit, evaluate auditors' performance, review fees and make
recommendations as to the appointment of auditors for the ensuing
year and review the adequacy of internal accounting control
procedures and systems.
During 1996, the compensation committee was comprised
Douglas H. Symons, J. Ross Schofield and James G. Torrance. At
its meeting on March 19, 1997, the Board selected Messrs.
Schofield, Shapira and Douglas H. Symons to serve on the Board's
compensation committee. Its role is to review the performance of
the chairman and chief executive officer as regards compensation,
determine compensation practices for the officers of the
Corporation, periodically review the Corporation's long-range
plans and policies for recruiting, developing and motivating
personnel, and to make recommendations to the board concerning
stock option grants.
Decisions Requiring Prior Approval Of The Board
In general, the management of the Corporation is empowered
to run the business on a day-to-day basis. The board approves
the annual business and strategic plan and reviews performance
against those plans on an interim basis throughout the year. The
board, of necessity, would approve any action leading to a
material change in the nature of the business of the Corporation,
including any acquisition or disposition of a significant
operating unit. The board also approves key borrowing and
financing decisions. The board also appoints the officers of the
Corporation, determines directors' compensation and declares
dividends (if any).
Recruitment Of New Directors
Currently, if vacancies should occur on the board, the board
seeks and receives input from individual board members and
reviews the qualifications of prospective members while taking
into consideration current board composition and the
Corporation's needs. It is anticipated that a nominating
committee will be formed by the board in the near future.
Measures For Receiving Shareholder Feedback
The board has requested management to make it aware, on an
on-going basis, of any significant shareholder concerns which are
communicated to management.
The Board's Expectation Of Management
The board expects management to operate the Corporation in
accordance with prudent business practices and the direction of
the board. The goal of management, the Corporation and the
board is to protect and enhance shareholder value while managing
the Corporation in a prudent manner as a fiduciary for the
Corporation's shareholders. Management is expected to provide
regular financial and operating reports to the board and to make
the board aware of all important issues and major business
developments, especially those which have not been anticipated.
Consistent with its previously enunciated goal, management is
expected to seek out opportunities for business acquisitions and
expansion and to forward appropriate recommendations to the board
for its action.
