The following selected financial data is derived from our audited financial statements for the years ended December 31, 2004, 2003, 2002, 2001, and 2000. You should read selected financial data together with the more detailed information contained in the Financial Statements and associated Notes and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. See also Note 12 of Notes to Consolidated Financial Statements regarding a recapitalization of the Company consummated on January 21, 2005.
The Company recorded GAAP combined ratios of 96.6% in 2004, 105.1% in 2003 and 125.9% in 2002. The GAAP expense ratios, included in the GAAP combined ratios, were 27.5%, 30.9% and 32.3%, respectively. The expense and combined ratios do not include the expenses of the holding company.
The Company only writes nonstandard personal auto insurance and has no plans to write any other lines of insurance. This business has been profitable in recent periods, due in large part to favorable market conditions. The Company’s current vision is to grow that business strategically to establish a broader, more geographically diversified earnings base by expanding into new states and markets to achieve growth with diversification of risk.
During its recent transition period (see “Capital Transactions - 2005 Recapitalization”), the Company limited its growth by maintaining a ratio of net premiums written to surplus (“leverage”) of approximately 1 to 1, which is below the level at which some competitors operate. The recently completed capital restructuring (discussed in detail below) has permitted management to change its focus to seek opportunities to grow premiums written while diversifying risk.
The Company limited its business to Florida until the fourth quarter of 2003, when it began writing policies in Texas. In 2004, the Company began writing policies in Arizona and Nevada and initiated a California program with a non-affiliated managing general agency as well. The Company experienced significant growth in premiums written during the first two months of 2005, and management currently expects continuing growth in premiums written and an increase in the Company’s leverage. Significant growth could enable the Company to increase its profitability, if it is able to achieve that growth with favorable profit margins, but it also has the potential to cause material and adverse effects on the Company’s financial condition and results if not profitably written.
• generally, new business initially produces higher loss ratios than more seasoned in-force business, and this factor could be magnified to the extent that the Company enters multiple new states and market areas within a short period of time. Furthermore, it amplifies the importance of the Company’s ability to assess any new trends accurately and respond effectively;
A.M. Best is the principal rating agency of the insurance industry. An insurance company’s ability to effectively compete in the market place is in part dependent upon the rating determination of A.M. Best. A.M. Best provides ratings of insurance companies based on comprehensive quantitative and qualitative evaluations and expresses its rating as an opinion of an insurer’s ability to meet its obligations to policyholders. A.M. Best has 16 possible ratings; the Company’s rating of “B-” (Fair) ranks eighth from the highest rating. A.M. Best’s assigns a “B-” rating to companies that have, in the opinion of A.M. Best, a fair ability to meet their current obligations to policyholders, but are financially vulnerable to adverse changes in underwriting and economic conditions.
Bonds available for sale are stated at fair value with changes in fair value recorded as a component of comprehensive income. Short-term investments are stated at cost. The “specific identification” method is used to determine costs of investments sold. Provisions for possible losses are recorded only when the values have experienced impairment considered “other than temporary” by a charge to realized losses resulting in a new cost basis of the investment. The Company’s policy is to review investments on a regular basis to evaluate whether or not each investment has experienced an “other than temporary” impairment. Interest rate fluctuations and credit quality of the issuer impact the variability in the fair value. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” for a discussion of variability of estimates.
Goodwill represents the excess of purchase price over fair value of net assets acquired. The Company periodically reviews the recoverability of goodwill based on an assessment of undiscounted cash flows of future operations to ensure it is appropriately valued. The recoverability of goodwill is evaluated on a separate basis for each acquisition.
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“Statement 142”). Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company adopted the provisions of Statement 142 effective January 1, 2002, which resulted in the Company no longer amortizing goodwill.
Goodwill of $609,000 is associated with the 1998 acquisition of the Lalande Group and reflects a value no more than the estimated fair valuation levels of combined agency and claims handling operations of this type in the personal automobile marketplace.
