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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________ to ____________
Commission File Number: 000-24366
GORAN CAPITAL INC.
(Exact name of registrant as specified in its charter)
CANADA Not APPLICABLE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Eva Road
Suite 200
Toronto, Ontario M9C 2A8
4720 Kingsway Drive
Indianapolis, Indiana 46205
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (416) 622-0660 (Canada)
(317) 259-6300 (U.S.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
As of July 31, 2002, there were 5,393,698 shares of Registrant's no par value
common stock issued and outstanding.
FORM 10-Q INDEX
FOR THE QUARTER ENDED JUNE 30, 2002
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 2002
(unaudited) and December 31,2001 3
Unaudited Consolidated Statements of Operations
for the Three Months Ended
June 30, 2002 and 2001 4
Unaudited Consolidated Statements of Operations
for the Six Months Ended
June 30, 2002 and 2001 5
Unaudited Consolidated Statement of Stockholder's
Equity (Deficit) for the Six Months ended
June 30, 2002 and 2001 6
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 7
Condensed Notes to Unaudited Consolidated Financial
Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3 Quantitative and Qualitative Disclosures about Market Risk 22
PART II OTHER INFORMATION 22
Item 1 Legal Proceedings 22
Item 2 Changes in Securities and Use of Proceeds 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
SIGNATURES 25
CERTIFICATIONS 26
GORAN CAPITAL INC., Analysis of Loss Per Share 27
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GORAN CAPITAL INC.
CONSOLIDATED BALANCE SHEETS
(CANADIAN GAAP, stated in thousands of U.S. dollars)
June 30,
2002 December 31,
(Unaudited) 2001
--------- ---------
ASSETS:
Investments:
Fixed maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74,398 $ 77,325
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . 15,356 21,610
Short-term investments, at amortized cost, which approximates market. 5,540 13,266
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . 695 1,594
---------- ----------
Total Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,989 113,795
Investments in and advances to related parties. . . . . . . . . . . . . . 222 1,130
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 6,934 11,263
Receivables, net of allowances of $216 and $1,526 . . . . . . . . . . . . 40,576 47,441
Reinsurance recoverable on paid and unpaid losses, net. . . . . . . . . . 33,824 29,284
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . . . . . . 35,023 40,039
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . 777 763
Property and equipment, net of accumulated depreciation . . . . . . . . . 8,486 9,907
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,214 4,376
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,514 2,421
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . 10,361 115,900
---------- ----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 236,920 $ 376,319
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT:
LIABILITIES:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . $ 78,818 $ 84,876
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 50,487 59,216
Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . . . . 59,127 58,868
Distributions payable on preferred securities . . . . . . . . . . . . 20,914 23,252
Deferred Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,750 7,250
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,653 21,563
Liabilities of discontinued operations. . . . . . . . . . . . . . . . 10,361 115,900
---------- ----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,110 370,925
---------- ----------
MINORITY INTEREST:
Company-obligated mandatorily redeemable preferred stock of trust
Subsidiary holding solely parent debentures . . . . . . . . . . . . . . . 67,994 94,540
---------- ----------
STOCKHOLDERS' DEFICIT:
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,502 18,502
Contributed surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,864 42,465
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . (847) (763)
Retained (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . . . (163,703) (149,350)
---------- ----------
TOTAL STOCKHOLDERS' (DEFICIT) . . . . . . . . . . . . . . . . . . . . . . (75,184) (89,146)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) . . . . . . . . . . . . . . $ 236,920 $ 376,319
========== ==========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(CANADIAN GAAP, stated in thousands of U.S. dollars, except per share data)
Three Months Ended
June 30,
------------------
2002 2001
-------- --------
Gross premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . $23,626 $49,950
Less ceded premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,970 22,248
-------- --------
Net premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,656 $27,702
======== ========
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,892 $26,411
Fee income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,176 3,444
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 1,401 1,712
Other Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 250
Net realized capital loss . . . . . . . . . . . . . . . . . . . . . . . . (625) (373)
-------- --------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,594 31,444
-------- --------
Expenses:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . 13,356 21,890
Policy acquisition and general and administrative expenses. . . . . . . 8,549 11,265
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . 43 13
-------- --------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,948 33,168
-------- --------
Loss from continuing operations before income taxes and minority interest (6,354) (1,724)
-------- --------
Total income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
-------- --------
Loss from continuing operations before minority interest. . . . . . . . . (6,354) (1,724)
Minority interest:
Distributions on preferred securities, net of tax of $0 in both
2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,032 2,216
-------- --------
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . (8,386) (3,940)
-------- --------
Discontinued operations:
Income (loss) from operations of discontinued segment, less applicable
income taxes of $0 in both 2002 and 2001. . . . . . . . . . . . . . . . - (2,156)
-------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,386) $(6,096)
======== ========
Weighted average shares outstanding - basic and fully diluted . . . . . . 5,394 5,776
======== ========
Net loss from continuing operations per share - basic and fully diluted . $ (1.55) $ (0.68)
======== ========
Net loss of discontinued operations per share - basic and fully diluted . $ 0.00 $ (0.37)
======== ========
Net loss per share - basic and fully diluted. . . . . . . . . . . . . . . $ (1.55) $ (1.05)
======== ========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(CANADIAN GAAP, stated in thousands of U.S. dollars, except per share data)
Six Months Ended
June 30,
----------------
2002 2001
--------- ---------
Gross premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,708 $ 98,288
Less ceded premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,943 53,641
--------- ---------
Net premiums written. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,765 $ 44,647
========= =========
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,985 $ 45,255
Fee income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,990 6,406
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . 2,739 3,521
Other Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 250
Net realized capital loss . . . . . . . . . . . . . . . . . . . . . . . . (1,347) (1,076)
--------- ---------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,867 54,356
--------- ---------
Expenses:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . 27,304 39,635
Policy acquisition and general and administrative expenses. . . . . . . . 15,842 22,938
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . 86 59
--------- ---------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,232 62,632
--------- ---------
Loss from continuing operations before income taxes and minority interest (10,365) (8,276)
--------- ---------
Total income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
--------- ---------
Loss from continuing operations before minority interest. . . . . . . . . (10,365) (8,276)
Minority interest:
Distributions on preferred securities, net of tax of $0 in both
2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,988 5,211
--------- ---------
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . (14,353) (13,487)
--------- ---------
Discontinued operations:
Income (loss) from operations of discontinued segment, less applicable
income taxes of $0 in both 2002 and 2001. . . . . . . . . . . . . . . . . - (2,156)
--------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(14,353) $(15,643)
========= =========
Weighted average shares outstanding - basic and fully diluted . . . . . . 5,423 5,776
========= =========
Net loss from continuing operations per share - basic and fully diluted . $ (2.65) $ (2.34)
========= =========
Net loss of discontinued operations per share - basic and fully diluted . $ 0.00 $ (0.37)
========= =========
Net loss per share - basic and fully diluted. . . . . . . . . . . . . . . $ (2.65) $ (2.71)
========= =========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CANADIAN GAAP, stated in thousands of U.S. dollars)
Cumulative Retained Total
Common Contributed Translation Earnings Stockholders'
Stock Surplus Adjustment (Deficit) Equity (Deficit
----- ------- --------- -------- -------------
Balance at December 31, 2000 $19,132 $23,748 $(291) $(115,257) $(72,668)
Purchase of Preferred Securities - 17,980 - - 17,980
Change in cumulative translation
Adjustment - - 584 - 584
Net loss
- - - (15,643) (15,643)
-------- ------- ----- ---------- -------
Balance at June 30, 2001. . . . . $19,132 $41,728 $ 293 $(130,900) $(69,747)
======= ======== ===== ========== =======
Balance at December 31, 2001 $18,502 $42,465 $(763) $(149,350) $(89,146)
Purchase of Preferred Securities 28,399 28,399
Change in cumulative translation
Adjustment - - (84) - (84)
Net loss - - - (14,353) (14,353)
------- -------- ----- --------- --------
Balance at June 30, 2002 $18,502 $70,864 $(847) $(163,703) $(75,184)
======= ======= ====== ======== =========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN GAAP, stated in thousands of U.S. dollars)
Six Months Ended
June 30,
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . $(14,353) $(15,643)
Adjustments to reconcile net loss to net cash provided by (used in) operations:
Depreciation, amortization, impairment and other. . . . . . . . . . . . . . . 1,763 2,276
Net realized capital loss . . . . . . . . . . . . . . . . . . . . . . . . . 1,347 1,076
Net changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,865 (15,018)
Reinsurance recoverable on paid and unpaid losses . . . . . . . . . . . . . . (4,540) 4,021
Prepaid reinsurance premiums. . . . . . . . . . . . . . . . . . . . . . . . . 5,016 (11,429)
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . (14) 259
Other assets and liabilities. . . . . . . . . . . . . . . . . . . . . . . . . (3,003) 12,223
Loss and loss adjustment expense reserves . . . . . . . . . . . . . . . . . . (6,058) (14,563)
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,729) 11,120
Reinsurance payables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 4,673
Distribution payable on preferred securities. . . . . . . . . . . . . . . . . 1,592 2,203
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,500) 8,750
Net assets from discontinued operations . . . . . . . . . . . . . . . . . . . (3,483) 1,602
--------- ---------
Net cash (used in) operations . . . . . . . . . . . . . . . . . . . . . . . . . (24,838) (8,450)
--------- ---------
Cash flows from investing activities, net of assets acquired:
Net sale of short-term investments. . . . . . . . . . . . . . . . . . . . . . 7,726 1,731
Proceeds from sales, calls and maturities of fixed maturities . . . . . . . . 19,437 27,045
Purchase of fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . (14,276) (8,029)
Proceeds from sale of equity securities . . . . . . . . . . . . . . . . . . . 8,447 16,953
Purchase of equity securities . . . . . . . . . . . . . . . . . . . . . . . . (3,427) (14,277)
Proceeds from repayment of mortgage loans . . . . . . . . . . . . . . . . . . - 1,870
Purchase of property and equipment. . . . . . . . . . . . . . . . . . . . . . (272) (1,577)
Net investing activities from discontinued operations . . . . . . . . . . . . 3,912 (263)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 878 (45)
--------- ---------
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . 22,425 23,408
--------- ---------
Cash flows from financing activities, net of assets acquired:
Purchase of subsidiary's preferred securities . . . . . . . . . . . . . . . . (2,395) (1,896)
Repayment of related party loans. . . . . . . . . . . . . . . . . . . . . . . 908 117
Net financing activities from discontinued operations . . . . . . . . . . . . (429) (655)
--------- ---------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . (1,916) (2,434)
--------- ---------
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . (4,329) 12,524
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . . . 11,263 3,230
--------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . 6,934 $ 15,754
========= =========
See condensed notes to consolidated financial statements.
