-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K6IB++FVlYz0bz7zTFQNEDu+Gw1I+khjAfQHx1BO38dExwkLAAqZLRLSbh3Wz4AD DWidNcR0I70wE0ICyan16Q== 0000780118-96-000004.txt : 19960131 0000780118-96-000004.hdr.sgml : 19960131 ACCESSION NUMBER: 0000780118-96-000004 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960130 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960130 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMWEST INSURANCE GROUP INC CENTRAL INDEX KEY: 0000780118 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 952672141 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09580 FILM NUMBER: 96508550 BUSINESS ADDRESS: STREET 1: 6320 CANOGA AVE STE 300 CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8187041111 MAIL ADDRESS: STREET 1: 6320 CANOGA AVENUE SUITE 300 STREET 2: PO BOX 4500 CITY: WOODLAND HILLS STATE: CA ZIP: 91367 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): January 30, 1996 Amwest Insurance Group, Inc. ---------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 1-9580 95-2672141 ---------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File number) Identification No.) 6320 Canoga Avenue, Suite 300 Woodland Hills, California 91367 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818)704-1111 ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) The following financial statements of Condor Services, Inc. ("Condor"), as previously reported by Condor, are being provided pursuant to Rule 3.05(b) of Regulation S-X and are being filed within 60-days of the Registrant's Report on Form 8-K dated November 30, 1995. 1. Independent Auditors' Report for Condor Services, Inc. 2. Consolidated Balance Sheets as of December 31, 1994 and 1993. 3. Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992. 4. Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992. 5. Notes to Consolidated Financial Statements. 6. Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994. 7. Consolidated Statements of Income for the three months and nine months ended September 30, 1995 and 1994. 8. Consolidated Statements of Cash Flows for the nine months ended September 30, 1995 and 1994. 9. Notes to Interim Consolidated Financial Statements INDEPENDENT AUDITORS' REPORT The Board of Directors Condor Services, Inc.: We have audited the accompanying consolidated financial statements of Condor Services, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Condor Services, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities", in 1993. KPMG Peat Marwick LLP Los Angeles, California February 23, 1995 CONDOR SERVICES, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1994 and 1993
Assets 1994 1993 ----------- ----------- Investments: Fixed maturities, available-for-sale, at fair market value (amortized cost $23,706,182 and $25,153,453) ...................... $22,427,419 26,194,963 Equity securities, trading, at fair market value (cost $397,409 and $125,000) ..................................... 314,475 121,875 Equity securities, available-for-sale, at fair market value (cost $2,853,885 and $3,746,341) ................................... 2,675,650 3,954,125 Short-term investments .............................. 2,264,324 1,693,597 ----------- ----------- 27,681,868 31,964,560 Cash .................................................. 82,896 380,151 Accrued investment income ............................. 449,167 482,230 Premiums receivable, net .............................. 853,899 1,812,566 Reinsurance recoverable on paid losses ................ 141,217 786,541 Reinsurance recoverable on unpaid losses .............. 6,802,294 15,533,469 Deposit held by reinsurer ............................. -- 154,000 Deferred policy acquisition costs ..................... 264,884 888,694 Furniture, equipment and improvements, net of accumulated depreciation of $1,353,941 and $958,872 1,176,573 977,724 Income taxes recoverable .............................. -- 521,953 Deferred tax asset .................................... 1,423,748 1,256,667 Deferred tax asset on holding losses on fixed maturities and equity securities ........... 495,379 -- Intangible assets, net of accumulated amortization of $38,980 and $31,660 .................. 28,930 36,250 Prepaid expenses and other assets ..................... 631,439 369,462 ----------- ----------- Total assets ................................ $40,032,294 55,164,267 =========== ===========
(Continued) CONDOR SERVICES, INC. AND SUBSIDIARIES Consolidated Balance Sheets, continued December 31, 1994 and 1993
Liabilities and Stockholders' Equity 1994 1993 ------------ ------------ Liabilities: Unpaid losses and loss adjustment expenses ............................................ $ 25,752,923 37,575,246 Unearned premiums ....................................... 979,638 3,475,290 Reinsurance funds held .................................. 885,255 -- Reinsurance premiums payable ............................ 1,087,390 720,214 Commissions payable ..................................... 262,221 503,462 Income taxes payable .................................... 91,421 -- Accounts payable and accrued expenses ................... 810,461 925,658 ------------ ------------ Total liabilities ............................... 29,869,309 43,199,870 ------------ ------------ Stockholders' equity: Preferred stock, par value $.01 per share Authorized 200,000 shares; none outstanding ......... -- -- Common stock, par value $.01 per share Authorized 3,800,000 shares; outstanding 1,969,806 and 1,983,006 shares; held in treasury 0 and 744 shares ........................... 19,698 19,837 Additional paid-in capital .............................. 7,899,622 7,946,005 Unrealized gains (losses) on investments ................ (961,619) 1,249,295 Retained earnings ....................................... 3,205,284 2,752,288 ------------ ------------ Total stockholders' equity ...................... 10,162,985 11,967,425 Less: Shares held in treasury ........................... -- (3,028) ------------ ------------ Net stockholders' equity ........................ 10,162,985 11,964,397 Commitments and contingencies ------------ ------------ Total liabilities and stockholders' equity ............................ $ 40,032,294 55,164,267 ============ ============
See accompanying notes to consolidated financial statements. CONDOR SERVICES, INC. AND SUBSIDIARIES Consolidated Income Statements Years ended December 31, 1994, 1993 and 1992
1994 1993 1992 ------------ ------------ ------------ Revenues: Gross premiums earned .................... $ 26,233,962 26,233,140 18,032,747 Less: Earned premiums ceded to reinsurers 6,773,950 4,237,913 2,744,038 ------------ ------------ ------------ Net premiums earned .......................... 19,460,012 21,995,227 15,288,709 Commissions and fees ......................... 1,378,703 815,037 584,898 Net investment income ........................ 1,629,469 1,471,582 1,456,832 Net unrealized gain (loss) on trading securities ................................. (79,809) (3,125) -- Net realized gains ........................... 385,429 1,052,077 221,981 Other revenue ................................ 44,087 27,593 197,924 ------------ ------------ ------------ 22,817,891 25,358,391 17,750,344 ------------ ------------ ------------ Expenses: Gross losses and loss adjustment expenses 20,087,549 19,060,496 12,597,625 Ceded losses and loss adjustment expenses 5,454,175 2,604,391 2,674,531 ------------ ------------ ------------ Net losses and loss adjustment expenses ....................... 14,633,374 16,456,105 9,923,094 Underwriting and acquisition costs ....... 4,709,236 4,176,265 2,889,169 Loss on broker misappropriation of funds . -- 1,870,022 -- General and administrative ............... 3,034,444 2,838,254 3,012,224 ------------ ------------ ------------ 22,377,054 25,340,646 15,824,487 ------------ ------------ ------------ Income before provision for income taxes ................... 440,837 17,745 1,925,857 Provision (benefit) for income tax expense ... (12,159) (223,654) 298,920 ------------ ------------ ------------ Net income ..................... $ 452,996 241,399 1,626,937 ============ ============ ============ Net income per common share .................. $ .23 .12 .82 ============ ============ ============ Weighted average number of common shares outstanding during the periods ........... 1,981,460 1,977,703 1,976,015 ============ ============ ============
See accompanying notes to consolidated financial statements. CONDOR SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1994, 1993 and 1992
1994 1993 1992 ------------ ------------ ------------ Cash flows from operating activities: Net income .............................................................. $ 452,996 241,399 1,626,937 Equity securities, trading: Purchases ............................................................. (13,894,944) -- -- Sales ................................................................. 13,622,535 -- -- Add items not affecting cash: Depreciation and amortization ......................................... 430,348 335,166 257,582 Unrealized losses on trading securities ............................... 79,809 3,125 -- Changes in: Accrued investment income ............................................. 33,063 90,430 (63,196) Premiums receivable, net .............................................. 958,667 (1,142,310) (224,272) Reinsurance recoverable on paid losses ................................ 645,324 67,623 215,078 Reinsurance recoverable on unpaid losses .............................. 8,731,175 (7,669,454) 501,302 Deposit held by reinsurer ............................................. 154,000 (154,000) -- Income taxes recoverable .............................................. 521,953 (521,953) 171,676 Deferred tax asset .................................................... (167,081) (372,069) (174,161) Deferred policy acquisition costs ..................................... 623,810 (888,694) -- Prepaid expenses and other assets ..................................... (261,977) (89,920) 50,539 Unpaid losses and loss adjustment expenses ............................ (11,822,323) 11,602,374 894,004 Unearned premiums ..................................................... (2,495,652) 3,021,521 37,879 Reinsurance funds held ................................................ 885,255 -- -- Reinsurance premiums payable .......................................... 367,176 59,270 (155,613) Commissions payable ................................................... (241,241) 168,000 151,226 Income taxes payable .................................................. 91,421 (77,539) 77,539 Accounts payable and accrued expenses ................................. (115,198) 384,237 9,115 ------------ ------------ ------------ Net cash provided (used) by operating activities ................................. (1,400,884) 5,057,206 3,375,635 ------------ ------------ ------------ Cash flows from financing activities: Stock options exercised by officers and employees ....................... 