In assessing the realization of its deferred tax assets, management considers whether it is more likely than not that a portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon management’s consideration of expected reversal of deferred tax liabilities, projected future taxable income and FASB Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, management believes it is appropriate to continue to fully reserve the deferred tax assets as of December 31, 2004.
In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123®”), which requires the cost resulting from stock options be measured at fair value and recognized in earnings. This Statement replaces Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which permitted the recognition of compensation expense using the intrinsic value method. SFAS No. 123® will be effective July 1, 2005. We estimate that the impact of adoption of SFAS No. 123® will approximate the impact of the adjustments made to determine pro forma net income and pro forma earnings per share under Statement No. 123. See Note 1(m) of Notes to Consolidated Financial Statements. The Company plans to adopt SFAS No. 123® on July 1, 2005 using the modified-retrospective method, revising all prior periods.
Net investment income decreased 26% and 28% in 2004 and 2003, respectively. The decrease for both years was primarily attributed to the decline in investment balances, due to principal payments on the note payable, commercial claim payments and the short-term investments comprising a significantly greater portion of investments each year.
Commissions are paid to independent retail agents to produce the business for the Company and typically vary with gross premiums written. Commissions increased in 2004 over 2003 primarily due to the increase in premiums written.
Change in DPAC represents the change during the period in the asset “Deferred policy acquisition cost”. This asset item is comprised of commission expenses and premium taxes, which are deferred. This asset is amortized into the results of operations through “Change in deferred policy acquisition costs” as the underlying net premiums written are earned. Change in DPAC resulted in a credit in 2004 of $1,090,256, charges of $382,861 and $1,513,880 in 2003 and 2002, respectively. The credit in 2004 is primarily attributable to changes of estimates in the calculation of DPAC in 2004 and growth in nonstandard personal auto premiums. The charges in 2003 and
Underwriting and operating expenses were up 8% in 2004 primarily due to a decrease in the allowance for doubtful reinsurance balances receivable in 2003 which did not recur in 2004. The decrease in 2003 was primarily due to expense reductions, primarily salaries and salary related expenses, and a decrease in the allowance for doubtful reinsurance balances receivable.
On January 31, 2005, the Company and the individual defendants filed a renewed motion in the Fort Worth Federal Court to dismiss the Second Amended Complaint for failure to state a cause of action on several grounds, including: (i) plaintiff failed to plead loss causation by linking any correction of alleged non-disclosures or deceptive disclosures in respect of Tri-State to a decline in the Company’s stock price; (ii) plaintiff failed to challenge the accuracy of the disclosed causes of reported losses which negatively impacted the Company’s stock price; (iii) plaintiff failed to plead that the Company’s alleged statements and omissions in respect of Tri-State were false when made or that the Company knew they were false when made; (iv) the alleged misrepresentations by defendants in respect of Tri-State were immaterial in the context of all disclosures provided to the market; (v) Tri-State was not material to the Company’s performance as a whole and overall; (vi) the Herb Hill lawsuit was not a material pending legal proceeding; (vii) the Company complied with generally accepted accounting principles in its treatment of goodwill associated with the Tri-State acquisition; and (viii) plaintiff failed to plead facts with particularity showing that the defendants acted intentionally or with severe recklessness with respect to the alleged misrepresentations and omissions. The plaintiff has made a filing in the Fort Worth Federal Court in opposition to this motion to dismiss.
The Second Amended Complaint does not specify the amount of damages plaintiff seeks. Discovery has not commenced. The Company believes that it has meritorious defenses to the claims asserted in plaintiff’s Second Amended Complaint and, although it cannot predict the outcome, intends to vigorously defend the action.