GORAN CAPITAL INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Six Months Ended June 30, 2002
1. BASIS OF PRESENTATION
Goran Capital Inc. ("the Company") is the parent company of the Goran group of
companies. The consolidated financial statements are prepared in accordance
with Canadian Generally Accepted Accounting Principles. In addition, the
consolidated financial statements are also used to satisfy the Company's
financial filing requirements in the U.S. Consequently, the consolidated
financial statements include disclosures that are not necessarily required under
Canadian GAAP and contain references to U.S. GAAP accounting pronouncements.
Note 8, presents a reconciliation of Canadian and U.S. GAAP. The consolidated
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). In management's opinion, these
financial statements include all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the results of
operations for the interim periods presented. Pursuant to SEC rules and
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these statements, unless
significant changes have taken place since the end of the most recent fiscal
year. For this reason, the accompanying consolidated financial statements and
notes thereto should be read in conjunction with the financial statements and
notes for the year ended December 31, 2001 included in the Company's 2001 Annual
Report on Form 10-K. Results for any interim period are not necessarily
indicative of results to be expected for the year.
The consolidated financial statements include the accounts, after intercompany
eliminations, of the Company and its wholly owned subsidiaries as follows:
- - Granite Reinsurance Company Ltd. ("Granite Re") a finite risk reinsurance
company domiciled in Barbados.
- - Granite Insurance Company ("Granite") a Canadian federally licensed
insurance company.
- - Symons International Group (Florida) Inc. ("SIGF") a Florida domestic
corporation.
Symons International Group, Inc. ("SIG") is a 73.1% owned subsidiary of Goran.
SIG's subsidiaries are as follows:
- - Superior Insurance Group Management, Inc ("Superior Group Management") a
holding company for the nonstandard automobile operations which includes:
- - Superior Insurance Group, Inc. ("Superior Group") a management company for
the nonstandard automobile operations;
- - Superior Insurance Company ("Superior") an insurance company domiciled in
Florida;
- - Superior American Insurance Company ("Superior American") an insurance
company domiciled in Florida;
- - Superior Guaranty Insurance Company ("Superior Guaranty") an insurance
company domiciled in Florida;
- - Pafco General Insurance Company ("Pafco") an insurance company domiciled in
Indiana;
- - IGF Holdings, Inc. ("IGFH") a holding company
- - IGF Insurance Company ("IGF") an insurance company domiciled in Indiana
(See Note 23);
As previously announced, SIG sold its crop insurance operations to Acceptance
Insurance Companies Inc. ("Acceptance") on June 6, 2001. The crop insurance
business was written through IGF, which is in runoff. Accordingly, the financial
statements included in this report reflect the results of the crop insurance
segment as "discontinued operations."
2. PREFERRED SECURITIES
On August 12, 1997, SIG's trust subsidiary issued $135 million in preferred
securities (the "Preferred Securities") bearing interest at an annual rate of
9.5%. The principal assets of the trust subsidiary are senior subordinated notes
of SIG in the principal amount of $135 million with an interest rate and
maturity date substantially identical to those of the Preferred Securities.
Expenses of the issue aggregated $5.1 million and are amortized over the term of
the Preferred Securities.
The Preferred Securities represent company-obligated mandatorily redeemable
securities of a trust subsidiary holding solely parent debentures and have a
term of 30 years with semi-annual interest payments that commenced February 15,
1998. SIG may redeem the Preferred Securities in whole or in part after 10
years. The annual Preferred Security obligations of approximately $13 million
must be funded from SIG's nonstandard automobile management company, which
receives management and billing fees from its insurance subsidiaries. In the
event the Company's insurance company subsidiaries continue to reduce premium
volume, reduced management and billing fees will be payable to Superior Group,
which would result in less funds from which to fund the obligations of the
Preferred Securities. Under the terms of the indenture, SIG is permitted to
defer semi-annual interest payments for up to five years. SIG elected to defer
the interest payments due in February and August 2000 and 2001 and February 2002
and may continue this practice through January 2005. SIG plans to defer the
interest payments due in August 2002.
The trust indenture for the Preferred Securities contains certain restrictive
covenants including covenants based upon SIG's consolidated coverage ratio of
earnings before interest, taxes, depreciation and amortization ("EBITDA"). If
SIG's EBITDA falls below 2.5 times consolidated interest expense (including
Preferred Security distributions) for the most recent four quarters, the
following restrictions become effective:
- - SIG may not incur additional indebtedness or guarantee additional
indebtedness.
- - SIG may not make certain restricted payments including making loans or
advances to affiliates, repurchasing common stock or paying dividends in
excess of a stated limitation.
- - SIG may not increase its level of non-investment grade securities defined
as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply, as SIG's consolidated coverage ratio was
(1.06) at June 30, 2002, and will continue to apply until SIG's consolidated
coverage ratio complies with the terms of the trust indenture. SIG was in
compliance with these additional restrictions as of June 30, 2002.
3. REGULATORY AFFAIRS
Pafco and IGF are domiciled in Indiana and prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Indiana Department of Insurance ("IDOI"). While neither Pafco nor IGF
currently has surplus from which to pay dividends, statutory requirements place
limitations on the amount of funds that can be remitted to SIG from Pafco and
IGF. The Indiana statute allows 10% of surplus in regard to policyholders or
100% of net income, whichever is greater, to be paid as dividends only from
earned surplus; however, the consent orders with the IDOI, described below,
prohibit the payment of any dividends by Pafco and IGF. Superior, Superior
American and Superior Guaranty are domiciled in Florida and prepare their
statutory financial statements in accordance with accounting practices
prescribed or permitted by the Florida Department of Insurance ("FDOI"). The
Florida statute also contains limitations with regard to the payment of
dividends. Superior may pay dividends of up to 10% of surplus or 100% of net
income, whichever is greater, from earned surplus. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations, and general administrative rules. The NAIC adopted the Codification
of Statutory Accounting Principles guidance ("Codification"), as the NAIC's
primary guidance on statutory accounting effective January 1, 2001. The IDOI and
FDOI have adopted Codification. Permitted statutory accounting practices
encompass all accounting practices not so prescribed.