6,006 29,718 59,500 Repurchase and retirement of common stock, net of brokerage fees ........ (49,500) -- (54,556) Purchase of common stock, held as treasury stock ........................ -- (136) (64,079) Payment of fractional shares on ten percent stock dividends ............. -- -- (12) ------------ ------------ ------------ Net cash provided (used) by financing activities ................................. (43,494) 29,582 (59,147) ------------ ------------ ------------ Cash flows from investing activities: Fixed maturities, available for sale: Purchases ............................................................. $ (3,976,088) -- -- Sales ................................................................. 4,110,150 -- -- Maturities and calls .................................................. 1,285,248 -- -- Equity securities, available for sale: Purchases ............................................................. (687,535) -- -- Sales ................................................................. 1,579,991 -- -- Fixed maturities: Purchases ............................................................. -- (11,740,130) (5,673,564) Sales ................................................................. -- 9,347,149 1,419,015 Maturities and calls .................................................. -- 1,540,000 765,000 Equity securities: Purchases ............................................................. -- (28,675,898) (6,956,156) Sales ................................................................. -- 25,257,683 7,161,923 Issuance of notes receivable from officers and directors ................ -- (20,758) (14,125) Repayment of notes receivable from officers and directors ............... -- 63,919 15,000 Additions to furniture, equipment and improvements ...................... (593,916) (396,950) (450,242) ------------ ------------ ------------ Net cash provided (used) by investing activities ........... 1,717,850 (4,624,985) (3,733,149) ------------ ------------ ------------ Net increase (decrease) in cash and short- term investments ........................................... 273,472 461,803 (416,661) Cash and short-term investments, beginning of year ........................ 2,073,748 1,611,945 2,028,606 ------------ ------------ ------------ Cash and short-term investments, end of year .............................. $ 2,347,220 2,073,748 1,611,945 ============ ============ ============
See accompanying notes to consolidated financial statements. CONDOR SERVICES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1994 and 1993 (1) Basis of Presentation and Summary of Significant Accounting Policies Condor Services, Inc., through its insurance subsidiary, is primarily engaged in the underwriting of non-standard commercial automobile insurance in the State of California. The accompanying consolidated financial statements include the accounts of Condor Services, Inc. (the "Company") and its wholly owned subsidiaries, Condor Insurance Company ("Condor Insurance"), Raven Claims Services, Inc. ("Raven Claims"), Falcon Re-Insurance Intermediaries, Inc. ("Falcon Re") and, through June 30, 1993, Interstate Program Managers-Insurance-Managing General Agents ("Interstate Program Managers"). The consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") which differ in some respects from those followed in reports to insurance regulatory authorities. All material intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the current year's financial statement presentation. Significant accounting policies are: Revenue Recognition Premium revenue is recognized ratably over the effective period of the policy net of premiums ceded to reinsurers. A liability is established for unearned insurance premiums for the unexpired portions of policies in force. Commissions are recognized principally on the later of the effective date of the insurance coverage or the billing date and are recorded net of amounts paid to brokers. Fees for services rendered are recorded as they are earned. Cash Cash consists of all non-interest bearing deposits at financial institutions. Short-term investments Short-term investments include all interest bearing deposits at financial institutions and all marketable debt securities with an original maturity of one year or less. This asset category consists primarily of money market fund balances used in conjunction with maintenance of the investment portfolio. All short-term investments are carried at cost, which approximates fair market value. Investments The Company adopted the provisions of Statement of Financial Accounting Standards No. 115 ("FAS 115") "Accounting for Certain Investments in Debt and Equity Securities" at December 31, 1993. Under FAS 115, the Company classifies its debt and equity securities in one of three categories: trading, available-for-sale or held-to-maturity. Securities classified as trading are bought and held principally for the purpose of sale in the near term. Securities classified as held-to-maturity are those securities which the Company has the positive ability and intent to hold until maturity. All other securities, not classified as trading or held-to-maturity, are classified as available-for-sale. The Company had no securities classified as held-to-maturity at December 31, 1994. Securities classified as trading and available-for-sale are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains or losses on trading securities are included in earnings. Unrealized holding gains or losses on securities available-for-sale are excluded from earnings and are reported as a separate component of stockholders' equity, net of applicable income taxes, until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains and losses are recognized in earnings for transfers into trading securities. Unrealized holding gains or losses associated with the transfers into securities from held-to-maturity to available-for-sale are recorded as a separate component of stockholders' equity. The unrealized holding gains or losses in debt securities included in the separate component of equity transferred from available-for-sale to held-to-maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security. There were no transfers between categories in 1994. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other than temporary is charged to income resulting in the establishment of a new cost basis for the security. No such adjustments were made in 1994, 1993 or 1992 for other than temporary declines in investment values. Premiums and discounts of the related held-to-maturity securities are amortized or accreted based on the effective interest method. Dividend and interest income are recognized when earned. The cost of securities sold and classified as held-to-maturity, available-for-sale and trading are determined using the specific identification method. Fair market value estimates of securities in the investment portfolio are drawn from third party industry trade data sources for fixed maturities and closing market prices of the securities market where listed for equities. Further, management believes each security is sufficiently liquid in its securities market to warrant these sources as providing the best estimate of fair value. In no case were any valuations made by the Company's management. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 ("FAS 109") "Accounting for Income Taxes," under which deferred income taxes are recognized for the tax consequences of "temporary differences" by applying the applicable tax rate to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company adopted FAS 109 in 1991 and applied the provisions of FAS 109 retroactively to January 1, 1989. The adoption of FAS 109 on a retroactive basis had no impact on previously reported earnings. Net Income Per Share Net income per share of common stock is based on the weighted average number of outstanding shares of common stock. Primary and fully diluted net income per share are the same for all periods presented. Unpaid Losses and Loss Adjustment Expenses The liability for unpaid losses and loss adjustment expenses is based on estimates of reported losses, estimates of unreported losses based on the Company's historical claims experience of Condor Insurance and industry data. Management believes that the provisions for unpaid losses and loss adjustment expenses are adequate to cover the cost of losses and loss adjustment expense incurred to date. However, such liability is, by necessity, based upon estimates and there can be no assurance that the ultimate liability will not exceed such estimates. Reinsurance In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company adopted the provisions of Statement of Financial Accounting Standards No. 113 ("FAS 113") "Accounting and Reporting Reinsurance of Short-Duration and Long-Duration Contracts" on January 1, 1993. It requires reinsurance recoverable and prepaid reinsurance premiums to be reported as assets. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. FAS 113 also establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. Contracts that do not result in the reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed generally do not meet conditions for reinsurance accounting and are to be accounted for as deposits. Deferred Policy Acquisition Costs Policy acquisition costs, consisting principally of commissions and premium taxes incurred at the time a policy is issued, are deferred and amortized over the period during which the related premiums are earned. Deferred policy acquisition costs are limited to the estimated future profit, based on the anticipated losses and loss adjustment expenses, maintenance costs and investment income. Prior to 1993, the Company had not deferred policy acquisition costs because it principally wrote only monthly policies. However, in 1993, the Company began writing annual policies as well. Furniture, Equipment and Improvements Automobiles are depreciated on a straight-line basis over estimated useful lives of three to seven years. Furniture and equipment, inclusive of computer hardware, are depreciated on a straight-line basis over estimated useful lives of three to five years. Computer software is amortized on a straight-line basis over estimated useful lives of three to five years. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the related lease or the useful life of the asset. A summary of fixed assets is as follows: 1994 1993 ---------- ---------- Automobiles ......................... $ 282,128 176,248 Furniture and equipment ............. 407,690 328,553 Computer hardware ................... 880,398 739,479 Computer software ................... 867,805 625,235 Leasehold improvements .............. 92,493 67,082 ---------- ---------- Total fixed assets ................ 2,530,514 1,936,597 Less accumulated depreciation and amortization .................. 