Introduction. On January 21, 2005, the Company consummated a recapitalization pursuant to agreements that it entered into on August 27, 2004 and that were approved by GNAC’s shareholders on January 18, 2005. The agreements were with Goff Moore Strategic Partners, L.P. (“GMSP”), then holder of the Company’s Series A and Series C Preferred Stock and approximately 5% of the outstanding Common Stock; Robert W. Stallings, the Chairman of the Board and then holder of the Company’s Series B Preferred Stock; and First Western Capital, LLC, a limited liability company (“First Western”) owned by James R. Reis. The recapitalization substantially reduced as well as extended the Company’s existing Preferred Stock redemption obligations and resulted in cash proceeds to the Company of approximately $8.7 million (before an estimated $2.2 million in transaction costs and approximately $3.4 million used to redeem the Series C Preferred Stock). The events leading up to, and the transactions constituting, the recapitalization are described below.
1999 GMSP Transaction. On October 4, 1999 and in conclusion of a strategic alternatives review process that the Board of Directors initiated in 1998 to seek out additional ways to maximize shareholder value (including the possible sale of the Company), the Company sold to GMSP, for an aggregate purchase price of $31,620,000, (i) 31,620 shares of Series A Preferred Stock (stated value $1,000 per share), which were convertible into 6,200,000 shares of Common Stock at a conversion price of $5.10 per share (subject to adjustment for certain events), (ii) the Series A Warrant (which expired unexercised on October 4, 2004) to purchase an aggregate of 1,550,000 - shares of Common Stock at an exercise price of $6.375 per share and (iii) the Series B Warrant expiring October 4, 2006 to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise of $8.50 per share. At closing, the Company and its insurance company subsidiaries entered into investment management agreements with GMSP, pursuant to which GMSP managed their respective investment portfolios. In the securities purchase agreement entered into between GMSP and the Company for the 1999 GMSP transaction, the Company agreed to nominate John C. Goff and another individual selected by GMSP, and to use its best efforts to cause them to be elected to the Board.
2001 GMSP Transaction. On March 23, 2001, the Company consummated another transaction with GMSP pursuant to which, among other things, the Company issued 3,000 shares of its newly created Series C Preferred Stock (stated value of $1,000 per share) to GMSP in exchange for an aggregate purchase price of $3 million in cash. The annual dividend rate on the Series C Preferred Stock was 10% until March 23, 2004 and 20% thereafter. The Series C Preferred Stock was redeemable at the Company’s option after March 23, 2006 and at GMSP’s option after March 23, 2007 at a price of $1,000 per share plus accrued and unpaid dividends. The Series C Preferred Stock was not convertible into Common Stock.
The agreement with GMSP in connection with the 2001 GMSP transaction was conditioned upon the following changes in the securities acquired by GMSP in the 1999 transaction: (i) the exercise prices of the Series A Warrant and the Series B Warrant held by GMSP were reduced to $2.25 per share and $2.5875 per share, respectively (each of these warrants provided for the purchase of 1,550,000 shares of Common Stock); and (ii) the Series A Preferred Stock was called for redemption by the Company so that on January 1, 2006 the Company would have become obligated to pay $1,000 per share for 31,620 shares ($31.6 million) to the holder to the extent that it could legally do so and, to the extent it could do so, the Company was obligated to pay quarterly an amount equal to 8% interest per annum on any unpaid balance.
The 2001 agreement with GMSP also provided an opportunity to convert the Company’s illiquid investments with a cost of $4.2 million to cash as of November 2002. In February 2002 and with GMSP’s consent, the Company exercised its option to require GMSP purchase the illiquid investments for approximately $2.1 million.
2001 Transactions with Robert W. Stallings. On March 23, 2001, the Company sold to Robert W. Stallings for $3 million in cash 3,000 shares of its newly created Series B Preferred Stock (stated value of $1,000 per share) and a warrant expiring March 23, 2006 to purchase an aggregate of 1,050,000 shares of Common Stock at $2.25 per share. The annual dividend provisions and the redemption provisions of the Series B Preferred Stock are the same as those for the Series C Preferred Stock. The Series B Preferred Stock was convertible into 1,333,333 shares of Common Stock at $2.25 per share. Mr. Stallings also entered into a consulting agreement pursuant to which he provided consulting services to the Company’s insurance subsidiaries for $300,000 per annum. In the securities purchase agreement entered into between Mr. Stallings and the Company for this transaction, the Company agreed to nominate Mr. Stallings, and use its best efforts to cause him to be elected to the Board.