On June 6, 2001, IGF sold substantially all of its crop insurance assets to
Acceptance. On June 24, 2001, following the sale of IGF's crop insurance assets
and as a result of losses experienced by IGF in its crop insurance operations,
the IDOI and IGF entered into a consent order (the "Consent Order") relating to
IGF. IGF has discontinued writing new business and its operations are presently
in run off. The IDOI has continued to monitor the status of IGF. The Consent
Order prohibits IGF from taking any of the following actions without prior
written consent of the IDOI:
- - Sell or encumber any of its assets, property, or business in force;
- - Disburse funds, except to pay direct unaffiliated policyholder claims and
normal operating expenses in the ordinary course of business (which does
not include payment to affiliates except for the reimbursement of costs for
running IGF by the Company, and does not include payments in excess of
$10,000);
- - Lend its funds or make investments, except in specified types of
investments;
- - Incur debts or obligations, except in the ordinary course of business to
unaffiliated parties;
- - Merge or consolidate with another company;
- - Enter into new, or amend existing, reinsurance agreements;
- - Complete, enter into or amend any transaction or arrangement with an
affiliate, and
- - Disburse funds or assets to any affiliate.
The Consent Order also requires IGF to provide the IDOI with monthly written
updates and immediate notice of any material change regarding the status of
litigation with Continental Casualty Company, statutory reserves, number of
non-standard automobile insurance policies in-force by state, and reports of all
non-claims related disbursements. IGF's failure to comply with the Consent Order
could cause the IDOI to begin proceedings to have a rehabilitator or liquidator
appointed for IGF to extend the provisions of the Consent Order.
Pafco has been subject to an agreed to order of the IDOI since February 17, 2000
that requires Pafco, among other matters, to:
- - Refrain from doing any of the following without the IDOI's prior written
consent:
- - Selling assets or business in force or transferring property, except in the
ordinary course of business;
- - Disbursing funds, other than for specified purposes or for normal operating
expenses and in the ordinary course of business (which does not include
payments to affiliates, other than under written contracts previously
approved by the IDOI, and does not include payments in excess of $10,000);
- - Lending funds;
- - Making investments, except in specified types of investments;
- - Incurring debt, except in the ordinary course of business and to
unaffiliated parties;
- - Merging or consolidating with another company; or
- - Entering into new, or modifying existing, reinsurance contracts.
- - Reduce its monthly auto premium writings, or obtain additional statutory
capital or surplus, such that the ratio of gross written premium to surplus
and net written premium to surplus does not exceed 4.0 and 2.4,
respectively; and provide the IDOI with regular reports demonstrating
compliance with these monthly writings limitations.
- - Continue to comply with prior IDOI agreements and orders to correct
business practices under which Pafco must provide monthly financial
statements to the IDOI, obtain prior IDOI approval of reinsurance
arrangements and affiliated party transactions, submit business plans to
the IDOI that address levels of surplus and net premiums written, and
consult with the IDOI on a monthly basis.
Pafco's inability or failure to comply with any of the above conditions could
result in the IDOI requiring further reductions in Pafco's permitted premium
writings or in the IDOI instituting future proceedings against Pafco.
Restrictions on premium writings result in lower premium volume. Management fees
payable to Superior Group are based on gross written premium; therefore lower
premium volume results in reduced management fees paid by Pafco to Superior
Group.
Pafco has agreed with the Iowa Department of Insurance ("IADOI") that it will
not write any new non-standard business in Iowa, until such time as Pafco has
reduced its overall non-standard automobile policy counts in the state or:
- - Has increased surplus, or
- - Has achieved a net written premium to surplus ratio of less than three to
one, or
- - Has surplus reasonable to its risk.
Pafco has continued to service existing policyholders and renew policies in Iowa
and provide policy count information on a monthly basis in conformance with
IADOI requirements.
Superior and Pafco also provide monthly financial information to the departments
of insurance in certain states in which they write business, and Pafco has
agreed to obtain IDOI prior approval of any new affiliated party transactions.
On July 7, 2000, the FDOI issued a notice of its intent to issue an order (the
"Notice") which principally addressed certain policy and finance fee payments by
Superior to Superior Group. A formal administrative hearing to review the
Notice and a determination that the order contemplated by the Notice not be
issued was held in February 2001. The administrative law judge entered a
recommended order on June 1, 2001 that was acceptable to SIG. On August 30,
2001, the FDOI rejected the recommended order and issued its final order which
SIG believes improperly characterized billing and policy fees paid by Superior
to Superior Group. On September 28, 2001, Superior filed an appeal of the final
order to the Florida District Court, which is pending. On March 4, 2002, the
FDOI filed a petition in the Circuit Court of the Second Judicial Circuit in and
for Leon County, Florida seeking court enforcement of the FDOI's final order.
Superior filed a motion with the FDOI for stay of the FDOI's final order.
Superior also filed a motion for stay with the District Court of Appeals, which
was denied pending a ruling from the FDOI. On April 5, 2002 the FDOI granted a
stay of the final order which is conditional upon the cessation of the payment
of billing fees by Superior to Superior Group and the posting of a $15 million
appeal bond. Superior is unwilling to agree to the conditions imposed by the
FDOI's conditional stay. On May 6, 2002 Superior filed a motion with the
district court seeking a stay of the final order pending Superior's appeal or,
in the alternative, a consolidation of the FDOI's enforcement action with the
pending appeal. On June 19, 2002, the district court entered an order which
struck the FDOI's conditional requirement for the stay that Superior post a $15
million appeal bond. However, the order denied Superior's request to consolidate
the appeal with the enforcement action.
In 1999, Superior ceased writing business in Illinois and agreed to obtain the
approval of the Illinois Department of Insurance prior to writing any new
business in Illinois. In July 2001, Superior agreed with the Department of
Insurance in Texas to obtain its prior approval before writing any new business
in that state.
On October 9, 2001, the State Corporation Commission of Virginia ("Virginia
Commission") issued an order to take notice regarding an order suspending
Superior's license to write business in that state. An administrative hearing
for a determination that the suspension order not be issued was held March 5,
2002. On May 3, 2002, the hearing examiner issued his report and recommended
that Superior's license not be suspended and that Superior file its Risk Based
Capital plans and monthly and quarterly financial information with the Virginia
Bureau of Insurance ("Bureau"). On June 19, 2002 the Virginia Commission
entered an order which adopted the findings of the hearing examiner, continued
the matter until such time as the Bureau requests further action and requires
the continued monitoring of the financial condition of Superior by the Bureau.
The nonstandard automobile insurance policies written in Virginia by Superior
accounted for approximately 13.1% of the total gross written premiums of the
Company in 2001.
SIG's operating subsidiaries, their business operations, and their transactions
with affiliates, including the Company, are subject to regulation and oversight
by the IDOI, the FDOI, and the insurance regulators of other states in which the
subsidiaries write business. SIG is a holding company and all of its operations
are conducted by its subsidiaries. Regulation and oversight of insurance
companies and their transactions with affiliates is conducted by state insurance
regulators primarily for the protection of policyholders and not for the
protection of other creditors or of shareholders. Failure to resolve issues with
the IDOI and the FDOI or other state insurance regulators in a mutually
satisfactory manner could result in future regulatory actions or proceedings
that materially and adversely affect SIG and the Company.
4. COMMITMENTS AND CONTINGENCIES
As previously reported, IGF had been a party to a number of pending legal
proceedings and claims relating to agricultural production interruption
insurance policies (the "AgPI Program") which were sold during 1998. All of the
policies of insurance issued in the AgPI Program were issued by and under the
name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota
corporation with its principal place of business located in Arden Hills,
Minnesota. Sales of this product resulted in large underwriting losses by IGF.
Approximately $29 million was paid through June 30, 2002 in settlement of legal
proceedings and policyholder claims related to the AgPI Program. All AgPI
policyholder claims were settled during 2000. However, on January 12, 2001 a
case was filed in the Superior Court of California, County of Fresno, entitled
S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual
Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo &
Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought by
four AgPI policyholders who had previously settled their AgPI claims pursuant to
binding settlement agreements who now seek additional compensation by asserting
through litigation that IGF and the third party carrier paid less than the
policy limits they were promised when they purchased the policy and that each
settling policyholder was forced to accept the lesser amount due to their
economic duress - a legal theory recognized in California if certain elements
can be established. On January 16, 2002, the court entered an order granting
IGF's motion for judgment on the pleadings and required plaintiffs to show an
insurable interest. Plaintiffs amended their complaint attempting to allege an
insurable interest, and on March 19, 2002, the court granted IGF's demurrer to
the amended complaint. In granting the demurrer the court held that any recovery
payable to plaintiff would be limited to their actual economic losses regardless
of how much plaintiffs thought they had been promised (i.e. plaintiffs cannot be
paid policy limits without regard to actual losses incurred). The plaintiffs
then filed their third amended complaint to which MSI filed a demurrer
challenging the insurance contract allegations, as the issuer of the AgPI
policies, contending that plaintiffs failed to make the amendments to show an
insurable interest as required by the court's previous rulings. This demurrer
was granted, without leave to amend, because the lack of an insurable interest
rendered the contract an unenforceable wager agreement, as described in each of
the various versions of the complaint. Plaintiffs have now moved for
reconsideration of the dismissal of the insurance claims asking for another
chance to allege an adequate insurable interest. This hearing is set for August
13, 2002. Discovery is proceeding.