1,353,941 958,873 ---------- ---------- Net fixed assets .................. $1,176,573 977,724 ========== ========== While expenditures for betterments and major renewals are capitalized, ordinary maintenance and repairs are expensed in the period incurred. Upon sale or retirement, the cost and related accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in income. Intangible Assets Intangible assets consist of organization costs. Organization costs of Condor Insurance and Falcon Re are being amortized over five-years. Statement of Cash Flows For purposes of the statement of cash flows, cash includes short-term investments with original maturities of one year or less. (2) Investments Net investment income for the years ended December 31, 1994, 1993 and 1992 was comprised of the following: 1994 1993 1992 ---------- ---------- ---------- Fixed maturities ................ $1,540,959 1,581,909 1,571,727 Equity securities ............... 182,614 92,624 2,308 Short-term investments .......... 78,242 91,526 79,588 ---------- ---------- ---------- Total investment income .. 1,801,815 1,766,059 1,653,623 Less investment expenses ........ 172,346 294,477 196,791 ---------- ---------- ---------- Net investment income .... $1,629,469 1,471,582 1,456,832 ========== ========== ========== Changes in net unrealized losses on trading securities of $79,809 and $3,125 at December 31, 1994 and 1993 were recognized in the respective years. The following table summarizes the net realized gains: 1994 1993 1992 --------- --------- --------- Fixed maturities .............. $ 227,238 805,527 90,650 Equity securities ............. 158,191 246,550 131,331 --------- --------- --------- Total net realized gains $ 385,429 1,052,077 221,981 ========= ========= ========= Condor Insurance classifies its debt and equity securities as available-for-sale. Gross gains of $218,411, $818,027 and $84,650 and gross losses of $10,410, $12,500 and $0 were realized on the sale of debt securities in 1994, 1993 and 1992, respectively. Gross gains of $185,702 and gross losses of $69,334 were realized on the sale of equity securities classified as available-for-sale in 1994. Gross gains of $249,387 and gross losses of $207,563 were realized on the sale of equity securities classified as trading in 1994. The table below presents costs and market values of equity securities classified as available-for-sale as of December 31, 1994: Gross Gross Unrealized Unrealized Market 1994 Cost Gains Losses Value - ----------------------------- ---------- ------- ---------- ---------- Preferred Stocks: Public Utilities .......... $ 388,125 -- (73,125) 315,000 Industrial and Miscellaneous ........... 656,113 -- (67,363) 588,750 Common Stocks: Banks, Trust & Ins ........ 391,650 -- (52,563) 339,087 Industrial and Miscellaneous .......... 1,417,998 160,163 (145,348) 1,432,813 ---------- ------- ---------- ---------- $2,853,886 160,163 (338,399) 2,675,650 ========== ======= ========== ========== The table below presents amortized cost and market values of fixed maturities classified as available-for-sale at December 31, 1994 and 1993:
Gross Gross Amortized cost unrealized gains unrealized Market 1994 losses value - ---------------------------------------- ----------------- ----------------- ----------------- ----------------- U.S. Treasury securities $ 502,277 - (24,494) 477,783 Obligations of U.S. 2,606,266 - (225,888) 2,380,378 Government and agencies Obligations of states 6,090,181 173,247 - 6,263,428 municipalities, and political subdivisions Corporate notes and bonds 14,507,458 - (1,201,628) 13,305,830 ================= ================= ================= ================= $ 23,706,182 173,247 (1,452,010) 22,427,419 ================= ================= ================= =================
Gross Gross Amortized cost unrealized gains unrealized Market 1993 losses value - ---------------------------------------- ----------------- ----------------- ----------------- ----------------- U.S. Treasury securities $ 502,617 40,572 - 543,189 Obligations of U.S. Government and agencies 1,102,513 50,671 - 1,153,184 Obligations of states, municipalities. and political subdivisions 10,008,411 947,986 - 10,956,397 Corporate notes and bonds 13,539,912 84,667 (82,386) 13,542,193 ================= ================= ================= ================= $ 25,153,453 1,123,896 (82,386) 26,194,963 ================= ================= ================= =================
Contractual maturities of fixed maturities classified as available for sale at December 31, 1994 are shown below. Expected maturities may differ from contractual maturities due to borrowers having the right to call or prepay their obligations with or without call or prepayment penalties.
Market Amortized Contractual Maturity ......................... Value % Cost % ----------- ------- ----------- ------- One year or less ....................................... $ 1,580,112 7.1 $ 1,600,000 6.7 Over one year to five years ............................ 9,654,087 43.0 10,021,621 42.3 Over five years to ten years ........................... 8,034,029 35.8 8,608,998 36.3 Over ten years ......................................... 3,159,191 14.1 3,475,563 14.7 ----------- ------- ----------- ------- $22,427,419 100.0 $23,706,182 100.0 =========== ======= =========== =======
All fixed maturities owned bear interest at fixed rates payable on a semiannual basis in U.S. dollars. At December 31, 1994 and 1993, in excess of 98% of the Company's fixed maturities were comprised of investment grade debt securities, and during the three years ended December 31, 1994 no investment in the Company's investment portfolio was classified as non-income producing. Further, no single investment in an entity has exceeded ten percent of stockholders' equity. Condor Insurance is required to maintain a deposit in the State of Arizona as a condition of licensure. This deposit must consist of government securities or Arizona government obligation bonds with a minimum par value of $550,000 and a minimum market value of $500,000 or an equal amount of cash and/or certificates of deposit. As of December 31, 1994 and 1993, the carrying value of these deposits was $547,546 and $568,000, respectively. Management has determined that the carrying value of these securities approximates fair market value. These securities are reported in the balance sheet as fixed maturities, available-for-sale. (3) Income Taxes Income tax expense (benefit) for the years ended December 31, 1994, 1993, and 1992 consisted of:
Years ended December 31, 1994 1993 1992 --------- --------- --------- Current tax expense .................................... $ 154,922 148,415 473,081 Deferred tax benefit, exclusive of the change in the valuation allowance .............................. (18,576) 87,236 (7,033) --------- --------- --------- Total income tax expense (benefit) ..................... $ (12,159) (223,654) 298,920 ========= ========= =========
A reconciliation of the corporate federal tax rate with the financial statement effective rates for the years ended December 31, 1994, 1993 and 1992 are as follows:
Years ended December 31, 1994 1993 1992 --------- --------- --------- Expected tax at 34% .................................................. $ 149,885 6,034 654,791 State taxes on income of non-insurance entities, net of Federal income tax benefits ........................................ 54,594 24,817 24,985 Nontaxable income .................................................... (175,769) (315,986) (439,257) Nondeductible expenses ............................................... 9,567 4,612 71,179 Change in valuation allowance ........................................ (18,576) 87,236 (7,033) Other ................................................................ (31,860) (30,367) (5,745) --------- --------- --------- Total income tax expense (benefit) .................................. $ (12,159) (223,654) 298,920 ========= ========= =========
The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and the deferred tax assets at December 31, 1994 and 1993 are presented below. December 31, 1994 1993 ----------- ----------- Deferred tax assets: Discounted loss reserves ....................... $ 954,447 1,101,819 Salvage and subrogation recoverable ............ 98,831 128,274 Unearned premiums, 20% add back ................ 66,615 236,320 Accounts payable, not currently deductible ..... 283,458 135,456 State income taxes paid ........................ 42,511 20,305 Alternative minimum taxes in excess of regular tax ............................... 458,831 450,455 Net operating loss carry forwards .............. 75,057 -- ----------- ----------- 1,979,750 2,072,629 Deferred tax liabilities: Deferred policy acquisition costs .............. (90,061) (302,156) Deductibles receivable ......................... (53,465) -- Elimination of intercompany expenses ........... -- (46,920) Other .......................................... (16,526) (52,360) ----------- ----------- 1,819,698 1,671,193 Valuation allowance ............................ (395,950) (414,526) ----------- ----------- Net deferred tax asset ......................... $ 1,423,748 1,256,667 =========== =========== FAS 109 requires the establishment of a valuation allowance for any portion of the deferred tax asset that management does not believe that it is more likely than not that it will be realized. Consideration must be given to those items of taxable income available to offset future deductible amounts represented in the deferred tax asset. Sources of taxable income available include taxable income in carryback years, reversal of temporary differences, future taxable income and tax planning strategies. The future deductibles will reverse over an estimated 12-year period during which the Company must have sufficient taxable income to offset them. Although it is the opinion of management that it is more likely than not that the Company will generate sufficient ordinary taxable income to offset the future ordinary deductibles, a valuation allowance of 20% has been established. The Company paid income taxes of $62,750, $712,500 and $360,000 during 1994, 1993 and 1992, respectively. The IRS is currently examining the Company's 1991 income tax return. Any proposed adjustments are not expected to have a material impact on the Company's financial condition or results of operations. (4) Reinsurance Reinsurance is the transfer of risk, by contract, from one insurance company to another for consideration (premium). The primary insurer remains liable if the reinsurer is unable to fulfill its obligations and, therefore, Condor Insurance has a contingent liability to the extent of any amounts ceded to another company. Condor Insurance evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar economic characteristics of the reinsurers to minimize its risk of significant losses from reinsurer insolvencies. On the auto and general liability lines of business, Condor Insurance had quota share, facultative and excess of loss coverage prior to May 1, 1991. Condor Insurance retained 90% of loss and loss adjustment expenses incurred on the first $100,000 of risk underwritten and retained 10% of the risk on amounts up to $1,000,000 in excess of $100,000. Since May 1, 1991, Condor