Preferred Stock in Relation to Capital Base. At December 31, 2004, the capital base (total assets less total liabilities) of the Company was $46,546,545 and consisted of Shareholders’ Equity of $12,854,545 and three series of Redeemable Preferred Stock (the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock), which were classified under GAAP as mezzanine financing in the aggregate amount of $33,692,000. At December 31, 2004, there was $3,928,000 of unaccreted discount on Redeemable Preferred Stock that remained in Shareholders’ Equity. At December 31, 2004, the per common share Shareholders’ Equity was approximately $0.61, including unaccreted discount on Redeemable Preferred Stock of $0.19; less such unaccreted discount, the per common share Shareholders’ Equity was approximately $0.42 per common share. The aggregate redemption value at December 31, 2004 of the Preferred Stock was $37,620,000 stated value.
Background of the Recapitalization. On May 19, 2003 the Board appointed a Special Committee of disinterested, independent directors which was authorized to review any proposal submitted for any investment in a business venture by the Company in which any holder of Preferred Stock or other affiliate was a co-investor or otherwise financially interested. At the time the Company was considering entering the financial services business by acquiring a company already in that business. Since the Company did not have the necessary capital for the transaction, the Company considered obtaining the necessary capital by entering into a joint arrangement with the holders of its Preferred Stock who could have provided necessary capital. Negotiations for such a transaction never developed to the point that management brought it to the Special Committee for its consideration.
Also as part of the recapitalization, (i) Mr. Stallings acquired 13,459,741 shares of Common Stock in exchange for $4,629,042.44 cash, his 3,000 shares of outstanding Series B Preferred Stock and his warrant expiring March 23, 2006 to purchase 1,050,000 shares of Common Stock for $2.25 per share, and (ii) First Western acquired 6,729,871 shares of Common Stock in exchange for $4,037,922 in cash. The purchase price of these shares was $0.60 per share.
The recapitalization agreements with GMSP, First Western and Mr. Stallings provide that, at least until January 21, 2007, the Company will (i) continue to be registered under Section 12(g) of the Securities Exchange Act of 1934 and file reports on Forms 10-K, 10-Q and 8-K (or their equivalents) and proxy statements with the Securities and Exchange Commission and (ii) observe and comply with many of the corporate governance rules promulgated by the New York Stock Exchange (even though the Common Stock is not listed there).
The recapitalization agreements with First Western and Mr. Stallings provide that, at least until January 21,2007 neither of them will purchase or otherwise acquire additional shares of Common Stock if thereafter they would together beneficially own more than 37.5% of the voting stock (provided that they will not be deemed collectively to own more than 37.5% of the voting stock solely by reason of the acquisition of Common Stock by Messrs. Reis and Stallings pursuant to any of the existing or future incentive stock plans). Mr. Stalling’s recapitalization agreement provides that he shall be nominated to the Board for two years after closing and for so long thereafter as he beneficially owns at least 20% of the Common Stock. First Western’s recapitalization agreement provides that during this two year period and for so long thereafter as it owns at least 10% of the voting stock and in the event Mr. Stallings ceases to be a director, First Western may designate another individual (including Mr. Reis) to serve on the Board.
The following pro forma financial statements are presented: 1) a Pro Forma Consolidated Balance Sheet as of December 31, 2004 showing pro forma adjustments to the Consolidated Balance Sheet as of December 31, 2004 with Notes explaining the pro forma adjustments and 2) Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2004 showing pro forma adjustments to the Consolidated Statement of Operations for the Year Ended December 31, 2004 with Notes explaining the pro forma adjustments. The Pro Forma Consolidated Balance Sheet presents the effects of the transaction as if it were recorded as of December 31, 2004. The Pro Forma Consolidated Statement of Operations presents the effects of the transaction as if it were effective as of January 1, 2004. The pro forma results are not necessarily indicative of the results of operations which may occur in the future or that would have occurred had the recapitalization been consummated on the date indicated.