As previously reported in the Company's March 31, 2001 Form 10-Q, MSI and IGF
were arbitrating their dispute over responsibility for claims paid to MSI
insureds. Also as previously reported, an action was filed against the Company,
SIG, IGF, IGFH, Granite Re and certain affiliates of those companies, as well as
certain members of the Symons family, and Acceptance in the United States
District Court for the Southern District of Indiana which alleged that the June
6, 2001 sale of IGF's assets to Acceptance and the payments by Acceptance to the
Company, SIG and Granite Re violated Indiana law and were voidable. The parties
have settled the arbitration and the Indiana action, and an order of dismissal
was entered by the court on June 26, 2002.
As previously reported, SIG, IGFH and IGF, are parties to a "Strategic Alliance
Agreement" dated February 28, 1998 (the "SAA") with Continental Casualty Company
("CNA"), pursuant to which IGF acquired certain crop insurance operations of
CNA. The obligations of SIG, IGFH, IGF and CNA under the SAA are the subject of
an action pending in United States District Court for the Southern District of
Indiana, Indianapolis Division. Claims have also been asserted in the action
against the Company, Granite Re, Pafco, Superior and certain members of the
Symons family. Although the Company continues to believe that it has claims
against CNA and defenses to CNA's claims which may offset or reduce amounts
owing by the Company or its affiliates to CNA, there can be no assurance that
the ultimate resolution of the claims asserted by CNA against the Company and
its affiliates will not have a material adverse effect upon the Company's and
its affiliates' financial condition or results of operations. There have been no
material developments since last reported in the Company's March 31, 2002 Form
10-Q.
As previously reported, the Company is a defendant in a case filed on February
23, 2000, in the United States District Court for the Southern District of
Indiana entitled Robert Winn, et al. v. Symons International Group, Inc., et
al., Cause No. IP 00-0310-C-B/S. Other parties named as defendants are SIG,
three individuals who were or are officers or directors of the Company or of
SIG, PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman, LLP. The case
purports to be brought on behalf of a class consisting of purchasers of the
Company's stock or SIG's stock during the period February 27, 1998, through and
including November 18, 1999. Plaintiffs allege, among other things, that
defendants misrepresented the reliability of the Company's reported financial
statements, data processing and financial reporting systems, internal controls
and loss reserves in violation of Section 10(b) of the Securities Exchange Act
of 1934 (the "1934 Act") and SEC Rule 10b-5 promulgated thereunder. The
individual defendants are also alleged to be liable as "controlling persons"
under Sec.20(a) of the 1934 Act. Discovery in the case is proceeding. There
have been no material developments since last reported in the Company's March
31, 2002 Form 10-Q.
As previously reported, an action has been brought in Florida against Superior
which purports to be brought on behalf of a class consisting of healthcare
providers improperly paid discounted rates on services to patients based upon a
preferred provider contract with a third party. The plaintiff alleges that
Superior breached a third party beneficiary contract, committed fraud and
engaged in racketeering activity in violation of federal and Florida law by
obtaining discounted rates offered by a third party with whom the plaintiff
contracted directly. Superior believes that the allegations of wrongdoing as
alleged in the complaint are without merit and intends to vigorously defend the
claims brought against it. There have been no material developments since last
reported in the Company's March 31, 2002 Form 10-Q.
As previously reported, an action has been brought in Florida against Superior
which purports to be brought on behalf of a class consisting of healthcare
providers that rendered treatment to and obtained a valid assignment of benefits
from Superior. The plaintiff alleges that Superior reduced or denied claims for
medical expenses payable to the plaintiff without first obtaining a written
report in violation of Florida law. The plaintiff also alleges that Superior
inappropriately reduced the amount of benefits payable to the plaintiff in
breach of Superior's contractual obligations to the plaintiff. Superior
believes the allegations of wrongdoing in violation of law are without merit and
intends to vigorously defend the claims brought against it. There have been no
material developments since last reported in the Company's March 31, 2002 Form
10-Q.
As previously reported, an action has been brought against Superior in Florida
by a purported class consisting of (i) healthcare providers that rendered
treatment to Superior insureds and claimants of Superior insureds and (ii) such
insureds and claimants. The plaintiff alleges that Superior improperly reduced
medical benefits payable and improperly calculated interest in violation of
Florida law. Superior believes the claim is without merit and intends to
vigorously defend the charges brought against it. There have been no material
developments since last reported in the Company's March 31, 2002 Form 10-Q.
As previously reported, actions have been brought in Florida against Superior
Guaranty purporting to be on behalf of a class of purchasers of insurance from
Superior Guaranty allegedly charged service or finance charges in violation of
Florida law. Superior Guaranty believes that the allegations of wrongdoing as
alleged in the complaint are without merit and intends to vigorously defend the
claims brought against it. There have been no material developments since last
reported in the Company's March 31, 2002 Form 10-Q.
SIG is a 50% owner in a limited liability corporation ("LLC") established to
provide business services to the Company, SIG and an unrelated third party. The
fair market value of the LLC's operating assets approximated its outstanding
debt at June 30, 2002.
The Company and its subsidiaries are named as defendants in various other
lawsuits relating to their business. Legal actions arise from claims made under
insurance policies issued by the Company's subsidiaries. The Company, in
establishing its loss reserves, has considered these actions. There can be no
assurance that the ultimate disposition of these lawsuits will not have an
adverse material affect the Company's operations or financial position.
5. LOSS DEVELOPMENT ON PRIOR ACCIDENT YEARS
During the three months ended June 30, 2002 SIG experienced unfavorable
development on its year-end 2001 loss and LAE reserves in the amount of $3.2
million. This was the result of unfavorable settlement of outstanding claims
due primarily to abnormally high loss frequency. This increased SIG's loss and
LAE ratio for the quarter by 32.3 percentage points. SIG believes the high
frequency of loss is due to increased motor vehicle traffic as policyholders opt
to drive, rather than fly, to their destinations following the September 11,
2001 terrorist attacks.
6. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
year presentation.
7. LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing net loss as
reported by the average number of shares outstanding as follows:
Three Months Ended Six Months Ended
(in thousands) June 30 June 30
2002 2001 2002 2001
----- ----- ----- -----
Basic:
Weighted-average common shares outstanding 5,394 5,776 5,423 5,776
===== ===== ===== =====
Diluted:
Weighted-average common shares outstanding 5,394 5,776 5,423 5,776
===== ===== ===== =====
The Company has 434,617 stock options outstanding as of June 30, 2002. Common
stock equivalents are anti-dilutive. Therefore, fully diluted loss per share is
the same as basic loss per share.
8. UNITED STATES ACCOUNTING PRINCIPLES
These unaudited consolidated financial statements have been prepared in
accordance with Canadian (CDN) GAAP. There are no differences between CDN GAAP
and US GAAP for both the net loss and the net loss per share. The differences
between CDN GAAP and US GAAP for stockholders' (deficit) are as follows (in
thousands):
(in thousands) June 30, 2002 December 31, 2001
--------------- -----------------
Stockholders (deficit) in accordance with
Canadian GAAP . . . . . . . . . . . . . . . . . . . . $ (75,184) $ (89,146)
Add (deduct) effect of difference in accounting for:
Receivable from sale of capital stock. . . . . . (1,258) (1,258)
Unrealized gain (loss) on investments. . . . . . (3,983) (2,246)
--------------- -------------------
Stockholders' (deficit) in accordance with
US GAAP . . . . . . . . . . . . . . . . . . . . . . . $ (80,425) $ (92,650)
=============== ==============
9. DISCONTINUED OPERATIONS
In December 2000, SIG initiated the divestiture of its crop insurance segment.
This business was predominantly written through IGF. The transaction was
completed in June 2001 and transferred ownership of substantially all of the
crop insurance assets of SIG and IGF, effective with the 2001 crop cycle, to
Acceptance. Upon completion of the sale, the net assets of the discontinued
operations were reduced to zero. IGF and its affiliates received approximately
$27.4 million at closing and Acceptance assumed all of the crop insurance
in-force policies for the 2001 crop year. For agreeing not to compete in the
crop insurance industry for a period of three years from the date of sale, the
Company and SIG each received $4.5 million at closing that is being amortized to
income on a straight-line basis over three years. An additional $9.0 million in
reinsurance premium is payable by Acceptance to Granite Re under a multi-year
reinsurance treaty whereby Granite Re has agreed to reinsure a portion of the
crop insurance business of Acceptance and provide an indemnity on behalf of IGF.
The results of the crop insurance segment have been reflected as "Discontinued
Operations" in the accompanying unaudited consolidated financial statements in
accordance with Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations --- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."
Summarized results of operations for discontinued operations were as follows:
STATEMENTS OF OPERATIONS:
(in thousands)
Three Months Ended
June 30
---------------
2002 2001
------ --------
Gross premiums written. . . . . . . . . . . . . . . . . . . $ 192 $88,569
====== ========
Net premiums written. . . . . . . . . . . . . . . . . . . . $ (2) $(7,906)
====== ========
Net premiums earned . . . . . . . . . . . . . . . . . . . $ (2) $(2,816)
Net investment and fee income . . . . . . . . . . . . . . 294 1,251
Net realized capital gain (loss). . . . . . . . . . . . . 44 629
------ --------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . 336 (936)
------ --------
Loss and loss adjustment expenses . . . . . . . . . . . . . (175) 913
Policy acquisition and general and administrative expenses. 511 1,901
Interest and amortization expense . . . . . . . . . . . . . - (1,594)
------ --------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . 336 1,220
------ --------
Earnings before income taxes. . . . . . . . . . . . . . . . - (2,156)
Income tax expense. . . . . . . . . . . . . . . . . . . . . - -
------ --------
Net earnings from discontinued operations . . . . . . . . . $ - $(2,156)
====== ======
STATEMENTS OF OPERATIONS:
(in thousands)
Six Months Ended
June 30
-----------------
2002 2001
------ --------
Gross premiums written. . . . . . . . . . . . . . . . . . . $ 192 $182,569
====== =========
Net premiums written. . . . . . . . . . . . . . . . . . . . $ - $ (18)
====== =========
Net premiums earned . . . . . . . . . . . . . . . . . . . $ - $ (18)
Net investment and fee income . . . . . . . . . . . . . . 483 935
Net realized capital gain (loss). . . . . . . . . . . . . (79) 631
------ ---------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . 404 1,548
------ ---------
Loss and loss adjustment expenses . . . . . . . . . . . . (193) 6,783
Policy acquisition and general and administrative expenses. 597 (1,722)
Interest and amortization expense . . . . . . . . . . . . - (1,357)
------ ---------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . 404 3,704
------ ---------
Earnings before income taxes. . . . . . . . . . . . . . . . - (2,156)
Income tax expense. . . . . . . . . . . . . . . . . . . . . - -
------ ---------
Net earnings from discontinued operations . . . . . . . . . $ - $ (2,156)
====== =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS AND CERTAIN RISKS
All statements, trend analyses, and other information contained in this report
relative to markets for the Company's products and/or trends in the Company's
operations or financial results, as well as other statements which include words
such as "anticipate," "could," "feel(s)," "believes," "plan," "estimate,"
"expect," "should," "intend," "will," and other similar expressions, constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results to be materially
different from those contemplated by the forward-looking statements. Such
factors include, among other things: (i) the effect on customers, agents,
employees and others due to SIG's receipt of a going concern opinion from its
independent auditor; (ii) general economic conditions, including prevailing
interest rate levels and stock market performance; (iii) factors affecting the
Company's nonstandard automobile operations such as rate increase approval,
policy renewals, new business written, and premium volume; (iv) the factors
described in this section and elsewhere in this report; and (v) adverse actions
by insurance regulatory officials.
OVERVIEW OF THE COMPANY
Goran Capital, Inc. ("the Company") owns 73.1% of Symons International Group,
Inc. ("SIG"). SIG owns insurance companies that underwrite and market
nonstandard private passenger automobile insurance. SIG's principal insurance
company subsidiaries are Pafco General Insurance Company ("Pafco") and Superior
Insurance Company ("Superior"). Additionally, the Company owns 100% of Granite
Reinsurance Company Ltd. ("Granite Re"), Granite Insurance Company ("Granite")
and Symons International Group (Florida) Inc. ("SIGF").
Pafco, Superior and Superior's subsidiaries, Superior Guaranty Insurance Company
("Superior Guaranty"), and Superior American Insurance Company ("Superior
American"), are engaged in the writing of insurance coverage for automobile
physical damage and liability policies for nonstandard risks. Nonstandard risk
insureds are those individuals who are unable to obtain insurance coverage
through standard market carriers due to factors such as poor premium payment
history, driving experience or violations, particular occupation or type of
vehicle. SIG offers several different policies that are directed towards
different classes of risk within the nonstandard market. Premium rates for
nonstandard risks are higher than for standard risks. Since it can be viewed as
a residual market, the size of the nonstandard private passenger automobile
insurance market changes with the insurance environment and grows when the
standard coverage becomes more restrictive. Nonstandard policies have
relatively short policy periods and low limits of liability. Also, since the
nonstandard automobile insurance business typically experiences lower rates of
retention than standard automobile insurance, the number of new policyholders
underwritten by nonstandard automobile insurance carriers each year is
substantially greater than the number of new policyholders underwritten by
standard carriers.
As previously announced, SIG sold its crop insurance operations to Acceptance
Insurance Companies Inc. ("Acceptance") on June 6, 2001. The crop insurance
business was written through SIG's subsidiary, IGF Insurance Company (IGF),
which is in runoff. Accordingly, the financial statements included in this
report reflect the results of the crop insurance segment as "discontinued
operations."
Granite Re is a finite risk reinsurance company based in Barbados.
Granite is a Canadian federally licensed insurance company that ceased writing
new insurance policies on January 1, 1990.
SIGF is a Florida domestic corporation engaged in several lines of business,
including a property/casualty insurance brokerage and a flood insurance
brokerage.
SIGNIFICANT LOSSES HAVE BEEN REPORTED AND ARE LIKELY TO CONTINUE
The net loss from continuing operations for the three months ended June 30, 2002
was $(8,386,000). The net loss from continuing operations for the three months
ended June 30, 2001 was $(6,096,000). The net loss from continuing operations
for the six months ended June 30, 2002 was $(14,353,000). The net loss from
continuing operations for the six months ended June 30, 2001 was $(15,643,000).
The net loss from continuing operations for the twelve months ended December 31,
2001 was $(31,937,000). The net loss from continuing operations for the twelve
months ended December 31, 2000 was $(63,224,000). The net loss from continuing
operations for the six months ended June 30, 2002 exceeded the net loss from
continuing operations for the six months ended June 30, 2001 primarily due to
significant adverse development on year end 2001 loss and LAE reserves and on
new business generated in the first quarter of 2002. Although the Company has
taken a number of actions to address factors contributing to these past losses,
there can be no assurance that operating losses will not continue.
RECENT AND FURTHER REGULATORY ACTIONS MAY ADVERSELY AFFECT THE COMPANY'S FUTURE
OPERATIONS
The Company's U.S. insurance company subsidiaries, their business operations,
and their transactions with affiliates, including the Company, are subject to
extensive regulation and oversight by the Indiana Department of Insurance
("IDOI"), the Florida Department of Insurance ("FDOI") and the insurance
regulators of other states in which the U.S. insurance company subsidiaries
write business. Moreover, the U.S. insurance company subsidiaries' losses,
adverse trends and uncertainties discussed in this report have been and continue
to be matters of concern to the domiciliary and other insurance regulators of
the Company's U.S. insurance company subsidiaries and have resulted in enhanced
scrutiny and regulatory action by several regulators (see Note 3, "Regulatory
Affairs" in the Condensed Notes to the Consolidated Financial Statements). The
primary purpose of insurance regulation is the protection of policyholders
rather than shareholders. Failure to resolve issues with the IDOI, the FDOI and
other regulators, in a manner satisfactory to the Company could impair the
Company's ability to execute its business strategy or result in future
regulatory actions or proceedings that could otherwise materially and adversely
affect the Company's operations.
THE COMPANY IS SUBJECT TO A NUMBER OF PENDING LEGAL PROCEEDINGS
As discussed elsewhere in this report, the Company is involved in a number of
pending legal proceedings (see Part II, Item 1, "Legal Proceedings"). Although
the Company believes that many of the allegations of wrongdoing are without
merit and intends to vigorously defend the claims brought against it and/or its
subsidiaries, there can be no assurance that such proceedings will not have a
material adverse effect on the Company's financial position or results of
operations. Furthermore, the existence of these lawsuits diverts the time and
attention of management and results in continued expense irrespective of the
ultimate outcome
THE TERMS OF THE TRUST PREFERRED SECURITIES MAY RESTRICT THE COMPANY'S ABILITY
TO ACT
SIG has issued, through a wholly owned trust subsidiary, $135 million aggregate
principal amount in trust originated preferred securities (the "Preferred
Securities"). The Preferred Securities have a term of 30 years and bear
interest at an annual rate of 9.5%, paid semi-annually. The obligations of the
Preferred Securities are funded from SIG's nonstandard automobile insurance
management company. SIG elected to defer the semi-annual interest payments due
in February and August 2000 and 2001 and the payment due in February 2002 and
may continue to defer such payments for up to an aggregate of five years as
permitted by the indenture for the Preferred Securities. SIG plans to defer the
interest payments due in August 2002. All of the deferred interest (if all
payments due in 2002, 2003, and 2004 are deferred) of approximately $84 million
will become due and payable in February 2005. The indenture contains a number
of covenants that may restrict SIG's ability to act in the future. These
covenants include restrictions on SIG's ability to incur or guarantee debt, make
payment to affiliates, repurchase its common stock, pay dividends on common
stock or increase its level of certain investments other than investment-grade,
fixed-income securities. There can be no assurance that compliance with these
restrictions and other provisions of the indenture for the Preferred Securities
will not adversely affect the cash flow of SIG.
CASH FLOW CONSTRAINTS TO SUPERIOR GROUP MAY ADVERSELY AFFECT SIG'S ABILITY TO
FUND OPERATIONS AND TO SERVICE THE OBLIGATIONS OF THE TRUST PREFERRED SECURITIES
Under the present structure, claims, agent commissions and premium taxes are
paid directly by the insurance company subsidiaries. However, pursuant to the
terms of the management agreement Superior Group is responsible for all payroll,
facilities, data processing, computer systems and other functions necessary for
the operations of the Company and its subsidiaries. The insurance companies pay
for such services through management fees that are calculated as a percentage of
gross written premiums. Therefore, declines in written premiums result in
reduced cash flow to Superior Group.
As discussed in "ITEM 1- Business - Recent Developments" in the Company's annual
report on Form 10-K for 2001, SIG projected a material decrease in gross written
premiums for 2002 from 2001 levels with a corresponding decrease in management
fees payable to Superior Group. However, the decrease in written premiums for
the three months ended June 30, 2002 was significantly higher than what we had
originally anticipated. Unless SIG is able to increase written premiums or
reduce expenses to correspond with the reduced level of written premiums, cash
flow will be inadequate to fund operations, including servicing of the Preferred
Securities. See, "ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - LIQUIDITY AND CAPITAL RESOURCES."
There can be no assurance that current levels of reduced cash flows will not
have a material adverse affect on SIG's financial position, results of
operations and its ability to meet short and long-term obligations.
REVIEW OF CONSOLIDATED OPERATIONS
NET LOSS
The net loss for the three months ended June 30, 2002 was $(8,386,000) or
$(1.55) per share (basic and diluted). The net loss for the three months ended
June 30, 2001 was $(6,096,000) or $(1.05) per share (basic and diluted). The
increased loss is due to the higher loss ratio in 2002 versus 2001. In
addition, policy acquisition and general and administrative expenses were 71.9%
and 42.7% of earned premiums for the three months ended June 30, 2002 and 2001,
respectively, due to SIG's inability to reduce expenses quickly enough to match
declining revenue. There was no loss on discontinued operations for the three
months ended June 30, 2002. The loss on discontinued operations for the three
months ended June 30, 2001 was $(2,156,000). Refer to Note 9., "Discontinued
Operations" of the Condensed Notes to Consolidated Financial Statements for
additional information.
GROSS PREMIUMS WRITTEN
Gross premiums written decreased 52.7% for the three months ended June 30, 2002
compared to the three months ended June 30, 2001. The primary reasons for this
decline in volume are the withdrawal from certain competitive markets and more
stringent underwriting initiatives intended to increase profitability. Refer to
"Liquidity and Capital Resources" for additional volume-related disclosure.
NET PREMIUMS WRITTEN
Net premiums written represent the portion of premiums retained by the Company
after consideration for risk sharing through reinsurance contracts. As a result
of declines in surplus in the Company's U.S. insurance subsidiaries and to
manage overall risk retention, in 2000 SIG entered into a reinsurance agreement
to cede a portion of its gross written premiums to National Union Fire Insurance
Company of Pittsburgh, PA, an unrelated third party. For the six months ended
June 30, 2002, SIG ceded 71.8% of its gross written premiums.
NET PREMIUMS EARNED
Net premiums earned decreased 55.0% and 44.8% for the three and six months ended
June 30, 2002, respectively, as compared to the same periods in 2001. Premiums
are earned ratably over the term of the underlying insurance contracts and the
reduction in net premiums earned is a result of the decreases in written
premiums and policies in force.
FEE INCOME
Fee income is derived from installment billings and other services provided to
policyholders. Fee income decreased 36.8% and 22.1% for the three and six
months ended June 30, 2002, respectively, as compared to the same periods in
2001. The decreases are attributable to the reduction in policies in force and
the overall decline in written premium in the second quarter of 2002.
NET INVESTMENT INCOME
Net investment income for the three and six months ended June 30, 2002 was 18.2%
and 22.2% lower, respectively, than for the comparable periods in 2001. The
decreases reflect the decline in invested assets during periods of declining
premiums and the liquidation of investments to pay prior year losses settled in
2002.
NET REALIZED CAPITAL (LOSSES)
Net realized capital (losses) were $(625,000) and $(373,000) for the three
months ended June 30, 2002 and 2001, respectively. Net realized capital (losses)
were $(1,347,000) and $(1,076,000) for the six months ended June 30, 2002 and
2001, respectively. Capital losses resulted primarily from the continued
liquidation of investments to fund operations and claim payments under
unfavorable market conditions.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The loss and loss adjustment expense (LAE) ratio for SIG for the three and six
months ended June 30, 2002, was 117.0% and 112.0%, respectively, of net premiums
earned as compared to 107.7% for first quarter 2002 and to 91.5% for the entire
year of 2001. During the second quarter of 2002 SIG experienced unfavorable
development on its loss and LAE reserves for accidents occurring in 2001 and
prior. This raised the loss and LAE ratio for the quarter by 32.3 percentage
points.
POLICY ACQUISITION AND GENERAL AND ADMINISTRATIVE EXPENSES
Policy acquisition and general and administrative expenses were $8,549,000 and
$11,265,000 for the three months ended June 30, 2002 and 2001, respectively.
Policy acquisition and general and administrative expenses were $15,842,000 and
$22,938,000 for the six months ended June 30, 2002 and 2001, respectively. The
decreases reflect the decline in gross written premiums and overall operating
expense reduction initiatives. As a percentage of gross premiums earned, SIG
experienced an increase in its operating expense ratio, net of fee income, from
31.1% for the three months ended June 30, 2001 to 51.0% for the three months
ended June 30, 2002. The increase in the expense ratio is the result of lower
net earned premium in the three months ended June 30, 2002 as compared to the
three months ended June 30, 2001.
INCOME TAXES
At June 30, 2002 the Company's net deferred tax assets were fully offset by a
100% valuation allowance that resulted in no tax benefit for the three months
ended June 30, 2002. At June 30, 2001 the Company's net deferred tax assets
were fully offset by a 100% valuation allowance that resulted in no tax benefit
for the three months ended June 30, 2001.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
CASH AND INVESTMENTS
Total cash and investments were $102,923,000 and $125,058,000 at June 30, 2002
and December 31, 2001, respectively. The decrease results from continued
liquidations to fund claim payments and operating expenses in a period of
declining premium volume.
REINSURANCE RECEIVABLES AND PAYABLES
SIG negotiated a third-party quota share reinsurance agreement that became
effective January 1, 2000. Under the quota share agreement, SIG may cede a
portion of its non-standard automobile insurance premiums and related losses
based on a variable percentage of up to 75% of Superior's and Pafco's earned
premiums. SIG's ceding percentage for the three months ended June 30, 2002
totaled 71.8%. The decrease in the amount of premiums and losses ceded under
this contract directly affect reinsurance balances due and payable on the face
of the financial statements.
RECEIVABLES
Receivables, exclusive of the allowance for doubtful accounts, decreased by
$8,175,000, or 16.7%, from December 31, 2001 to June 30, 2002. This decrease is
primarily attributable to a decrease in billable premiums due to lower written
premiums in the three and six months ended June 30, 2002 compared to the fourth
quarter of 2001. The allowance for doubtful accounts decreased by $1,310,000,
or 85.8%, from December 31, 2001 to June 30, 2002, primarily due to the final
reconciliation of receivables previously maintained on a legacy policy
administration system that is no longer in service.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Total loss and LAE reserves decreased by $6,058,000, or 7.1%, from December 31,
2001 to June 30, 2002. This decrease is consistent with SIG's declining volume
of business.
UNEARNED PREMIUMS
Unearned premiums decreased by $8,729,000, or 14.7%, from December 31, 2001 to
June 30, 2002. This decrease is consistent with the decrease in receivables
discussed above.
DEFERRED INCOME
In connection with the sale of the crop insurance book of business to Acceptance
on June 6, 2002, the Company and SIG each received a payment of $4.5 million for
agreeing not to engage in the crop insurance business for three years from the
sale date. The payment is being amortized to income on a straight-line basis
over the three-year period.
STOCKHOLDERS' (DEFICIT)
Stockholders' (deficit) was $(75,184,000) and $(89,146,000) as of June 30, 2002
and December 31, 2001, respectively. This increase is the result of the net loss
of $(14,353,000) for the six months ended June 30, 2002, offset by an increase
in combined surplus of $28,339,000 due primarily to the purchase by the Company
of SIG's Preferred Securities.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of funds for the Company are dividends and loans from
Granite Re.
The primary source of funds available to SIG are fees from policyholders and
management fees and dividends from its insurance company subsidiaries.
Superior Insurance Group, Inc. ("Superior Group") collects billing fees charged
to policyholders who elect to make their premium payments in installments.
Superior Group also receives management fees under its management agreement with
its insurance subsidiaries. When the FDOI approved the acquisition of Superior
by Superior Group, it prohibited Superior from paying any dividends (whether
extraordinary or not) for four years from the date of acquisition (May 1, 1996)
without the prior written approval of the FDOI, which restriction expired in
April 2000. As a result of regulatory actions taken by the IDOI with respect to
Pafco and IGF, those subsidiaries may not pay dividends without prior approval
by the IDOI. Pafco cannot pay extraordinary dividends, within the meaning of
the Indiana Insurance Code, without the prior approval of the Indiana Insurance
Commissioner. The management fees charged to Pafco, Superior and IGF are
subject to review by the IDOI and FDOI.
The nonstandard automobile insurance subsidiaries' primary sources of funds are
premiums, investment income and proceeds from the maturity or sale of invested
assets. Such funds are used principally for the payment of claims, payment of
claims settlement costs, operating expenses (primarily management fees),
commissions to independent agents, premium taxes, dividends and the purchase of
investments. There is variability in cash outflows because of uncertainties
regarding settlement dates for liabilities for unpaid losses. Accordingly, SIG
maintains investment programs intended to provide adequate funds to pay claims.
During the second quarter of 2002 and during 2001 and 2000, due to reduced
premium volume, SIG has liquidated investments to pay claims. SIG historically
has tried to maintain duration averages of 3.5 years. However, the reduction in
new funds due to lower premium volume has and will continue to cause SIG to
shorten the duration of its investments. SIG may incur additional costs in
selling longer bonds to pay claims, as claim payments tend to lag premium
receipts. Due to the decline in premium volume, SIG has experienced a reduction
in its investment portfolio, but to date has not experienced any problems
meeting its obligations for claims payments.
As of June 30, 2002, SIG has drawn all funds available under its $2.5 million
revolving credit facility ("Facility") with Granite Re, a related party. The
terms of the Facility call for monthly interest payments at the prime rate (as
printed in the Wall Street Journal on the first business day of each month) plus
5.25% (the total rate was 10.0% at August 1, 2002) computed on an annual basis
and not to exceed 18% per annum calculated on the average principal outstanding
each month. All principal borrowed under the Facility is due on December 20,
2004.
On August 12, 1997, SIG issued through a wholly owned trust subsidiary $135
million aggregate principal amount in trust originated preferred securities (the
"Preferred Securities"). The Preferred Securities have a term of 30 years with
semi-annual interest payments of $6.4 million that commenced February 15, 1998.
SIG may redeem the Preferred Securities in whole or in part after 10 years. SIG
may defer interest payments in accordance with the terms of the trust indenture
for a period of up to five years. The unpaid interest installment amounts accrue
interest at 9.5%. SIG deferred the semi-annual interest payments due in February
and August 2000 and 2001 and February 2002 and may continue this deferral
practice for all remaining payments due in 2002, 2003, and 2004. SIG intends to
defer the interest payments due in August 2002.
The following table sets forth the minimum required obligations of SIG under the
Preferred Securities for interest and principal payments for each of the next
four years and thereafter assuming all semi-annual interest payments due in
2002, 2003, and 2004 are deferred (in thousands):
2002 2003 2004 2005 Thereafter Total
----- ----- ----- ------- ----------- --------
Interest payments. $ - $ - $ - $96,779 $ 282,150 $378,929
Principal payments - - - - 135,000 135,000
----- ----- ----- ------- ----------- --------
Total due. . . . . $ - $ - $ - $96,779 $ 417,150 $513,929
===== ===== ===== ======= =========== ========
The trust indenture contains certain restrictive covenants including those based
upon SIG's consolidated coverage ratio of earnings before interest, taxes,
depreciation and amortization (EBITDA). If SIG's EBITDA falls below 2.5 times
consolidated interest expense (including Preferred Securities distributions) for
the most recent four quarters, the following restrictions become effective:
- - SIG may not incur additional indebtedness or guarantee additional
indebtedness.
- - SIG may not make certain restricted payments including making loans or
advances to affiliates, repurchasing common stock or paying dividends in
excess of a stated limitation.
- - SIG may not increase its level of non-investment grade securities defined
as equities, mortgage loans, real estate, real estate loans and
non-investment grade fixed income securities.
These restrictions currently apply, as SIG's consolidated coverage ratio was
(1.06) at June 30, 2002, and will continue to apply until SIG's consolidated
coverage ratio complies with the terms of the trust indenture. SIG was in
compliance with these additional restrictions as of June 30, 2002.
Beginning in the fourth quarter of 2001 and continuing in the second quarter of
2002, SIG experienced adverse loss experience on a substantial portion of its
new business written in certain markets. In late February and early March 2002,
SIG commenced further analysis of loss ratios by individual agency and a review
of claim settlement procedures. Based on this and other analysis, SIG took the
following actions in late March and in April 2002 to improve its financial
position and operating results:
- - Eliminated reinstatements in all markets, i.e., upon policy cancellation,
the insured must obtain a new policy at prevailing rates and current
underwriting guidelines;
- - Terminated or placed on new business moratorium several hundred agents
whose loss ratios were abnormally high when compared to the average for the
remaining agents (these agents accounted for approximately 16% of the total
gross written premium in 2001);
- - Increased underwriting requirements in certain markets including: higher
down payments, new policy fees, and shorter policy terms;
- - Hired a consultant with significant auto claims experience to review
processes and suggest modifications to the claims function.
As previously reported in the Company's December 31, 2001 Annual Report on Form
10-K, SIG expected the above actions to result in a decline of approximately 10
to 15% in gross written premiums from 2001 levels. Based on actual results
through June 2002, SIG now expects a decline ranging from 30% to 35% in gross
written premiums for calendar year 2002 from 2001 levels with a corresponding
decrease in management fees payable to Superior Group. In April 2002, SIG
eliminated approximately 60 full-time positions, primarily in its claims and
underwriting departments, representing approximately 17% of its employees before
the layoffs. In addition, SIG has undertaken other cost savings initiatives and
process changes in order to reduce operating expenses.
Net cash used by operating activities in the first half of 2002 aggregated
$(24,838,000) compared to $(8,450,000) for the same period in 2001. The increase
is primarily due to SIG's lower premium volume in the first half of 2002 and the
receipt in 2001 of $9.0 million for the non-compete agreement with Acceptance.
See Note 8 "Discontinued Operations" in the Condensed Notes to the Financial
Statements.
SIG's present projected level of cash flow from premium volume, investment
income and billing fees will be insufficient to fund its operating expenses at
their present levels through the end of 2002. SIG is considering alternative
sources of working capital which may be available in order to fund operations.
Among the alternate sources pursued by SIG are capital contributions and loans
from the Company. In addition, SIG may continue to reduce operating expenses to
match cash inflows and may increase premium volume in the third or fourth
quarters in certain states assuming the new business is written to generate an
underwriting profit. In the event SIG's insurance company subsidiaries continue
to reduce premium volume, the result will be continued reductions in management
and billing fees paid to Superior Group which will reduce cash flow and sources
of funds available to fund operating expenses and other obligations, including
the Preferred Securities.
Shareholders' equity reflected a deficit of $(75.18) million at June 30, 2002,
which does not reflect the statutory surplus upon which the Company conducts its
U.S. insurance operations. The Company's U.S. insurance subsidiaries, not
including IGF, after the effects of Codification, had statutory surplus of
approximately $13.2 million at June 30, 2002.
Given the financial position and loss experience of SIG over the past several
years as described above, SIG's independent auditors issued an opinion based
upon their audit of SIG's December 31, 2001 Consolidated Financial Statements
which includes an emphasis paragraph that raises the question of whether or not
SIG can continue as a going concern. SIG's plans to improve financial results
are described above.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to Qualitative and Quantitative Disclosures about Market
Risk was included under Part I, Item 1 "Business" in the December 31, 2001 Form
10-K. No material changes have occurred in market risk since this information
was disclosed in the December 31, 2001 Form 10-K.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, IGF had been a party to a number of pending legal
proceedings and claims relating to agricultural production interruption
insurance policies (the "AgPI Program") which were sold during 1998. All of the
policies of insurance which were issued in the AgPI Program were issued by and
under the name of Mutual Service Casualty Insurance Company ("MSI"), a Minnesota
corporation with its principal place of business located in Arden Hills,
Minnesota. Sales of this product resulted in large underwriting losses by IGF.
Approximately $29 million was paid through March 31, 2002 in settlement of legal
proceedings and policyholder claims related to the AgPI Program. All AgPI
policyholder claims were settled during 2000. However, on January 12, 2001 a
case was filed in the Superior Court of California, County of Fresno, entitled
S&W Seed Company, Dudley Silveira, Ric Blanchard and Darrell Silveira v. Mutual
Service Casualty Insurance Company, IGF Insurance Company, and Dibuduo &
Defendis Insurance Agency, Inc.; Case No. OICE CG 00137. The case was brought
by four AgPI policyholders who had previously settled their AgPI claims pursuant
to binding settlement agreements who now seek additional compensation by
asserting through litigation that IGF and the third party carrier paid less than
the policy limits they were promised when they purchased the policy and that
each settling policyholder was forced to accept the lesser amount due to their
economic duress - a legal theory recognized in California if certain elements
can be established. On January 16, 2002, the court entered an order granting
IGF's motion for judgment on the pleadings and required plaintiffs to show an
insurable interest. Plaintiffs amended their complaint attempting to allege an
insurable interest, and on March 19, 2002, the court granted IGF's demurrer to
the amended complaint. In granting the demurrer the court held that any
recovery payable to plaintiff would be limited to their actual economic losses
regardless of how much plaintiffs thought they had been promised (i.e.
plaintiffs cannot be paid policy limits without regard to actual losses
incurred). The plaintiffs then filed their third amended complaint to which MSI
filed a demurrer challenging the insurance contract allegations, as the issuer
of the AgPI policies, contending that plaintiffs failed to make the amendments
to show an insurable interest as required by the court's previous rulings. This
demurrer was granted, without leave to amend, because the lack of an insurable
interest rendered the contract an unenforceable wager agreement, as described in
each of the various versions of the complaint. Plaintiffs have now moved for
reconsideration of the dismissal of the insurance claims asking for another
chance to allege an adequate insurable interest. This hearing is set for August
13, 2002. Discovery is proceeding.
As previously reported in the Company's March 31, 2002 Form 10-Q, MSI and IGF
were arbitrating their dispute over responsibility for claims paid to MSI
insureds. Also as previously reported, an action was filed against the Company,
IGF, IGFH, Granite Re, SIG and certain affiliates of those companies, as well as
certain members of the Symons family, and Acceptance in the United States
District Court for the Southern District of Indiana which alleged that the June
6, 2001 sale of IGF's assets to Acceptance and the payments by Acceptance to the
Company, SIG and Granite Re violated Indiana law and were voidable. The parties
have settled the arbitration and the Indiana action, and an order of dismissal
was entered by the court on June 26, 2002.
As previously reported, the Company is a defendant in a case filed on February
23, 2000, in the United States District Court for the Southern District of
Indiana entitled Robert Winn, et al. v. Symons International Group, Inc., et
al., Cause No. IP 00-0310-C-B/S. Other parties named as defendants are SIG,
three individuals who were or are officers or directors of the Company or of
SIG, PricewaterhouseCoopers LLP and Schwartz Levitsky Feldman, LLP. The case
purports to be brought on behalf of a class consisting of purchasers of the
Company's stock or SIG's stock during the period February 27, 1998, through and
including November 18, 1999. Plaintiffs allege, among other things, that
defendants misrepresented the reliability of the Company's reported financial
statements, data processing and financial reporting systems, internal controls
and loss reserves in violation of Section 10(b) of the Securities Exchange Act
of 1934 (the "1934 Act") and SEC Rule 10b-5 promulgated thereunder. The
individual defendants are also alleged to be liable as "controlling persons"
under Sec.20(a) of the 1934 Act. Discovery in the case is proceeding.
The Company and its subsidiaries are named as defendants in various other
lawsuits relating to their business. Legal actions arise from claims made under
insurance policies issued by the Company's subsidiaries. The Company, in
establishing its loss reserves, has considered these actions. There can be no
assurance that the ultimate disposition of these lawsuits will not have an
adverse material affect the Company's operations or financial position.
Except as set forth above, there have been no other material developments in any
of the pending legal proceedings previously reported by the Company in the March
31, 2002 Form 10Q.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company
Held Its annual meeting of shareholders on May 31, 2002.
Following is a summary of the matters voted on at the
meeting:
- - The following six nominees for director were re-elected to
the board by a vote of 2,650,378 in favor:
John R. McKeating G. Gordon Symons
Alan G. Symons Douglas H. Symons
J. Ross Schofield David B. Shapira
- - BDO Seidman, LLP was re-appointed as the Company's
independent auditors by a vote of 2,653,478 in favor.
ITEM 5. OTHER INFORMATION On June 10, 2002 the Company announced the
retirement of Alan G. Symons, the Company's chief executive
officer. Mr. Symons also retired from all directorships with the
Company and its subsidiaries. At the same time, the Company
announced the appointments of Douglas H. Symons as the Company's
chief executive officer and Robert C. Whiting as a director of
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits: None
Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on August 13, 2002.
By: /s/ Douglas H. Symons
-----------------------------
Douglas H. Symons
Chief Executive Officer
(principal executive officer)
By: /s/ John G. Pendl
-----------------------------
John G. Pendl
Chief Financial Officer
(principal financial and accounting officer)
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Goran Capital, Inc. (the "Company")
on Form 10-Q for the quarterly period ended June 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, in the capacities and dates indicates below, hereby certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
Dated: August 13, 2002 By: /s/ Douglas H. Symons
------------------------
Douglas H. Symons
Chief Executive Officer
(principal executive officer)
Dated: August 13, 2002 By: /s/ John G. Pendl
------------------------
John G. Pendl
Chief Financial Officer
(principal financial and accounting officer)
Goran Capital Inc. - Consolidated
Analysis of Loss Per Share
US GAAP - Treasury Method
Three Months Three Months
Ended Ended
June 30, 2002 June 30, 2001
--------------- ---------------
Average Price (US $). . . . . . . . . . . . . . . . . . N/A N/A
Proceeds from Exercise of Warrants and Options (US $) . Nil Nil
Shares Repurchased - Treasury Method. . . . . . . . . . Nil Nil
Shares Outstanding - Weighted Average . . . . . . . . . 5,393,698 5,776,398
Add: Options and Warrants Outstanding (1). . . . . . . Nil Nil
Less: Treasury Method - Shares Repurchased . . . . . . Nil Nil
Shares Outstanding for US GAAP Purposes . . . . . . . . 5,393,698 5,776,398
Net Loss in Accordance with US GAAP . . . . . . . . . $ (8,386,000) $ (6,096,000)
Net Loss Per Share - US GAAP - Basic and Fully Diluted. $ (1.55) $ (1.05)
(1) Only those options with a dilutive effect were included above for the three months
ended June 30, 2002 and 2001.