Insurance has had excess of loss coverage for $800,000 in excess of $200,000 and on a facultative basis, $1,000,000 in excess of $1,000,000 and $3,000,000 in excess of $2,000,000. On May 1, 1993, the contract on the first layer was split into two layers of $300,000 in excess of $200,000 and $500,000 in excess of $500,000. Condor Insurance's liability excess of loss reinsurance contracts from May 1, 1991 to April 30, 1995 have retrospective provisions which could cause positive or negative premium adjustments based on future loss development. Prior to 1994, ceded losses had not developed to the point where retrospective ceded premium adjustments were necessary. In 1994, retrospective ceded premium adjustments were $2,359,000 due to the further development of ceded losses for accident years 1991 through 1994. Condor Insurance does not expect future adjustments with respect to these contracts to significantly impact earnings. Condor Insurance is in the process of commuting its liability excess of loss contracts with its foreign and non-admitted reinsurers, which represented 50% participation, for the reinsurance ceded period of May 1, 1991 to April 30, 1993. The objective of the commutations is to remove the statutory non-admitted liability and secure settlement from outstanding claims and reduce credit risk. The commutations are based on results as of April 30, 1994 on ceded unpaid losses and loss adjusting expenses less the retrospective premium rate adjustment. The tentative cash settlement of $851,321 is included in reinsurance funds held in the consolidated balance sheet. On physical damage lines , Condor Insurance retains 100% of the risk up to $200,000 and retains 5% of the risk on amounts up to $1,000,000 in excess of $200,000. As of May 1, 1993, the contract changed to $600,000 in excess of $400,000. Condor Insurance cedes 100% of physical damage risks underwritten in excess of $1,000,000 up to a limit of $5,000,000. As of May 1, 1994, terms were changed to $4,800,000 in excess of $200,000. (5) Liability for Unpaid Losses and Loss Adjustment Expenses The liability for unpaid losses and loss adjustment expenses for Condor Insurance is based upon the accumulation of individual case reserves for losses reported prior to the close of the accounting period plus estimates, based on historical loss experience and industry data, for unreported losses and loss adjustment expenses. There is a high level of uncertainty inherent in the evaluation of loss and loss adjustment expense reserves. The long-tailed nature of liability claims exacerbates that uncertainty. Management has selected target loss and loss expense ratios that it believes are reasonable and reflective of anticipated ultimate experience, based on quarterly actuarial developments. However, loss and loss adjustment expense reserves necessarily are estimates and ultimate liability may be greater or less than the reserves established. It is necessary at times to adjust estimates of liability on a claim either upward or downward between the time a claim is reported and the time of payment. The ultimate costs of claims are dependent upon future events, the outcomes of which are affected by many factors. Condor Insurance's claims reserving procedures and settlement philosophy, current and future court rulings and jury attitudes, and other economic and social factors all can have effects on the ultimate cost of claims. Changes in company operations and management philosophy also may cause actual developments to vary from the past. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows: 1994 1993 ------------ ------------ Balance at January 1 ........ $ 37,575,246 25,972,871 Less reinsurance recoverable 15,533,469 7,864,015 ------------ ------------ Net balance at January 1 .... 22,041,777 18,108,856 ------------ ------------ Incurred related to: Current year ............... 16,282,358 17,972,070 Prior years ................ (783,756) (1,186,000) ------------ ------------ Total incurred .............. 15,498,602 16,786,070 ------------ ------------ Paid related to: Current year ............... 6,499,436 5,117,285 Prior years ................ 12,090,264 7,735,864 ------------ ------------ Total paid .................. 18,589,750 12,853,149 ------------ ------------ Net balance at December 31, . 18,950,629 22,041,777 Plus reinsurance recoverables 6,802,294 15,533,469 ============ ============ Balance at December 31, ..... $ 25,752,923 37,575,246 ============ ============ Condor Insurance settled twenty (20) of the twenty-eight (28) prior year claims that were reinsured in excess of $200,000 during 1994, in addition to a large portion of smaller claims as indicated by the total paid of $18,589,750 during 1994 compared to $12,853,149 during 1993. As a result, Condor Insurance's reduction in case reserves and the number of remaining outstanding claims greatly reduced the factor attributed to incurred but not reported claims development. (6) Related Party Transactions The Company had no notes receivable from officers and directors at December 31, 1994 and 1993. The Company pays to or recovers from an outside director an annual fee equal to twenty percent of net capital gains or losses on equity securities in the Company's trading portfolio for which he is responsible. In addition, Condor Insurance pays to this outside director for investment services an annual fee equal to one-tenth of one percent of the value of the investments made in debt securities. For 1994, his participation resulted in a net recovery of $6,957 and was paid $49,123 and $27,868, for 1993 and 1992, respectively. Condor Insurance pays Tocqueville Asset Management L.P., of which one of the directors is a principal, a fee equal to one-half of one percent of the total market value of the equity portfolio under its management, evaluated and paid on a monthly basis. During 1994, 1993 and 1992, such fees amounted to $12,728, $8,609, and $0, respectively. Condor Insurance, since the commencement of insurance company operations in 1989, has offered its monthly commercial automobile insurance policies to members of the Waste Industry Loss Prevention and Safety Association (the "Association"). The Chairman and Chief Executive Officer of the Company is an officer, director and shareholder of the Association. In order to accept monthly commercial automobile coverage written by Condor Insurance, an applicant must become a member of the Association. This business constituted approximately 94%, 84% and 100% for 1994, 1993 and 1992, respectively. of total premiums written by Condor Insurance. Since 1981, the Company has had the exclusive right to provide insurance programs to the Association pursuant to an agreement which may be terminated as of April 1 of any year by either party by giving 15 months' notice of cancellation. (7) Operating Lease The Company leases office space under an operating lease which expires on February 29, 1996 with two one-year options to renew. The lease provides for annual adjustments to rent based on changes in the consumer price index. The following table shows minimum non-cancelable rental commitments for leases in effect at December 31, 1994: Minimum Year payable rentals ---------------------------- ------------- 1995 $ 245,683 1996 40,948 1997 and thereafter - ------------- Total $ 286,631 ============= Total rent expense under the Company's operating leases for 1994, 1993 and 1992 was $245,683, $245,683 and $143,864, respectively. The rent expense for 1992 was exceptionally low due to leasing considerations. In addition, monthly parking, excess electricity and after-hours air conditioning expenses were paid to the lessor under the operating lease commencing December 11, 1992. (8) Stock Options In January 1989, the Company adopted a qualified stock incentive plan whereby the Company may grant to employees determined by the Company's Compensation Committee either options to purchase or appreciation rights with respect to the Company's common stock and may sell restricted shares of the Company's common stock. A maximum of 220,000 shares of the Company's common stock is available for issuance under this plan. On May 28, 1992, the Company adopted the 1992 Non-Employee Director Stock Option Plan. Under this plan, each of the non-employee directors annually are automatically granted 3,300 shares of common stock effective on the twelfth business day following the release by the Company of its annual summary statement of sales and earnings relating to its most recently completed fiscal year, at an exercise price equal to the fair market value of the stock on that day and exercisable over a five-year period. A maximum of 88,000 shares of the Company's common stock is available for issuance under this plan. On January 6, 1989 and April 1, 1991, the Company granted 10,000 and 9,000 options to certain officers and directors outside of the stock plans. As of December 31, 1994, 14,300 options were outstanding outside of the stock plans. Transactions in stock options are summarized as follows: Shares under option Price range ------- -------------- Outstanding at December 31, 1991 67,300 2.000 - 5.500 Granted ........................ 35,500 3.375 - 3.750 Exercised ...................... 25,000 2.000 - 3.3750 Effect of 10% stock dividend ... 6,180 -- Canceled ....................... 16,000 2.000 -5.500 ------- -------------- Outstanding at December 31, 1992 67,980 1.820 - 4.550 Granted ........................ 29,200 6.375 - 7.010 Exercised ...................... 9,250 1.820 - 4.550 ------- -------------- Outstanding at December 31, 1993 87,930 1.820 - 6.370 Granted ........................ 33,200 5.250 - 5.775 Exercised ...................... 3,300 1.820 Canceled ....................... 5,020 3.070 - 6.375 ------- -------------- Outstanding at December 31, 1994 112,810 ======= The Company has granted all stock options to date at the fair market value on the date of grant. In certain circumstances, outstanding options have been canceled and reissued at the fair market value at the date of reissue. A summary of stock options expirations for options outstanding as of December 31, 1994 is as follows: Number of Exercise Shares Price -------------- ---------------------- April 1, 1996 12,650 $ 1.820 May 28, 1997 9,900 3.410 August 18, 1997 18,250 3.070 - 3.410 May 21, 1998 27,700 6.375 - 7.010 March 30, 1999 33,200 5.250 - 5.775 December 21, 1999 11,110 4.550 -------------- 112,810 ============== The number of shares of common stock reserved for granting future options was 169,640, 197,820, and 227,020, December 31, 1994, 1993 and 1992, respectively. (9) Treasury Stock As of December 31, 1994, 1993 and 1992, the Company held 0, 744 and 16,223 shares of common stock in treasury with a cost and carrying basis of $0, $3,028 and $65,454, respectively. In 1994, 1993 and 1992, 16,500, 0 and 39,700 shares of common stock were purchased in the open market. In addition, 0, 21 and 10 shares were purchased in 1994, 1993 and 1992, respectively, from former employees at market value on the date of purchase. (10) Employee's Profit Sharing Plan The Company maintains a noncontributory employees' profit sharing plan for the purpose of providing a qualified pension plan. The plan provides for contributions by the Company of a discretionary sum not to exceed 15% of the total covered employees' compensation. Contributions by the Company to the plan amounted to $80,826, $0 and $254,976 for the years ended December 31, 1994, 1993 and 1992, respectively. (11) Government Regulation Many aspects of the Company's operations are subject to government regulation. As an insurance holding company domiciled in California, the Company is subject to regulation by the California Department of Insurance. Under applicable California law, Condor Insurance is restricted from paying dividends to the greater of net income for the preceding year or 10% of policyholder surplus as of December 31 of the preceding year without obtaining prior regulatory approval. Condor Insurance is domiciled in the state of California and prepares its financial statements in accordance with statutory accounting practices prescribed or permitted by the California Department of Insurance. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. During 1993, the California Insurance Department completed its triennial examination of Condor Insurance. The Department classified certain investments amounting to $723,504 as non-admitted and excluded them from their calculation of statutory surplus as these investments were held outside of the State of California. Subsequent to the exam, Condor Insurance transferred these assets back to the State of California. The Department's report contained certain other findings, none of which have an impact on statutory surplus. A reconciliation of stockholders' equity and net income for Condor Insurance, as filed with regulatory authorities on the basis of statutory accounting practices to that reported in the accompanying consolidated financial statements, based on generally accepted accounting principles, is shown as follows: Statutory Surplus and Stockholders' Equity 1994 1993 ------------ ------------ Condor Insurance's statutory surplus ......... $ 6,463,479 6,306,890 Nonadmitted assets ........................... 190,518 180,018 Allowance for doubtful accounts .............. (114,311) (108,000) Deductibles receivable ....................... 157,250 109,456 Deferred income taxes ........................ 1,218,409 1,256,667 Unrealized gain (loss) on securities available for-sale ................................... (804,634) 1,041,510 Equity of non-insurance companies ............ 3,783,829 3,520,243 Other ........................................ (731,555) (342,387) ------------ ------------ Consolidated GAAP stockholders' equity ....... $ 10,162,985 11,964,397 ============ ============
Net Income 1994 1993 1992 ----------- ----------- ----------- Condor Insurance's statutory net income $ 297,072 (1,046,030) 1,361,509 Allowance for doubtful accounts ....... (6,311) 11,000 (59,000) Deductibles receivable ................ 47,794 57,020 (9,774) Deferred income taxes ................. 370,914 247,460 174,161 Deferred policy acquisition costs ..... (623,810) 888,694 -- Net income of non-insurance companies . 633,592 249,337 164,899 ----------- ----------- ----------- Other ................................. (266,255) (166,082) (4,858) ----------- ----------- ----------- Consolidated GAAP net income .......... $ 452,996 241,399 1,626,937 =========== =========== ===========
The National Association of Insurance Commissioners ("NAIC"), in response to growing concerns about the financial health of insurance companies, adopted the "Solvency Policing Agenda for 1990" which outlined several areas for strengthening state regulation in order to discourage federal regulation. One of the areas addressed by the NAIC in the agenda was the development of a model for the insurance industry for determining the risk based capitalization requirements ("RBC"). The RBC model has proven to be a complex and far reaching, as well as controversial, element of the NAIC's agenda. The controversy revolves around the application of a standard RBC model to all property and casualty companies having diverse underwriting risks. The RBC model for property and casualty insurance companies was adopted in December 1993. The RBC model provides for the calculation of an "RBC Charge after Covariance Adjustment," 80 percent of which determines the "Company Action Level." The RBC model sets the first level of regulatory supervision if a company's statutory surplus falls below the "Company Action Level." Condor Insurance has calculated the Company Action Level using the 1994 statutory annual statement to be $4,458,657 and Condor Insurance's statutory surplus at December 31, 1994 was $6,463,479. (12) Disposition of Subsidiary Effective July 1, 1993, the Company divested itself of Interstate Program Managers, a separate and wholly owned subsidiary. Interstate Program Managers operated as a non-exclusive general agent which placed excess and surplus lines of insurance. The sale resulted in an insignificant gain to the Company. (13) Commitments and Contingencies On October 31, 1991, Consolidated Disposal Service, Inc. and John Telesio initiated Los Angeles Superior Court Case No. BC041196 against Guy A. Main & Company; Interstate Program Managers, Inc., Condor Services, Inc.; and Does 1-100, Inclusive. On June 22, 1993, an adverse jury verdict was awarded against the Company in the amount of $620,000 comprised of $500,000 in damages plus $120,000 in interest. The case involved placement of insurance in 1985 by the Company's predecessor insurance brokerage operation, which placed a $1,000,000 liability insurance policy for the plaintiff with an admitted insurance company which became insolvent approximately three years later. An accident occurred in September 1985 resulting in a judgment of $1.7 million in favor of the plaintiff. The California Insurance Guarantee Association paid $500,000, the excess insurance carrier paid $700,000 and the jury held the Company liable for the remaining $500,000. On September 14, 1993, the Court granted the Company's motion for an order for judgment notwithstanding the verdict, which overturned the jury verdict. The ruling is in the process of appeal. The Company does not anticipate that this litigation will have a material impact on the Company. In 1993, Condor Insurance filed suit against a former agent L. W. Gaskill Company, Inc., which represented Condor in its Arizona private passenger automobile program, and an individual who represented that agent alleging misappropriation of premium funds in the amount of approximately $1,870,000 from the program. (Condor Insurance Company v. L.W. Gaskill, Nicholas Neu, Norwest Bank Arizona, et. al., No. CV33-25238). On July 14, 1994, Condor Insurance was awarded a judgment in the Superior Court of Arizona for approximately $1,947,000 against L.W. Gaskill and Nicholas Neu. The judgment covered approximately $1,870,000 in premium monies which were not paid over to Condor Insurance with related expenses, and is subject to 10% interest from July 14, 1994. Although Condor Insurance is attempting to collect on this judgment, it has not yet been successful and no assurance can be given that Condor Insurance will be successful in recovering any funds. Nicholas Neu, the individual against whom Condor Insurance has a judgment, filed for bankruptcy in Las Vegas in December 1994. The Company has challenged this filing and the case is still active. In 1993, Condor Insurance wrote off $1,870,000 for the misappropriation of premium funds. Condor Insurance filed a legal action in U.S. District Court for the Southern District of New York against a financial institution alleging that the financial institution improperly deposited misappropriated checks from the Arizona program totaling approximately $2.8 million into accounts unrelated to the Company in (Condor Insurance v. Citibank, N.A.). Discovery has commenced in this case and the Company intends to vigorously prosecute the action. On or about November 30, 1994, Michael Cruise filed a "Class Action Complaint" in Federal District Court in Arizona against the Company and Mr. Main, the Company's Chief Executive Officer (Michael Cruise v. Condor Services, Inc. and Guy A. Main, No. 94-832 TUC RMB). The complaint seeks damages in an unspecified amount, and asserts claims for alleged violations of Sections 10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10(b)5 thereunder, and for negligent misrepresentation, related to the Company's Arizona private passenger automobile program and misappropriation of premium funds in 1993. The claims in the lawsuit relate to the Arizona automobile program and misappropriation of premiums by Gaskill during 1993 in Arizona. The complaint alleges that between August 3, 1993 and August 2, 1994, the Company's public announcements and filings with the Securities and Exchange Commission were inadequate and misleading in that they allegedly failed to disclose the extent of the problems relating to the Arizona automobile program and the misappropriation of premiums by Gaskill. The complaint further alleges that during the year in question the timing of the Company's public announcements and filings with the Securities and Exchange Commission manipulated the market for the Company's stock, and that as a result during that year the Company's stock traded at artificially inflated prices which purportedly damaged the plaintiff and other investors. While formal discovery has not yet commenced, the Company believes that it has meritorious defenses to the claims asserted and it intends to vigorously defend its position. Management believes that resolution of this litigation is not expected to have a significant impact on the financial position of the Company. Condor Insurance is involved in various other litigation relating to losses arising from insurance contracts in the normal course of business which are provided for under "unpaid losses and loss adjustment expenses." The Company also is involved in other litigation pertaining to general corporate matters. While litigation is by nature uncertain, management, based in part on advice of counsel, believes that the ultimate outcome of these actions will not have a material adverse effect on the consolidated financial condition of the Company. CONDOR SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1995 1994 ------------ ------------ (Unaudited) ASSETS Investments: Fixed maturities, available-for-sale, at fair market value (amortized cost $21,807,480 and $23,706,182) .................................................... $ 21,878,503 $ 22,427,419 Equity securities, trading, at fair market value (cost $482,500 and $ 397,409)....................................................................... 472,938 314,475 Equity securities, available-for-sale, at fair market value (cost $3,161,413 and $2,853,885) ................................................ 3,554,900 2,675,650 Short-term investments .............................................................. 217,394 2,264,324 ------------ ------------ 26,123,735 27,681,868 Cash .................................................................................... 85,359 82,896 Accrued investment income ............................................................... 331,738 449,167 Premiums receivable, net ................................................................ 1,161,125 853,899 Reinsurance recoverable on paid losses .................................................. 204,873 141,217 Reinsurance recoverable on unpaid losses ................................................ 5,767,511 6,802,294 Deferred policy acquisition costs ....................................................... 296,102 264,884 Furniture, equipment and improvements, net of accumulated depreciation of $1,359,438 and $1,353,941 ........................................................... 854,780 1,176,573 Income taxes recoverable ................................................................ 144,845 -- Deferred tax asset ...................................................................... 1,228,880 1,423,748 Deferred tax asset on holding losses on fixed maturities and equity securities ........................................... -- 495,379 Intangible assets, net of accumulated amortization of $59,420 and $38,980 ......................................................................... 8,490 28,930 Prepaid expenses and other assets ....................................................... 915,695 631,439 ------------ ------------ Total assets ................................................................ $ 37,123,133 $ 40,032,294 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Unpaid losses and loss adjustment expenses .............................................. $ 20,814,099 $ 25,752,923 Unearned premiums ....................................................................... 1,187,565 979,638 Reinsurance funds held .................................................................. 106,484 885,255 Reinsurance premiums payable ............................................................ 1,793,049 1,087,390 Commissions payable ..................................................................... 280,380 262,221 Income taxes payable .................................................................... -- 91,421 Deferred tax liability on holding gains on fixed maturities and equity securities ..................................................................... 157,933 -- Accounts payable and accrued expenses ................................................... 656,568 810,461 ------------ ------------ Total liabilities ........................................................... 24,996,078 29,869,309 ------------ ------------ Stockholders' equity: Preferred stock, par value $.01 per share; Authorized 200,000 shares; none outstanding ..................................... -- -- Common stock, par value $.01 per share; Authorized 3,800,000 shares; 1,949,806 and 1,969,806 shares outstanding ......... 19,498 19,698 Additional paid-in capital .............................................................. 7,809,822 7,899,622 Unrealized gains (losses) on investments, ............................................... 306,577 (961,619) Retained earnings ....................................................................... 3,991,158 3,205,284 ------------ ------------ Total stockholders' equity .................................................. 12,127,055 10,162,985 Less: Shares held in treasury ........................................................... -- -- ------------ ------------ Net stockholders' equity .................................................... 12,127,055 10,162,985 Commitments and contingencies ------------ ------------ Total liabilities and stockholders' equity .................................. $ 37,123,133 $ 40,032,294 ============ ============
See accompanying notes to consolidated financial statements. CONDOR SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Nine Months Ended September 30, Ended September 30, ---------------------------- ---------------------------- 1995 1994 1995 1994 ------------ ------------ ------------ ------------ Revenues Gross premiums earned ...................... $ 5,787,936 $ 6,996,222 $ 17,340,723 $ 20,951,139 Less: Earned premiums ceded to reinsurers . 1,402,512 1,828,991 4,112,008 5,085,785 ------------ ------------ ------------ ------------ Net premiums earned ..................... 4,385,424 5,167,231 13,228,715 15,865,354 Commission and fees ........................ 141,252 278,452 453,461 772,470 Net Investment income ...................... 404,615 431,946 1,210,953 1,208,241 Net unrealized gains (losses) on trading securities ............................... (1,147) 8,507 73,372 (30,439) Net realized gains ......................... 61,236 93,324 14,194 365,900 Recovery on misappropriation of funds ...... -- -- 890,000 -- Other revenue (expense) .................... (16,285) 20,033 (6,865) 31,427 ------------ ------------ ------------ ------------ 4,975,095 5,999,493 15,863,830 18,212,953 ------------ ------------ ------------ ------------ Expenses: Gross losses and loss adjustment expense ... 4,900,591 4,498,291 14,643,935 14,497,522 Ceded losses and loss adjustment expenses .. 1,228,303 545,995 5,276,274 2,026,585 ------------ ------------ ------------ ------------ Net losses and loss adjustment expenses .... 3,672,288 3,952,296 9,367,661 12,470,937 Underwriting and acquisition costs ......... 1,083,727 1,332,402 3,392,097 3,859,204 General and administrative ................. 624,411 658,829 2,098,755 2,188,133 ------------ ------------ ------------ ------------ 5,380,426 5,943,527 14,858,513 18,518,274 ------------ ------------ ------------ ------------ Income (loss) before provision for income taxes (405,331) 55,966 1,005,317 (305,321) Provision (benefit) for income tax expense .... (149,448) 30,551 219,443 (284,507) ------------ ------------ ------------ ------------ Net Income (loss) ....................... $ (255,883) $ 25,415 $ 785,874 $ (20,814) ============ ============ ============ ============ Net Income (loss) per common share ............ $ (.13) $ .01 $ .40 $ (.01) ============ ============ ============ ============ Weighted average number of common shares outstanding during the periods .......... 1,962,415 1,984,333 1,967,315 1,983,453 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. CONDOR SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ---------------------------- 1995 1994 ------------ ------------ Cash flows from operating activities: Net income ............................................................. $ 785,874 $ (20,814) Equity securities, trading: Purchases ........................................................... (17,423,813) (10,522,391) Sales ............................................................... 17,338,722 10,072,062 Add items not affecting cash: Depreciation and amortization ....................................... 327,224 318,760 Unrealized (gains) losses on trading securities ..................... (73,372) 30,439 ------------ ------------ 954,635 (121,944) Changes in: Accrued investment income ........................................... 117,429 133,607 Premiums receivable, net ............................................ (307,226) 129,102 Reinsurance recoverable on paid losses .............................. (63,656) (927,201) Reinsurance recoverable on unpaid losses ............................ 1,034,783 2,522,710 Deposit held by reinsurer ........................................... -- 154,000 Deferred policy acquisition costs ................................... (31,218) 617,303 Income taxes recoverable ............................................ (144,845) 521,953 Deferred tax asset .................................................. 194,868 (343,809) Prepaid expenses and other assets ................................... (284,256) (218,191) Unpaid losses and loss adjustment expenses .......................... (4,938,824) (3,403,245) Unearned premiums ................................................... 207,927 (2,518,568) Reinsurance funds held .............................................. (778,771) -- Reinsurance premiums payable ........................................ 705,659 1,240,916 Commissions payable ................................................. 18,159 (51,622) Income taxes payable ................................................ (91,421) 26,848 Accounts payable and accrued expenses ............................... (153,893) (277,952) ------------ ------------ Net cash provided (used) by operating activities ....... (3,560,650)) (2,516,093) ------------ ------------ Cash flows from financing activities: Exercise of options by employees ....................................... -- 6,006 Repurchase and retirement of common stock .............................. (90,000) ------------ ------------ Net cash provided (used) by financing activities ....... (90,000) 6,006 ------------ ------------ Cash flows from investing activities: Fixed maturities, available for sale: Purchases ........................................................... (6,538,913) (3,976,088) Sales ............................................................... 6,986,143 4,110,150 Maturities and calls ................................................ 1,427,672 1,240,248 Equity securities, available for sale: Purchases ........................................................... (1,231,037) (586,014) Sales ............................................................... 923,509 966,278 Additions to furniture, equipment and improvements, net ................ (126,340) (427,845) Disposal of furniture, equipment and improvements, net ................. 165,149 -- ------------ ------------ Net cash provided by investing activities .............. 1,606,183 1,326,729 ------------ ------------ Net increase (decrease) in cash and short term investments ................................. (2,044,467) (1,183,358) Cash and short term investments, beginning of period .................... 2,347,220 2,073,748 ------------ ------------ Cash and short term investments, end of period .......................... $ 302,753 $ 890,390 ============ ============
See accompanying notes to consolidated financial statements. Notes to Interim Consolidated Financial Statements (1) Basis of Presentation Condor Services, Inc., through its insurance subsidiary, is primarily engaged in the underwriting of non-standard commercial automobile insurance in the State of California and, to a lesser extent, non-standard commercial and private passenger automobile insurance in the State of Arizona. The accompanying consolidated financial statements include the accounts of Condor Services, Inc. (the "Company") and its wholly-owned subsidiaries, Condor Insurance Company ("Condor Insurance"), Raven Claims Services, Inc. ("Raven Claims") and Falcon Re-Insurance Intermediaries, Inc. ("Falcon Re"). The consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") which differ in some respects from those followed in reports to insurance regulatory authorities. All material intercompany transactions and balances have been eliminated. The interim consolidated financial statements presented herein are unaudited. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for such periods. The results for the interim periods are not necessarily indicative of the results for the full year. These interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 1994. (2) Income Taxes The Company files a consolidated income tax return with its subsidiaries for federal income tax purposes. For California franchise tax purposes, the Company files a combined return with Raven Claims and Falcon Re. In lieu of the franchise tax, both California and Arizona impose a tax on insurance companies based on direct premiums written. Thus, Condor Insurance is taxed separately in California and Arizona based on the amount of its direct premiums written for those states. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 ("FAS 109") "Accounting for Income Taxes," under which deferred income taxes are recognized for the tax consequences of "temporary differences" by applying the applicable tax rate to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of the change. Income taxes for interim periods are based on the estimated effective tax rate for the year. (3) Reinsurance In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company adopted the provisions of Statement of Financial Accounting Standards No. 113 ("FAS 113") "Accounting and Reporting Reinsurance of Short-Duration and Long-Duration Contracts" on January 1, 1993. It requires reinsurance recoverable and prepaid reinsurance premiums to be reported as assets. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. FAS 113 also establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. Contracts that do not result in the reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed generally do not meet conditions for reinsurance accounting and are to be accounted for as deposits. (4) Investments The Company adopted the provisions of Statement of Financial Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain Investments in Debt and Equity Securities" at December 31, 1993. FAS 115 established new standards for accounting for certain investments in debt and equity securities, requiring classification of securities and specific accounting treatments for each classification. Under FAS 115, debt and equity securities are classified as either held-to-maturity, trading or available-for-sale. The Company has classified the entire portfolio of debt and equity securities of its insurance subsidiary as available-for-sale, and accordingly, these securities have been reported at fair value, recording an unrealized gain or loss, net of applicable income taxes, in the equity section of the balance sheet. The portfolio of equity securities of the holding company has been classified as trading, and accordingly, these securities have been reported at fair value, recording an unrealized gain or loss on the Consolidated Statements of Income. (5) Stockholders' Equity In 1995, the Company purchased 34,500 shares of its common stock in the open market at the current market price. As of November 13, 1995, 20,000 of these shares have been retired, and the remaining 14,500 shares have been retained by the Company as treasury stock. (b) The following pro forma financial information is being furnished pursuant to Article 11 of Regulation S-X and are being filed within 60-days of the Registrant's Report on Form 8-K dated November 30, 1995. 1. Unaudited Pro Forma Combined Balance Sheet as of September 30, 1995. 2. Unaudited Pro Forma Combined Statements of Income for the nine months ended September 30, 1995 and 1994. 3. Unaudited Pro Forma Combined Statements of Income for the years ended December 31, 1994, 1993 and 1992. 4. Notes to Unaudited Pro Forma Combined Financial Statements. Unaudited Pro Forma Combined Balance Sheet As of September 30, 1995 (In thousands)
Historical Pro Forma -------------------------- ------------------------- Amwest Condor Adjustments Combined ASSETS Investments: Fixed maturities, held to maturity, at amortized cost $ 15,473 $ 15,473 Fixed maturities, available for sale, at market value 82,165 21,879 104,044 Equity securities, available for sale, at market value 7,439 3,555 (414) 10,580 Equity securities, trading, at market value 473 473 Other invested assets 333 333 Short-term investments 1,059 217 1,276 ---------- ------ ---- --------- Total investments 106,469 26,124 (414) 132,179 Cash and cash equivalents 5,028 85 5,113 Accrued investment income 1,267 332 1,599 Agents balances and premiums receivable 9,311 1,161 10,472 Reinsurance recoverable: Paid loss and loss adjustment expenses 1,078 205 1,283 Unpaid loss and loss adjustment expenses 768 5,768 6,536 Ceded unearned premiums 2,959 2,959 Deferred policy acquisition costs 14,393 296 14,689 Furniture, equipment and improvements, net 2,324 855 3,179 Current Federal income taxes 668 145 813 Deferred Federal income taxes 1,229 1,229 Other assets 6,496 923 7,419 ---------- ------ ---- --------- Total assets $ 150,761 37,123 (414) $ 187,470 ========== ====== ==== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Unpaid losses and loss adjustment expenses $ 10,207 20,814 $ 31,021 Unearned premiums 34,431 1,188 35,619 Funds held as collateral 41,435 41,435 Commissions payable 280 280 Reinsurance funds held 106 106 Amounts due to reinsurers 345 1,793 2,138 Bank indebtedness 12,500 12,500 Current Federal income taxes 0 Deferred Federal income taxes 4,010 (288) 3,722 Deferred tax liability on holding gains on fixed maturities and equity securities 158 158 Other liabilities 5,831 657 692 7,180 ---------- ------ ---- --------- Total liabilities 108,759 24,996 404 134,159 Stockholders' equity: Preferred stock, $.01 par value Common stock, $.01 par value 24 19 (10) 33 Additional paid-in capital 9,358 7,810 10 17,178 Net unrealized appreciation (depreciation) of investments carried at market, net of income taxes 1,554 307 (164) 1,697 Retained earnings 31,066 3,991 (654) 34,403 ---------- ------ ---- --------- Total stockholders equity 42,002 12,127 (818) 53,311 ---------- ------ ---- --------- Total liabilities and stockholders'equity $ 150,761 37,123 (414) $ 187,470 ========== ====== ==== =========
See accompanying notes to pro forma combined financial statements. Unaudited Pro Forma Combined Statement of Income For the nine months ended September 30, 1995 (In thousands, except per share data)
Historical Pro Forma -------------------------- ---------------------------- Amwest Condor Adjustments Combined Underwriting revenues: Net premiums written $ 49,928 13,229 $ 63,157 Net change in unearned premiums 550 550 -------- ------ --------- Net premiums earned 50,478 13,229 63,707 Underwriting expenses: Net losses and loss adjustment expenses 16,440 9,368 25,808 Policy acquisition costs 25,302 3,392 28,694 General operating costs 8,927 2,099 11,026 -------- ------ --------- Total underwriting expenses 50,669 14,859 65,528 -------- ------ --------- Underwriting income (loss) (191) (1,630) (1,821) Net investment income 4,787 1,211 5,998 Net unrealized gains (losses) on trading securities 73 73 Net realized investment gains (losses) 1,229 14 1,243 Interest expense (805) (805) Collateral interest expense (1,305) (1,305) Recovery on misappropriation of funds 890 890 Commissions and fees 453 453 Other revenue (6) (6) -------- ------ --------- Income before provision for income taxes 3,715 1,005 4,720 Provision for income taxes 778 219 997 -------- ------ --------- Net income from continuing operations $ 2,937 786 $ 3,723 ======== ====== ========= Earnings per common share, primary: Net income from continuing operations $ 1.22 0.40 $ 1.12 ======== ====== ========= Weighted average number of common shares outstanding 2,402 1,967 3,337 ======== ====== ========= Earnings per common share, assuming full dilution: Net income from continuing operations $ 1.22 0.40 $ 1.11 ======== ====== ========= Weighted average number of common shares outstanding 2,405 1,967 3,340 ======== ====== =========
See accompanying notes to pro forma combined financial statements. Unaudited Pro Forma Combined Statement of Income For the nine months ended September 30, 1994 (In thousands, except per share data)
Historical Pro Forma ------------------------- -------------------------- Amwest Condor Adjustments Combined Underwriting revenues: Net premiums written $ 51,507 15,865 $ 67,372 Net change in unearned premiums (7,433) (7,433) ---------- ------ ---------- Net premiums earned 44,074 15,865 59,939 Underwriting expenses: Net losses and loss adjustment expenses 11,023 12,471 23,494 Policy acquisition costs 23,120 3,859 26,979 General operating costs 9,452 2,188 11,640 ---------- ------ ---------- Total underwriting expenses 43,595 18,518 62,113 ---------- ------ ---------- Underwriting income (loss) 479 (2,653) (2,174) Net investment income 4,104 1,208 5,312 Net unrealized gains (losses) on trading securities (30) (30) Net realized investment gains (losses) (214) 366 152 Interest expense (597) (597) Collateral interest expense (1,507) (1,507) Commissions and fees 772 772 Other revenue 31 31 ---------- ------ ---------- Income before provision for income taxes 2,265 (306) 1,959 Provision for income taxes 431 (285) 146 ---------- ------ ---------- Net income from continuing operations $ 1,834 (21) $ 1,813 ========== ====== ========== Earnings per common share, primary: Net income from continuing operations $ 0.76 (0.01) $ 0.54 ========== ====== ========== Weighted average number of common shares outstanding 2,411 1,983 3,354 ========== ====== ========== Earnings per common share, assuming full dilution: Net income from continuing operations $ 0.76 (0.01) $ 0.54 ========== ====== ========== Weighted average number of common shares outstanding 2,411 1,983 3,354 ========== ====== ==========
See accompanying notes to pro forma combined financial statements. Unaudited Pro Forma Combined Statement of Income For the year ended December 31, 1994 (In thousands, except per share data)
Historical Pro Forma -------------------------- ---------------------------- Amwest Condor Adjustments Combined Underwriting revenues: Net premiums written $ 66,975 19,460 $ 86,435 Net change in unearned premiums (5,146) (5,146) --------- ------ --------- Net premiums earned 61,829 19,460 81,289 Underwriting expenses: Net losses and loss adjustment expenses 14,095 14,633 28,728 Policy acquisition costs 31,755 4,709 36,464 General operating costs 12,734 3,034 15,768 --------- ------ --------- Total underwriting expenses 58,584 22,376 80,960 --------- ------ --------- Underwriting income (loss) 3,245 (2,916) 329 Net investment income 5,737 1,629 7,366 Net unrealized gains (losses) on trading securities (80) (80) Net realized investment gains (losses) (269) 385 116 Interest expense (840) (840) Collateral interest expense (1,921) (1,921) Commissions and fees 1,379 1,379 Other revenue 44 44 --------- ------ --------- Income before income taxes 5,952 441 6,393 Provision for income taxes 1,364 (12) 1,352 --------- ------ --------- Net income from continuing operations $ 4,588 453 $ 5,041 ========= ====== ========= Earnings per common share, primary: Net income from continuing operations $ 1.91 0.23 $ 1.50 ========= ====== ========= Weighted average number of common shares outstanding 2,408 1,981 3,350 ========= ====== ========= Earnings per common share, assuming full dilution: Net income from continuing operations $ 1.91 0.23 $ 1.50 ========= ====== ========= Weighted average number of common shares outstanding 2,408 1,981 3,350 ========= ====== =========
See accompanying notes to pro forma combined financial statements. Unaudited Pro Forma Combined Statement of Income For the year ended December 31, 1993 (In thousands, except per share data)
Historical Pro Forma ------------------------ -------------------------- Amwest Condor Adjustments Combined Underwriting revenues: Net premiums written $ 54,331 21,995 $ 76,326 Net change in unearned premiums (4,241) (4,241) --------- ------ -------- Net premiums earned 50,090 21,995 72,085 Underwriting expenses: Net losses and loss adjustment expenses 11,909 16,456 28,365 Policy acquisition costs 25,077 4,176 29,253 General operating costs 11,387 2,838 14,225 Loss on broker misappropriation of funds 1,870 1,870 --------- ------ -------- Total underwriting expenses 48,373 25,340 73,713 --------- ------ -------- Underwriting income (loss) 1,717 (3,345) (1,628) Net investment income 4,989 1,471 6,460 Net unrealized gains (losses) on trading securities (3) (3) Net realized investment gains (losses) 1,810 1,052 (508) 2,354 Interest expense (1,050) (1,050) Collateral interest expense (2,027) (2,027) Commissions and fees 815 815 Other revenue 27 27 --------- ------ -------- Income before income taxes 5,439 17 (508) 4,948 Provision for income taxes 1,398 (224) (173) 1,001 --------- ------ -------- Net income from continuing operations $ 4,041 241 (335) $ 3,947 ========= ====== ======== Earnings per common share, primary: Net income from continuing operations $ 1.70 0.12 $ 1.20 ========= ====== ======== Weighted average number of common shares outstanding 2,375 1,978 3,299 ========= ====== ======== Earnings per common share, assuming full dilution: Net income from continuing operations $ 1.70 0.12 $ 1.20 ========= ====== ======== Weighted average number of common shares outstanding 2,376 1,978 3,300 ========= ====== ========
See accompanying notes to pro forma combined financial statements. Unaudited Pro Forma Combined Statement of Income For the year ended December 31, 1992 (In thousands, except per share data)
Historical Pro Forma ------------------------- -------------------------- Amwest Condor Adjustments Combined Underwriting revenues: Net premiums written $ 46,697 15,289 $ 61,986 Net change in unearned premiums 1,557 1,557 ---------- ------ ---------- Net premiums earned 48,254 15,289 63,543 Underwriting expenses: Net losses and loss adjustment expenses 10,955 9,923 20,878 Policy acquisition costs 25,016 2,889 27,905 General operating costs 10,871 3,012 13,883 ---------- ------ ---------- Total underwriting expenses 46,842 15,824 62,666 ---------- ------ ---------- Underwriting income (loss) 1,412 (535) 877 Net investment income 5,607 1,456 7,063 Net unrealized gains (losses) on trading securities 0 Net realized investment gains (losses) 728 222 950 Interest expense (1,359) (1,359) Collateral interest expense (1,992) (1,992) Commissions and fees 585 585 Other revenue 198 198 ---------- ------ ---------- Income before income taxes 4,396 1,926 6,322 Provision for income taxes 998 299 1,297 ---------- ------ ---------- Net income from continuing operations $ 3,398 1,627 $ 5,025 ========== ====== ========== Earnings per common share, primary: Net income from continuing operations $ 1.44 0.82 $ 1.55 ========== ====== ========== Weighted average number of common shares outstanding 2,360 1,976 3,242 ========== ====== ========== Earnings per common share, assuming full dilution: Net income from continuing operations $ 1.44 0.82 $ 1.55 ========== ====== ========== Weighted average number of common shares outstanding 2,361 1,976 3,243 ========== ====== ==========
See accompanying notes to pro forma combined financial statements. NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited pro forma combined financial statements are presented for illustrative purposes only, giving effect to the Merger of Amwest Insurance Group, Inc. and Condor Services, Inc. as accounted for by the "pooling of interests" method. In accordance with Commission reporting rules, the pro forma combined statements of income, and the historical statements from which they are derived, present only income from continuing operations and, therefore, do not include discontinued operations, extraordinary items, and the cumulative effects of accounting changes. Because the transaction has not been completed and transition plans are currently being developed, transaction costs of the Merger and nonrecurring costs and expenses expected to be incurred in connection with the integration of the companies' business operations can only be estimated at this time. The pro forma combined statements of income excludes investment banking, legal and miscellaneous transaction costs and expenses of the Merger, currently estimated to be $600,000. However, the pro forma combined balance sheet as of September 30, 1995 includes the adjustment, net of related taxes, of $396,000, for the above estimated amount of transaction costs related to the Merger. 2. Pro Forma Adjustments Pro Forma Combined Balance Sheet Equity securities, available for sale, at market value; deferred Federal income taxes Amwest Surety Insurance Company, a wholly owned subsidiary of Amwest, currently owns 97,350 shares of Condor which is classified as an equity investment in the historical balances for Amwest. These shares will be retired pursuant to the Merger Agreement. Based on the market value of this investment at September 30, 1995, a decrease of $414,000 is reflected in the pro forma combined balance sheet as of September 30, 1995. Deferred Federal Income Taxes The pro forma balance sheet at September 30, 1995 reflects an adjustment of $288,000 which is attributed to the deferred taxes associated with the gross unrealized gain of $247,000 on the equity investment in Condor (as explained above), or $84,000 coupled with the deferred taxes associated with the $600,000 estimate for transaction costs, or $204,000. Other Liabilities The pro forma balance sheet at September 30, 1995 reflects an adjustment of $692,000 which is attributed to the $600,000 estimate for transaction costs coupled with an increase in the cash dividend accrual associated with the assumed issuance of approximately 919,000 shares as further explained under Stockholder's Equity below. Amwest declared a cash dividend of $.10 per share payable to stockholders of record as of September 30, 1995. Stockholders' Equity Stockholders' equity as of September 30, 1995 has been adjusted to reflect the following: Common Stock, $.01 par value, has been adjusted to reflect the assumed issuance of approximately 919,000 shares of Amwest Insurance Group, Inc. Common Stock, $.01 par value, in exchange for 1,837,956 (net of 14,500 shares held by Condor in treasury) shares of Condor Services, Inc. Common Stock issued and outstanding as of November 30, 1995, utilizing the exchange rate of 0.5 share of Amwest for each share of Condor (and assuming that the 97,350 shares of Condor Common Stock indirectly owned by Amwest will be retired). The number of shares of Amwest Common Stock to be issued at consummation of the Merger will be based upon the actual number of shares of Condor Common Stock outstanding at that time. Paid in capital is adjusted for the effects of the aforementioned issuance of approximately 919,000 shares of Amwest Common Stock having a par value of $.01 per share in exchange for Condor Common Stock. Net unrealized appreciation (depreciation) of investments carried at market, net of income taxes is adjusted for the net unrealized gain of $164,000 associated with the equity investment of 97,350 shares of appreciated Condor Common Stock owned by a wholly-owned subsidiary of Amwest. The net decrease in retained earnings is attributed to the pro forma adjustments made to retire the 97,350 shares of Condor Common Stock owned by a wholly-owned subsidiary of Amwest, the increased dividend accrual associated with the assumed issuance of approximately 919,000 shares and the $396,000 after-tax effect for the estimate for transaction costs associated with the Merger. Pro Forma Combined Statements of Income Net realized investment gains The pro forma results for net realized investment gains were adjusted for the year ended December 31, 1993 pursuant to sale transactions of Condor Common Stock made by a wholly-owned subsidiary of Amwest. For the year ended December 31, 1993, the investment in Condor Common Stock was reduced from 212,850 shares at January 1, 1993 to 97,350 shares at December 31, 1993 resulting in realized investment gains, net of income taxes of $335,000. Earnings per common share To arrive at pro forma combined net income, adjustments have been made as necessary to reflect such income on both a primary and fully diluted basis. Pro forma weighted average number of common shares outstanding for the nine month periods ended September 30, 1995 and 1994 and for the years ended December 31, 1994, 1993 and 1992 are based upon Amwest's and Condor's combined historical weighted average shares, after adjustment of Condor's historical number of shares by the Conversion Number and excluding any Condor shares held in treasury or owned by Amwest. 3. Proposition 103 On December 14, 1995, the Supreme Court of the State of California affirmed the decision of the Second District Court of Appeal overturning Insurance Code Section 1861.135 which exempted the surety insurance industry from major provisions of Proposition 103. Accordingly, the surety insurance industry will no longer be exempted from the rate rollback and prior approval provisions contained in Proposition 103. To date, Amwest has not received any calculations from the California Department of Insurance regarding Amwest's Proposition 103 rollback amount. Amwest anticipates that it will accrue during the fourth quarter of 1995 its estimated rollback obligation pursuant to Proposition 103, the amount of which has not yet been determined. However, as previously disclosed in Amwest's Annual Report on Form 10-K and subsequent filings on Form 10-Q, Amwest believes that the ultimate rollback amount will have a significant impact on the Company's 1995 earnings, but is not expected to materially adversely impact Amwest's financial position. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMWEST INSURANCE GROUP, INC. Dated: January 30, 1996 By:/s/ STEVEN R. KAY ----------------------- Steven R. Kay Senior Vice President Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----