(A) Cash to be received from Mr. Stallings for purchase of 7,745,450 shares of Common Stock, cash to be received from First Western for purchase of 6,729,871 shares of Common Stock, less cash to be disbursed to redeem Series C Preferred Stock and cash to be disbursed for professional and other fees and expenses not yet paid.
(B) Professional and other fees and expenses paid that were recorded in Other assets and that will be charged to Additional paid-in capital.
(D) Retirement of the 3,000 shares of Series B Preferred Stock to be exchanged for 5,714,292 shares of Common Stock.
(E) Redemption of the 3,000 shares of Series C Preferred Stock for cash.
(F) To record par value at $.10 per share of Common Stock to be issued for transactions described in A, B, C, D and grant to Mr. Anderson of 200,000 shares of Common Stock and issuance of 400,000 shares of restricted Common Stock to him;
(G) To write-down the Series B Warrant and to cancel the Warrant issued to Mr. Stallings.
(J) To recognize unearned compensation on issuance of 400,000 shares of restricted Common Stock to Mr. Anderson at fair value of $1.65 per share (the actual market price per share at issuance date).
The preceding Pro Forma Consolidated Statement of Operations do not include the following nonrecurring items:
2) Regarding Net income to common shareholders, a nonrecurring deduction of $722,150 which represents the fair value of the Common Stock transferred to the holders of the Preferred Stock over the carrying amount of the Preferred Stock retired or redeemed.
(B) Additional compensation and compensation related expenses to be incurred in accordance with employment agreements pursuant to which Glenn W. Anderson, Robert W. Stallings and James R. Reis will be entitled to receive annual salaries of $340,000, $300,000 and $200,000, respectively, plus annual bonuses of 2%, 5% and 2.5%, respectively, of the Company’s EBIT as defined in their respective employment agreements.
(C) Reversal of historical accretion of discount and dividends paid on Redeemable Preferred Stock in 2004, less pro forma accretion of discount and dividends to be recognized on adjusted Series A Preferred Stock and additional compensation and compensation related expenses to be incurred in accordance with employment agreements.
(D) Net income to common shareholders divided by 61,084,960 shares of Common Stock outstanding (21,169,736 shares currently outstanding plus 39,915,224 shares to be issued).
(E) The effect of convertible preferred stock is antidulitive, therefore diluted net income per share is reported the same as basic net income per share.
In certain circumstances, Section 382 of the Internal Revenue Code may apply to materially limit the amount of the Company’s taxable income that may be offset in a tax year by the Company’s net operating losses carried forward from prior years (the “§ 382 Limitation”). The annual § 382 Limitation generally is an amount equal to the value of the Company (immediately before an “ownership change”) multiplied by the long-term tax-exempt rate for the month in which the change occurs (e.g., 4.27% if the ownership change occurred in March 2005). This annual limitation would apply to all years to which the net operating losses can be carried forward.
The primary sources of the insurance subsidiaries’ liquidity are funds generated from insurance premiums, net investment income and maturing investments. The short-term investments and cash are intended to provide adequate funds to pay claims without selling fixed maturity investments. At December 31, 2004, the insurance subsidiaries held short-term investments and cash that provide adequate liquidity for the payment of claims and other short-term commitments.
With regard to long term liquidity, the average duration of the investment portfolio is approximately .5 years. The fair value of the fixed maturity portfolio at December 31, 2004 was $710,346 above amortized cost, before taxes. Unrealized losses were not material at December 31, 2004 (see Note 2 of Notes to Consolidated Financial Statements). Various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 2004 and 2003, the balance on deposit for the benefit of such policyholders totaled $10,529,976 and $11,902,432, respectively.
Ceded unpaid C&CAE decreased primarily as a result of the decrease in unpaid C & CAE with regard to commercial claims subject to the commercial quota share reinsurance agreement. This balance represents unpaid C & CAE which have been ceded to reinsurers under the Company’s various reinsurance agreements, other than the reserve reinsurance cover agreement. These amounts are not currently due from the reinsurers but are expected to become due in the future when the Company pays the claim and requests reimbursement from the reinsurers.
Deferred Federal income taxes have a valuation allowance for its full amount recorded against the asset. This asset is primarily a tax benefit from net operating loss carry forwards, which can be used to offset tax expense on future operating earnings or capital gains. See earlier discussion under "Results of Operations.” A change in ownership of the Company’s stock greater than 50% (as specified under Internal Revenue Code Section 382) could severely limit the Company’s ability to recover this asset in future periods. See “Net Operating Loss Carryforwards.”
Funds held by reinsurers decreased as a result of the reinsurer on a nonstandard personal auto quota share reinsurance agreement from earlier years returning funds no longer needed to collateralize the Company’s obligation to the reinsurer. Additionally, funds held by the reinsurer under the commercial quota share reinsurance agreement were applied by the Company against the Company’s contingent commission obligation to the reinsurer, which also accounts for the decrease in Commissions payable.
Unpaid C & CAE decreased primarily as a result of the settlement of claims in the normal course and favorable development in the ultimate expected liabilities of nonstandard personal auto and commercial lines. As of December 31, 2004, the Company had $58,482,207 in net unpaid C & CAE (Unpaid C & CAE of $95,545,360 less Ceded unpaid C & CAE of $37,063,153). This amount represents management’s best estimate, as derived from the actuarial analysis and was set equal to the selected reserve estimate as established by an independent actuary. The independent actuary identified the recent adverse development in the Company’s unpaid C&CAE and the Company’s decision in 2002 to discontinue writing commercial lines as risk factors. In consideration of these risk factors the independent actuary believes that there are significant risks and uncertainties that could result in material adverse deviation of the unpaid C&CAE. The independent actuary has opined that the unpaid C&CAE: (a) meets the requirements of the insurance laws of the states, (b) are consistent with amounts computed in accordance with the Casualty Actuarial Society Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves and relevant standards of practice promulgated by the Actuarial Standards Board; and (c) make a reasonable provision for all unpaid C&CAE obligations of the Company under the terms of its contracts and agreements. Management has reviewed and discussed the results of the actuarial analysis with the actuary and believes the reserve estimate selected by the actuary to be the best estimate of reserves at this time.
due to continued adverse claims development and unprofitable results. The Company has been settling and reducing its remaining inventory of commercial claims. See Item 1, “Business -Recent Developments - Discontinuance of Commercial Lines.” As of December 31, 2004, 264 commercial and runoff claims remained. Included in these claims are 32 product liability claims, 30 construction defect type claims, 1 environmental claim and 1 asbestos claim. The average commercial lines claim at December 31, 2004 was approximately $169,400 per claim, at December 31, 2003 the average commercial lines claim was approximately $123,608 per claim.
Commissions payable decreased primarily due to contingent commission settlements made with the commercial quota share reinsurers during 2004.
Accounts payable increased primarily due to premiums payable to the carrier the Company uses to write nonstandard personal auto business in Texas (as a result of increased writings) and accrued expenses in conjunction with the recapitalization.
Deferred revenues decreased primarily as a result of reinsurance recoveries under the reserve reinsurance cover agreement. This balance is primarily comprised of C & CAE recoveries under this agreement which will be recognized as Other income in future periods based upon the ratio of actual C & CAE paid to the total of potential C & CAE payable under this reinsurance agreement.
The Company is not aware of any current recommendations by regulatory authorities, which if implemented, would have a material effect on the Company’s liquidity, capital resources or results of operations. The Company’s statutory capital exceeds the benchmark capital level under the Risk Based Capital formula for its insurance companies. Risk Based Capital is a method for establishing the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The tragic events of September 11, 2001 did not impact the Company’s financial results for 2002, 2003 and 2004.
The Company’s unpaid C & CAE do not have contractual maturity dates; however, based on historical payment patterns, the amount presented is management’s estimate of expected timing of C & CAE payments. The timing of C & CAE payments is subject to significant uncertainty. The Company maintains a portfolio of marketable investments with varying maturities and a substantial amount of short-term investments intended to provide adequate cash flows for C & CAE payments.
On January 21, 2005, the Company consummated a recapitalization pursuant to agreements that it entered into on August 27, 2004 and that were approved by GNAC’s shareholders on January 18, 2005. In the recapitalization $13,500,000 of the Series A Preferred Stock were exchanged for Common Stock. The Company will be obligated to pay $18,120,000 to the holder of the Series A Preferred Stock on January 1, 2011 if not converted. From January 1, 2005 dividends on the Series A Preferred Stock accrue at a rate of 6% per annum until January 1, 2006 and then they accrue at 10% per annum thereafter until redemption. The Series B and Series C Preferred Stock were retired. As a result of the recapitalization mentioned previously, the investment management agreements of the Company and its insurance company subsidiaries with GMSP were terminated. See Note 12 of Notes to Consolidated Financial Statements.
There are no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships of the Company with unconsolidated entities or other persons that have, or may have, a material effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.
Statements made in this report that are qualified with words such as “will be,” “may,” “anticipates,” “intends to engage,” “expects,” “could be impacted,” etc., are forward-looking statements. Investors are cautioned that important factors, representing certain risks and uncertainties, could cause actual results to differ materially from those contained in the forward-looking statements, and they should not place undue reliance on such statements. These factors include, but are not limited to, (a) the change in operational risks associated with increased premium production and expansion into new markets or states (as discussed under “Business Operations - Nonstandard Personal Auto Line”,) (b) heightened competition from existing competitors and new competitor entrants into the Company’s markets, (c) the extent to which market conditions firm up, the acceptance of higher prices in the market place and the Company’s ability to realize and sustain higher rates, (d) contraction of the markets for the Company’s business, (e) factors considered by A.M. Best in its rating of the Company, and acceptability of the Company’s current A.M. Best rating of “B-” (Fair), with a stable outlook, or its future rating, to its end markets, (f) the Company’s ability to effectively adjust and settle remaining claims associated with its exit from the commercial insurance business, (g) the ongoing level of claims and claims-related expenses and the adequacy of claim reserves, (h) the outcome of pending litigation, (i) the effectiveness of investment strategies implemented by the Company, (j) continued justification of recoverability of goodwill in the future, (k) the availability of reinsurance and the ability to collect reinsurance recoverables, including amounts that may become recoverable from reinsurers with less than A.M. Best “Secure” ratings, (l) the limitation on the Company’s ability to use net operating loss carryforwards as a result of constraints caused by ownership changes within the meaning of Internal Revenue Code Section 382, and (m) general economic conditions, including fluctuations in interest rates. In addition, the actual emergence of losses and loss expenses may vary, perhaps materially, from the Company’s estimate thereof, particularly with respect to new business and new markets, because (a) estimates of loss and loss expense liabilities are subject to large potential errors of estimation as the ultimate disposition of claims incurred prior to the financial statement date, whether reported or not, is subject to the outcome of events that have not yet occurred (e.g., jury decisions, court interpretations, legislative changes, subsequent damage to property, changes in the medical condition of claimants, public attitudes and social/economic conditions such as inflation), (b) estimates of losses do not make provision for extraordinary future emergence of new classes of losses or types of losses not sufficiently represented in the Company’s historical data base or which are not yet quantifiable, and (c) estimates of future costs are subject to the inherent limitation on the ability to predict the aggregate course of future events. A forward-looking statement is relevant as of the date the statement is made and the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which the statements are made. Please refer to the Company’s recent SEC filings for further information regarding factors that could affect the Company’s results.
The following Consolidated Financial Statements are on pages 59 through 96:
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002
The following Consolidated Financial Statements Schedules are on pages 97 through 106: