<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1998
REGISTRATION NO. 333-50511
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FINANCIAL PACIFIC INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6331 68-0311660
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
3850 ATHERTON ROAD
ROCKLIN, CA 95765
(916) 630-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT C. GOODELL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FINANCIAL PACIFIC INSURANCE GROUP, INC.
3850 ATHERTON ROAD
ROCKLIN, CALIFORNIA 95765
(916) 630-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JANIS B. SALIN, ESQ. MICHAEL J. CONNELL, ESQ.
RIORDAN & MCKINZIE MORRISON & FOERSTER LLP
300 SOUTH GRAND AVENUE, 29TH FLOOR 555 W. FIFTH STREET, SUITE 3500
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90013
(213) 629-4824 (213) 892-5200
</TABLE>
APPROPRIATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: as soon as practicable after Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If the Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY
STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS Subject to completion, dated June , 1998
- --------------------------------------------------------------------------------
2,500,000 SHARES
(FINANCIAL PACIFIC LOGO)
FINANCIAL PACIFIC INSURANCE GROUP, INC.
Common Stock
Of the shares of Common Stock offered hereby, 2,000,000 shares are being
sold by the Company and 500,000 shares are being sold by the Selling
Stockholders. The Company will not receive any proceeds from the sale of the
shares by the Selling Stockholders. Prior to the Offering, there has been no
public market for the Company's Common Stock. It is currently estimated that the
initial public offering price will be between $9 and $11 per share. See
"Underwriting" for information relating to the method of determining the initial
public offering price. The Common Stock has been approved, subject to issuance,
for quotation on the Nasdaq National Market under the symbol "FPAC".
------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<S> <C> <C> <C> <C>
UNDERWRITING PROCEEDS TO THE
PRICE TO DISCOUNT AND PROCEEDS TO THE SELLING
PUBLIC COMMISSION(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------------------------
Per Share............ $ $ $ $
- -------------------------------------------------------------------------------------------------------------------------
Total(3)............. $ $ $ $
=========================================================================================================================
</TABLE>
(1) See "Underwriting" for indemnification and other compensation
arrangements with the Underwriters.
(2) Before deducting expenses estimated at $700,000, which will be paid by
the Company.
(3) The Company has granted the Underwriters a 45-day option to purchase up
to an aggregate of 375,000 additional shares to cover over-allotments, if
any. If the option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to the Company will be $ ,
$ and $ , respectively.
------------------------------------
The shares of Common Stock are offered by the several Underwriters subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made at the offices of EVEREN Securities, Inc. or through the facilities
of the Depository Trust Company, New York, New York on or about June , 1998.
EVEREN SECURITIES, INC.
<PAGE> 3
(MAP OF UNITED STATES SHOWING STATES IN WHICH THE COMPANY IS LICENSED AND HAS
LICENSE APPLICATIONS PENDING GOES HERE)
Although the Company is licensed in all the states indicated, in 1997, 100%
of its direct premiums written were produced in California.
------------------------
State insurance holding company statutes applicable to the Company
generally prohibit any person from acquiring control of the Company, and thus,
indirect control of its insurance subsidiary, without the prior approval of the
appropriate insurance regulators. Generally, any person who acquires beneficial
ownership of ten percent (10%) or more of the outstanding voting stock of the
Company would be presumed to have acquired such control unless appropriate
insurance regulators, upon application, determine otherwise.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING THE PURCHASE OF THE COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING
TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF
MAINTAINING THE PRICE OF THE COMMON STOCK OR THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the consolidated financial statements and notes thereto,
appearing elsewhere in this Prospectus. Unless the context otherwise indicates,
the "Company" or "Financial Pacific" refers to Financial Pacific Insurance
Group, Inc. (the "Group") and its consolidated subsidiaries including the
Group's wholly owned insurance subsidiary, Financial Pacific Insurance Company
("FPIC"). Unless indicated otherwise, the information contained in this
Prospectus (i) is presented in conformity with generally accepted accounting
principles ("GAAP"); (ii) assumes the Underwriters' over-allotment option is not
exercised; (iii) reflects a 394.375 for 1 stock split effected on April 14,
1998; (iv) assumes the conversion of all the outstanding shares of Series A
Convertible Preferred Stock ("Series A Stock") into an aggregate of 1,735,251
shares of Common Stock of the Company (the "Common Stock"); and (v) assumes the
exercise of certain outstanding Warrants, into an aggregate of 593,691 shares of
Common Stock. Certain insurance terms used herein are defined in the "Glossary
of Selected Insurance Terms." This Prospectus contains forward-looking
statements that involve risks and uncertainties. Actual results could differ
materially from those discussed in the forward-looking statements as a result of
certain factors including those set forth under "Risk Factors" and elsewhere in
this Prospectus. Prospective investors should carefully consider the information
set forth under the heading "Risk Factors."
THE COMPANY
Financial Pacific is a regional, custom-underwriting insurance company. The
Company writes policies for small and medium-sized commercial customers within
specified niche markets which are typically overlooked by large insurance
companies. During 1997, the Company derived direct premiums written from artisan
contractors (40%), commercial property owners (5%), light industrial businesses
(5%), a variety of other businesses (25%) and special programs (25%). The
special programs were designed for refuse haulers, farm labor contractors,
bowling centers and restaurants. For these programs, the Company has developed
underwriting expertise and focused marketing materials and applies rate
deviations or coverage extensions. The Company writes the vast majority of its
business in rural markets in California. FPIC is currently rated A-(excellent)
by A.M. Best Company ("A.M. Best").
Direct premiums written increased from $15.1 million in 1994, the Company's
first full year of operation, to $39.5 million in 1997. Net income increased
from $777,000 in 1994 to $2.3 million in 1997. The Company's combined ratio,
which is a measure of underwriting profitability, was 92% in 1997, well below
the industry average of 102%. Much of the Company's growth and profitability is
attributable to its retention of renewal policies. Renewal retention rates were
81%, 83% and 84% in the three years ended 1995, 1996 and 1997, respectively.
The Company markets insurance through 232 independent insurance agents, as
of March 31, 1998, all of which are located in California. The Company believes
its relationship with its agents allows it to provide ongoing and attentive
service to its targeted customer base. The Company's strategy is to focus on
writing policies that typically generate between $1,100 to $5,000 in annual
premiums. These policies are typically written for small businesses having one
to five employees and for medium-sized businesses having more than five but less
than 50 employees. Management believes this market has been overlooked by many
of the larger insurance companies as a result of lower annual premiums per
policy, and in some cases, the remote locations of the policyholders and the
agents.
During 1997, FPIC wrote 100% of its business in California. In that year,
approximately 58% of FPIC's direct premiums written was for Commercial
Multi-Peril Liability ("CMP") coverages, 17% was for Commercial Automobile
Liability coverages, 11% was for Commercial Property coverages, 6% was for
Commercial Automobile Physical Damage coverages, and the remainder was for
Inland Marine, Surety and Fidelity. The Company is also engaged, through its
wholly owned insurance agency, Financial Pacific Insurance Agency ("FPIA"), in
the mail order distribution of license and permit surety bonds in 36 states on
behalf of Markel Corporation. These bonds are low limit surety commitments
pledged to a regulatory agency as a condition of obtaining and maintaining a
business license.
3
<PAGE> 5
The Company has been able to maintain a high level of service and fast
turnaround time by using its proprietary integrated tracking software
("QuoteTracker(TM)") which enables management to track each policy from initial
application through renewal, along with tracking the performance of individual
agents and employees. The system provides data on a real-time basis and allows
for greater visibility of processing time and underwriting performance.
The Company is raising capital through this Offering to allow for continued
growth of its business and to repay its long-term debt. Insurance regulators and
rating services presently recommend that the Company's ratio of annual net
premiums written to surplus as regards policyholders not exceed 3 to 1. The
Company's ratio at March 31, 1998 was 2.1 to 1.
The Company's long term growth strategies, while continuing to emphasize
small to medium-sized businesses as its primary target market, are to:
- RETAIN MORE DIRECT PREMIUMS WRITTEN. Due to its limited capital, the
Company has historically ceded as much as 43% of its annual direct
premiums written to reinsurers. As a result of increased capital from this
Offering, the Company will be able to retain a greater portion of premium
income.
- EXPAND EXISTING BUSINESS. The Company intends to pursue further growth in
California by selectively appointing new agents and by attracting a larger
percentage of business from each of its existing agents through
cross-selling of its existing lines of business.
- DEVELOP NEW PROGRAMS. The Company will continue to focus on developing
new specialty insurance programs for carefully selected market segments in
which the Company has identified niche opportunities. Such programs will
replicate those successfully established in prior periods including those
developed for refuse haulers, restaurants and bowling centers.
- EXPAND SURETY BUSINESS. The Company began writing surety business in 1995
to complement CMP. This line of business provides payment or performance
guarantees for construction contracts or other obligations. The Company
wrote nearly $1.2 million in profitable surety premium with one staff
underwriter in 1997. The Company plans to emphasize surety as a line of
business by increasing its marketing efforts and adding to its staff.
- EXPAND GEOGRAPHICALLY. The Company intends to expand its specialty
insurance business into other states. Beginning with the states adjoining
California, the Company will select and appoint agents in rural areas of
those states to sell its products. Its marketing efforts will focus on the
insurance programs in which the Company has developed an expertise in
underwriting. The Company is licensed currently to do business in Arizona,
California, Idaho, Missouri, Montana, Nebraska, Nevada, North Dakota,
Oregon, South Dakota and Utah and has license applications pending in
eight additional states.
The Company is a Delaware corporation formed in 1993, whose offices are
located at 3850 Atherton Road, Rocklin, California 95765; telephone
(916) 630-5000; www.financialpacific.com.
THE OFFERING
Common Stock offered
hereby:
By the Company........... 2,000,000 shares
By the Selling
Stockholders............. 500,000 shares
Common Stock to be
outstanding after the
Offering................. 4,816,897 shares(1)
Use of proceeds............ To contribute additional capital to FPIC which will
allow it to retain a greater portion of direct
premiums written currently being ceded to
reinsurers; to permit greater underwriting volume
of its insurance products; to repay senior debt and
for general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market
Symbol................... FPAC
4
<PAGE> 6
- ---------------
(1) Excludes 82,819 and 153,525 shares of Common Stock reserved for issuance
upon exercise of options outstanding as of March 31, 1998 pursuant to grants
to officers and employees of the Company and certain Warrants to purchase
Common Stock, respectively, outstanding as of March 31, 1998. Includes
593,691 shares of Common Stock to be issued upon exercise of certain
Warrants to purchase Common Stock and 1,735,251 shares of Common Stock to be
issued upon the conversion of the Series A Stock concurrently with the
closing of the Offering. See Notes to Consolidated Financial Statements.
SUMMARY CONSOLIDATED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- ------------------
1993(2) 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- --------- ------- --------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Direct premiums written............. $ 6,094 $15,072 $ 24,695 $ 31,927 $ 39,512 $ 9,203 $ 10,384
Premiums ceded...................... (2,345) (5,785) (10,653) (13,674) (12,576) (2,941) (3,096)
------- ------- -------- -------- --------- ------- --------
Net premiums written.......... 3,749 9,287 14,042 18,253 26,936 6,262 7,288
------- ------- -------- -------- --------- ------- --------
Net premiums earned........... 2,380 6,701 12,060 14,987 22,854 4,741 6,583
Commissions......................... 159 213 105 628 709 170 207
Investment income, net of
expenses.......................... 523 750 1,028 1,449 1,720 405 510
Net realized gains (losses) on sales
of investments.................... 68 (246) 466 52 (46) -- --
Other income, net................... (107) 502 578 547 800 178 220
------- ------- -------- -------- --------- ------- --------
Total revenues.................... 3,023 7,920 14,237 17,663 26,037 5,494 7,520
Expenses:
Losses and loss adjustment
expenses.......................... (273) 2,944 6,325 9,750 12,748 2,541 3,415
Policy acquisition costs............ 610 1,493 3,957 4,785 7,440 1,524 2,383
Contingent ceding commission........ -- (422) (1,246) (3,222) (1,511) (450) (62)
General operating costs............. 731 2,297 1,712 1,929 2,443 760 437
Agency expenses..................... 136 253 145 688 721 167 202
Interest expense.................... 21 113 128 693 617 163 151
------- ------- -------- -------- --------- ------- --------
Total expenses.................... 1,225 6,678 11,021 14,623 22,458 4,705 6,526
------- ------- -------- -------- --------- ------- --------
Income before taxes................. 1,798 1,242 3,216 3,040 3,579 789 994
------- ------- -------- -------- --------- ------- --------
Income tax provision.......... 588 465 1,066 1,037 1,237 271 341
------- ------- -------- -------- --------- ------- --------
Net income.................... $ 1,210 $ 777 $ 2,150 $ 2,003 $ 2,342 $ 518 $ 653
======= ======= ======== ======== ========= ======= ========
EARNINGS PER SHARE(3):
Basic............................. $ 5.41 $ 1.60 $ 4.42 $ 4.12 $ 4.82 $ 1.06 $ 1.34
Diluted........................... $ 1.22 $ 0.40 $ 0.94 $ 0.69 $ 0.79 $ 0.17 $ 0.22
Weighted average diluted shares... 988 1,956 2,292 2,901 2,970 2,972 2,972
GAAP RATIOS(4):
Loss ratio........................ (7.0)% 43.9% 52.4% 65.1% 55.8% 53.6% 51.9%
Expense ratio..................... 56.1 52.0 36.6 23.3 36.3 38.7 41.7
------- ------- -------- -------- --------- ------- --------
Combined ratio.................... 49.1% 95.9% 89.0% 88.4% 92.1% 92.3% 93.6%
======= ======= ======== ======== ========= ======= ========
STATUTORY RATIOS(4):
Combined ratio.................... 35.6% 95.4% 89.3% 90.3% 92.3% 91.4% 92.8%
======= ======= ======== ======== ========= ======= ========
Industry combined ratio(5)........ 112.2% 110.1% 110.5% 111.0% 101.8% -- --
OTHER DATA:
Underwriting profit(6)............ $ 1,312 $ 389 $ 1,585 $ 1,745 $ 1,734 $ 366 $ 410
Surplus as regards
policyholders................... 5,890 5,773 12,387 13,788 14,262 12,970 14,075
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED(7)
-------- ---------------
(In thousands, except
per share data and ratios)
<S> <C> <C>
BALANCE SHEET AND OTHER DATA:
Total cash and investments.................................. $34,855 $50,886
Total assets................................................ 72,651 88,682
Unpaid losses and loss adjustment expenses.................. 22,236 22,236
Total debt(8)............................................... 4,986 --
Stockholders' equity........................................ 14,088 35,119
Book value per common share(3).............................. $ 6.18 $ 7.29
Surplus as regards policyholders(9)......................... $14,075 $30,106
Ratio of annualized net premiums written to surplus as
regards policyholders(10)................................. 2.1x 1.0x
</TABLE>
- ---------------
(1) Other than the statutory combined ratios, surplus as regards policyholders
and ratio of net premiums written to surplus as regards policyholders, which
are presented in accordance with statutory accounting principles ("SAP"),
all data is presented in accordance with GAAP. See "Glossary of Selected
Insurance Terms."
(2) Effective November 12, 1993, the Group completed the acquisition of FPIC and
FPIA pursuant to the Stock Purchase Agreement dated June 2, 1993. Because
management of the Group had effective control of FPIC and FPIA as of May 26,
1993, the acquisition has been accounted for as of that date. Accordingly,
the 1993 consolidated financial statements include results of operations for
the period of May 26, 1993 through December 31, 1993.
(3) All periods adjusted to reflect a 394.375 for 1 stock split effective April
14, 1998. Book value per common share is based on stockholders' equity
adjusted for anticipated proceeds from the exercise of the Senior Note
Warrants and outstanding shares as of the calculation date. Outstanding
shares include Common Stock issued and outstanding as of the calculation
date as well as Common Stock issued in conjunction with the anticipated
conversion of Series A Stock and exercise of Senior Note Warrants.
(4) During 1993, in conjunction with the acquisition, management determined that
the Company's IBNR reserves were redundant and recorded a reserve reduction
of $2.4 million.
(5) Source: "Best's Insurance Reports Property/Casualty United States, 1997
Edition." The 1997 ratio is based on A.M. Best's estimate contained in
January 1998, "Review Preview -- Property/Casualty." A comparison of a
company's combined ratio with the industry combined ratio does not
necessarily indicate that a company has performed well or poorly as compared
with its peers.
(6) Underwriting profit represents the difference between premiums earned and
underwriting expenses. Underwriting profit may not provide an accurate
comparison among companies because it is not necessarily computed
identically by all companies. The use of such information is intended only
to supplement the conventional income statement presentation and is not to
be considered as an alternative to net income, cash flows or any other
indicator of the Company's operating performance which is presented in
accordance with GAAP.
(7) Gives effect to the sale of 2,000,000 shares in the Offering (at an assumed
initial public offering price of $10.00 per share) and the transactions
contemplated under "Use of Proceeds."
(8) Effective December 28, 1995, the Company issued $5 million in Senior Notes
due January 1, 2001 (the "Senior Notes"). The Senior Notes were issued in
conjunction with warrants for the purchase of 593,691 shares of the
Company's Common Stock at the price of $5.61 per share (the "Senior Note
Warrants"). The proceeds from the issuance of the Senior Notes were
contributed to FPIC's capital.
(9) Surplus as regards policyholders is derived from financial statements
prepared in accordance with SAP prescribed or permitted by the California
Department of Insurance (the "DOI"), a comprehensive basis of accounting
other than GAAP. Statutory financial information, and the ratios derived
from such information, should not be considered an alternative to
information derived from financial position, results of operations or cash
flows determined in accordance with GAAP.
(10) Ratio of net premiums written to surplus as regards policyholders was
calculated based on annualizing net premiums written for the quarter ended
March 31, 1998 as compared to surplus as regards policyholders as of March
31, 1998.
6
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following
information should be considered carefully by potential purchasers in evaluating
the Company, its business and the shares of Common Stock offered hereby. Certain
statements included in this Prospectus, including, without limitation,
statements containing the words "believes", "anticipates", "intends", "expects",
"will" and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the important factors set forth below and
elsewhere in this Prospectus. Given these uncertainties, potential purchasers of
the Common Stock offered hereby are cautioned not to place undue reliance on
such forward-looking statements.
NATURE OF THE COMPANY'S BUSINESS
All of the Company's direct premiums written (which are the Company's
largest source of revenue) are attributable to property/casualty insurance,
which is cyclical in nature and has historically been characterized by periods
of relatively high levels of price competition, less restrictive underwriting
standards and generally low premium rates ("Soft Market"), followed by periods
of capital shortages resulting in a lack of insurance availability, relatively
low levels of competition, more selective underwriting of risks and relatively
high premium rates ("Hard Market"). A Soft Market has existed for several years
with premiums decreasing and competition remaining at high levels. Historically,
the unpredictability and competitive nature of the property/casualty insurance
industry have contributed to significant quarter-to-quarter and year-to-year
fluctuations in underwriting results and net income. Many of the factors which
have resulted in the current Soft Market in the property/casualty insurance
industry continue and the Company cannot predict if, or when, the market
conditions for the property/casualty insurance industry, including the product
lines sold by the Company will improve. The Company's profitability is affected
by many factors, including not only rate competition, but also severity and
frequency of claims, fluctuations in interest rates that affect investment
returns, regulation, court decisions, natural disasters, the legislative
climate, and general economic conditions and trends, such as inflationary
pressures that may affect the adequacy of reserves, all of which are
substantially beyond the control of the Company.
One of the distinguishing features of the property/casualty industry is
that prices are set before costs are known because premium rates for individual
policies are determined before losses for such policies are reported. Changes in
statutory and case law can dramatically affect the liability associated with
known risks after the insurance contract is in place. The number of competitors
and the similarity of products offered, as well as regulatory constraints, limit
the ability of property/casualty insurers such as the Company to increase prices
in response to declines in profitability. In addition, during periods of high
interest rates, some property/casualty insurers may be willing to absorb
underwriting losses in order to generate funds for investment, thereby
prolonging low premium rates which are not adequate to cover underwriting losses
and expenses. As a result of these factors, the Company may experience
significantly lower premiums in the future.
Most insurance underwriting decisions are based on assumptions about events
that will occur over a period of future years and are generally based on
actuarial projections and historical data reflecting the collective experience
of large groups of insureds. The actuarial projections may not accurately
predict the aggregate obligations of any given insurer. Because the Company's
experience represents an insignificant portion of the industry's experience,
actuarial assumptions based on aggregate industry data may not be reflective of
actual obligations to be incurred. With respect to underwriting experience
(decisions concerning the issuance of its policies), the Company relies heavily
on its own underwriting experience.
GEOGRAPHIC AND PRODUCT LINE CONCENTRATION
Virtually all of the Company's direct premiums written to date have been
attributed to policies written in California. During the years ended December
31, 1995, 1996 and 1997, 95% to 100% of direct premiums written by the Company
were derived from policies issued to insureds located in northern and central
7
<PAGE> 9
California, where it is estimated that only 30% of California's population
currently resides. The Company's revenues and profitability are therefore
subject to prevailing economic, regulatory, demographic and other conditions in
California. The Company is presently evaluating expansion into other states
where management believes there are favorable insurance climates. The Company is
currently licensed to transact property/ casualty insurance business in
California and ten other states (Arizona, Idaho, Missouri, Montana, Nebraska,
Nevada, North Dakota, Oregon, South Dakota and Utah). The Company has license
applications pending in eight additional states (Arkansas, Colorado, Iowa,
Kansas, Minnesota, New Mexico, Washington and Wisconsin). Management believes it
will likely receive at least three of these state licenses before the end of
1998. The Company may need additional funds to finance any such expansion and
there can be no assurance that such funds will be available. Even if the Company
obtains the funds necessary to expand, there can be no assurance that the
Company will be able to overcome competition and/or regulatory barriers or that
any such expansion, if completed, will be successful. See
"Business -- Competition" and "-- Regulation."
REINSURANCE CONSIDERATIONS
The Company depends upon its ability to reinsure certain risks insured by
the Company. The amount, availability and cost of reinsurance are subject to
prevailing market conditions beyond the control of the Company, and they affect
the Company's ability to write additional premiums and its profitability. If the
Company were unable to secure reinsurance at competitive prices and terms, the
Company's results of operations could be adversely impacted. The maintenance of
reinsurance does not affect the Company's direct liability to its policyholders
on the business it writes. Although the Company's reinsurance is currently
maintained with several reinsurers rated A- (excellent) or better by A.M. Best,
one of the Company's reinsurer's insolvency or inability to make payments under
the terms of a reinsurance treaty could have a material adverse effect on the
Company. See "Business -- Reinsurance."
RELIANCE ON INDEPENDENT INSURANCE AGENTS
The failure or inability of independent insurance agents to market the
Company's insurance programs successfully could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company principally markets its insurance programs through 232 independent
insurance agents as of March 31, 1998. The agents are not obligated to promote
the Company's products and many sell or promote competitors' insurance products
in addition to the Company's products. Independent insurance agents produced
100% of the Company's direct premiums written during 1997. In 1997, 81% of the
Company's business was produced by its top 90 agents. No agent accounted for
more than 4% of the Company's direct premiums written in 1997. As a result, the
Company's business depends in part on the marketing efforts of these agents and
on the Company's ability to offer insurance programs and services that meet the
requirements of the agents and customers of these agents. See
"Business -- Marketing."
ADEQUACY OF LOSS RESERVES
The Company is required to maintain adequate reserves to cover its
estimated ultimate liability for losses and loss adjustment expenses ("LAE")
with respect to reported, and to Incurred But Not Reported ("IBNR"), claims as
of the end of each accounting period. These reserves are estimates of what the
Company expects the ultimate settlement and administration of claims will cost,
and are based on facts and circumstances then known, predictions of future
events, estimates of future trends in claims severity and other variable,
subjective factors. There is no method for precisely estimating the ultimate
liability. In recent years, a number of courts have issued decisions expanding
civil liability. Such decisions have resulted in higher damage awards to injured
parties. In many cases, such decisions have also resulted in liability and
increased losses to property/casualty insurers. In addition, the Company relies
on policy language, developed by the Company and by others, to exclude or limit
coverage. If such language is held by a court to be invalid or unenforceable it
could materially adversely affect the Company's financial position. This
possibility of expansion of insurers' liability either through new concepts of
liability or a refusal to accept restrictive policy language has added to the
inherent uncertainty of reserving for losses. Although management believes that
adequate provision has been made for loss reserves, the establishment of
appropriate reserves is an inherently
8
<PAGE> 10
uncertain process, and there can be no assurance that ultimate losses will not
exceed the Company's loss reserves and have a material adverse effect on the
Company's results of operations and financial condition. If the Company's
reserves should be inadequate, the Company will be required to increase reserves
with a corresponding increase in losses and LAE incurred and reduction in the
Company's net income and stockholders' equity in the period in which the
deficiency is identified. See "Business -- Reserves."
RISKS RELATED TO EXPANSION STRATEGY
Since 1993, the Company has experienced significant growth in its revenues,
policyholders and scope of operations. This growth has required and will
continue to require the Company to obtain additional capital, primarily to fund
FPIC. The Company intends to use a significant portion of the net proceeds from
this Offering to increase the surplus as regards policyholders of FPIC. If the
Company is unable to generate sufficient capital, either internally or from
outside sources, it could be required to slow its growth. The Company intends to
pursue further growth opportunities through greater penetration in existing
markets and expansion into new jurisdictions (see "Business -- Growth
Strategy"). As the Company expands, it will be underwriting policies for
insureds in industries and geographic areas less familiar to the Company. In
addition, the Company may rely to a greater extent on third party providers for
assistance in adjusting claims and various administrative matters in its new
markets. The Company's growth has also resulted in, and is expected to continue
to create, new and increased responsibilities for management personnel, as well
as additional demands on the Company's operating and financial systems. The
Company's further growth will depend on the efforts of key management personnel
and on the Company's ability to attract and retain qualified persons, to enhance
managerial systems for its operations, and to integrate successfully new
employees and systems into its existing operations. If the Company is unable to
continue to manage growth effectively, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Business Strategy."
COMPETITION
The property/casualty insurance industry is highly competitive. The Company
competes with other property/casualty insurers both in the recruitment and
retention of qualified independent agents to sell its products. Success in
recruiting and retaining independent agents willing to sell the Company's
products or services is dependent upon the commission rates, services, and the
ability of the insurer to provide products that meet the needs of the agent and
the agent's customers.
In selling its insurance products, the Company competes with other insurers
through independent agents (including insurers represented by the independent
agents who represent the Company), with insurers having their own agency
organizations and with direct sellers of insurance products. There are numerous
companies competing for business in the geographic areas in which the Company
operates. No single company dominates the marketplace, but many of the Company's
competitors have more established national reputations and substantially greater
financial resources and market share than the Company.
The Company pays its agents a base commission of 15% with additional
commission for meeting increasing volume levels. Should other insurers begin
paying higher commissions than the Company, this would present a competitive
disadvantage in attracting and retaining high-quality agents. While recognizing
the significance of the rate of commission, the Company believes its efforts to
serve the agents and their customers by providing superior service in
underwriting and claims processing will allow it to continue to compete with
other insurers. See "Business -- Competition."
IMPORTANCE OF AN A.M. BEST RATING
A.M. Best, an independent insurance rating agency, assigned FPIC a B++
(very good) rating in 1994. In 1996, A.M. Best upgraded FPIC's rating to A-
(excellent). An A- rating is assigned to companies which have a balance, in A.M.
Best's opinion, of excellent financial strength, operating performance and
market profile when compared to the standards established by A.M. Best and have
a good ability to meet their
9
<PAGE> 11
ongoing obligations to policyholders. A- is A.M. Best's fourth highest rating
classification out of 15 ratings. While the Company does not expect any
reduction in its A.M. Best rating, there can be no assurance that the Company
will continue to be rated A-. Any significant decline in the Company's future
ratings could have a material impact on its relationship with clients, and thus,
a material adverse effect on the Company. A.M. Best rates firms both on quality
and on size. The size categories range from I, which represents surplus as
regards policyholders of less than $1 million, to XV, which represents surplus
as regards policyholders of greater than $2 billion. Prior to the Offering, FPIC
was financial size V, representing surplus as regards policyholders between $10
million and $25 million. Following this Offering, it is expected that FPIC will
be category VI, representing surplus as regards policyholders between $25
million and $50 million. When considering whether to accept a Financial Pacific
policy, customers often review both the rating and the financial size category.
While many customers and potential customers view an A- rating as sufficient,
there are others that require financial category sizes of VII and greater. There
can be no assurance that customers will continue to accept FPIC's rating and
financial category regardless of the Offering. See "Business -- Ratings."
LIMITS ON WRITING INSURANCE
The DOI and insurance regulators in all other states in which the Company
is licensed, presently recommend that the Company's annual net premiums written
not exceed three times (300%) its surplus as regards policyholders. As of March
31, 1998, the Company's annual net premiums written to surplus as regards
policyholders was 2.1 to 1. This limitation could restrict the Company's future
growth and profitability unless the Company is able to increase its surplus as
regards policyholders or modify its reinsurance arrangements to cede more of its
premiums. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Business -- Regulation -- Limits on Writing Business" and
"-- Surplus as Regards Policyholders."
RELIANCE ON KEY PERSONNEL
The Company depends, and will continue to depend, on the services of Robert
C. Goodell, the Company's Chairman, President and Chief Executive Officer, as
well as the other members of the senior management team. The Company has entered
into an employment agreement with Mr. Goodell for a one-year term. This
agreement will automatically renew at the end of such term and each anniversary
thereof for a successive one-year term unless terminated in accordance with such
agreement. See "Management -- Employment Agreements." In 1991, Mr. Goodell was
diagnosed with a remitting, relapsing form of Multiple Sclerosis that is being
treated with medication. While Mr. Goodell does not have any health problems
today that materially affect his ability to perform his regular duties, his
condition could deteriorate which could adversely affect his future performance.
The Company is the sole beneficiary of a key man life insurance policy in the
amount of $3.0 million which it maintains on Mr. Goodell. The loss of Mr.
Goodell or any of the other senior managers could have a material adverse effect
on the business of the Company.
REGULATIONS, PENDING LEGISLATION AND CASE LAW
The Company and FPIC, as a California domiciled insurer, are subject to
extensive regulation by the DOI and the California Commissioner of Insurance
("Commissioner"). The Company is also subject to extensive regulation by the
insurance regulatory agencies of Arizona, Idaho, Missouri, Montana, Nebraska,
Nevada, North Dakota, Oregon, South Dakota and Utah. The Company will also
become subject to regulation in each jurisdiction in which it becomes licensed
to transact business. Such regulation is primarily for the protection of
policyholders rather than stockholders and could limit the Company's ability to
react to changes in its marketplace or take advantage of new opportunities in a
timely manner. Changes in such regulation could materially and adversely affect
the Company's operations and financial condition. The nature and extent of such
regulation varies from jurisdiction to jurisdiction, but typically involves: (i)
standards of solvency and minimum amounts of capital and surplus which must be
maintained; (ii) limits on types and amounts of investments; (iii) restrictions
on the size of risks which may be insured by a single company; (iv) licensing of
insurers and their agents; (v) required deposits of securities for the benefit
of policyholders;
10
<PAGE> 12
(vi) approval of policy forms; (vii) establishment of statutory reporting
practices and the form and content of statutory financial statements; (viii)
establishment of methods for setting statutory loss and expense reserves; (ix)
review, and in some instances, prior approval of premium rates; (x) limits on
transactions among insurers and affiliates; (xi) approval of all proposed
changes of control; (xii) approval of dividends; (xiii) setting and collecting
guarantee fund assessments; and (xiv) required filing of annual and other
reports with respect to the financial condition and operation of insurers. In
addition, state regulatory examiners perform periodic financial and underwriting
examinations of insurers.
In recent years, the insurance regulatory framework has been subject to
increased scrutiny by the National Association of Insurance Commissioners (the
"NAIC"), state legislatures, state insurance regulators and the United States
Congress. The NAIC is a voluntary organization of state regulators. Its
principal mission is to encourage uniformity in state regulation of insurance
through the drafting of model laws and the continuing refinement of insurance
accounting practices and reporting procedures. None of the NAIC's pronouncements
has any legal effect unless enacted by individual states. The NAIC recently
approved codification of statutory accounting practices that change the
definition of what constitutes prescribed statutory accounting practices and
will result in changes to the accounting policies that insurance enterprises use
to prepare their statutory financial statements. The codification becomes
effective in 1999. The Company is unable to predict how codification will affect
FPIC's statutory financial statements or how insurance rating agencies will
interpret or react to any such changes. No assurance can be given that future
legislative or regulatory changes resulting from such activities will not
adversely affect the Company. See "Business -- Regulation."
Currently, approximately 40% of the Company's business is related to
artisan contractors. Accordingly, the law relating to construction defect
liability can substantially affect the Company's business. Any changes in such
laws, rules and regulations, including any attempt to find more fault with a
contractor or subcontractor for problems with a project they worked on, could
materially and adversely affect the operations of the Company. For example, in
July of 1995, the California Supreme Court rendered its opinion on Montrose
Chemical Corporation vs. Admiral Insurance Company (the "Montrose Decision"). In
that decision, the Supreme Court ruled that in the case of a continuous and
progressively deteriorating loss, such as pollution liability (or construction
defect liability), an insurance company has a definitive duty to defend the
policyholder until all uncertainty related to the severity and cause of the loss
is extinguished. Therefore, multiple periods of coverage are triggered and often
with multiple insurance companies. The Montrose Decision was in stark contrast
to prior decisions wherein, only the carrier insuring the business when a loss
first manifested itself was obligated to defend and/or provide indemnity relief.
As a result of the Montrose Decision, the Company experienced a significant
increase in construction defect liability cases, to which it would not have been
subject under the old law. Once the new law was understood, the Company adjusted
its underwriting guidelines to mitigate the risk. Management believes that the
significant improvement in the results for accident years 1995 and following are
attributed to changes in the Company's underwriting guidelines. The Company also
relies on policy language, developed by the Company and by others, to exclude or
limit coverage. If such language is held by a court to be invalid or
unenforceable it could materially adversely affect the Company's financial
position. The Company is unaware of any additional or amended legislation which
is pending or contemplated concerning construction defect liability or other
laws which, if adopted, could materially and adversely impact the Company's
operations. See "Business -- Regulation" and "-- Reserves."
HOLDING COMPANY STRUCTURE AND RESTRICTIONS ON DIVIDENDS
As a holding company with no significant business operations of its own,
the Group relies on dividends from its subsidiaries, which are domiciled in
California, as the principal source of cash to meet its obligations, including
the payment of principal and interest on its debt obligations and the payment of
dividends to stockholders. California law places significant restrictions on the
ability of FPIC to pay dividends to the Group. In particular, all dividends from
FPIC require prior notice to the DOI. All "extraordinary" dividends must be
approved in advance by the DOI. A dividend is deemed "extraordinary" if, when
aggregated with all other dividends paid within the preceding 12 months, the
dividend exceeds the greater of (i) FPIC's statutory
11
<PAGE> 13
net income (excluding unrealized capital gains) for the preceding calendar year
or (ii) 10% of surplus as regards policyholders as of the preceding December
31st. Additionally, unless approved in advance by the DOI, no dividend may be
paid by FPIC except from unassigned funds or earned surplus. The DOI may
disallow the payment of any dividend if, in the DOI's opinion, the payment would
in any way violate the California Insurance Code (the "Code") or be hazardous to
policyholders, creditors or the public. Based on these limitations and statutory
results, as of December 31, 1997, the maximum dividend that could be paid by
FPIC to the Group in 1998, without obtaining prior regulatory approval from the
DOI, would be $1,426,000. A dividend in the amount of $300,000 was declared and
paid on January 1, 1998 to fund the debt service on the Group's Senior Notes.
There can be no assurance that dividends will be declared by the Group in the
future or that any required approval for payment of dividends by FPIC will be
obtained from the applicable state insurance departments. See "Dividend Policy,"
"Business -- Regulation" and "-- Regulation of Dividends and Other Payments from
Insurance Subsidiaries."
Income from FPIA is not subject to dividend restrictions; however, the
income generated by FPIA has been de minimis in the past and is expected to be
de minimis for several years. See "Business -- Financial Pacific Insurance
Agency."
RELIANCE ON TECHNOLOGY
The Company relies heavily on computers in all aspects of its business
including rating, issuing and billing policies. In the event of a disaster which
results in the loss of some or all of the Company's computer hardware and/or
software, the Company would incur significant recovery expense. While the
Company purchases insurance against such an event, there can be no assurance
that the Company would be fully compensated for the costs incurred in recovering
to full operations, and as such, an event of this nature could materially
adversely affect the Company's short-term operating results.
CONTROL OF COMPANY
After the completion of this Offering, Robert C. Goodell and the existing
investors will still own approximately 46% of the Company's outstanding Common
Stock. Mr. Goodell and the existing investors will have power to influence the
Company, to select the Board of Directors and to approve any action requiring
stockholder approval, including adopting amendments to the Company's Certificate
of Incorporation and approving or disapproving mergers or sales of all the
assets of the Company. As long as Mr. Goodell and the other original
stockholders maintain their ownership of the Company's Common Stock, third
parties will have a difficult time obtaining control of the Company through
purchases of the Common Stock in the open market. "See Principal and Selling
Stockholders," "Certain Transactions" and "Description of Capital Stock."
POTENTIAL ANTI-TAKEOVER EFFECT OF REGULATION AND CERTAIN CHARTER PROVISIONS
Under the terms of California law governing insurance holding companies,
any person or entity desiring to acquire 10% or more of the Company's
outstanding voting securities is required to obtain prior approval of the DOI.
In addition, certain other factors may have the effect of deterring, delaying,
or preventing a change in control of the Company without further action by the
stockholders; may discourage bids for the Common Stock at a premium over the
market price of the Common Stock; and may adversely affect the market price of,
and the voting and other rights of the holders of, Common Stock. These factors
include the absence of cumulative voting and the ability of the Company's
directors to issue "blank check" preferred stock and provisions of Delaware law.
See "Business -- Regulation -- Insurance Regulation Concerning Change or
Acquisition of Control" and "Description of Capital Stock."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to this Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
continue after this Offering. The initial public offering price has been
determined by negotiations between the Company and the representative of the
Underwriters and may
12
<PAGE> 14
not be indicative of the market price for the Common Stock after this Offering.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The market price of the Common Stock could be
subject to significant fluctuations in response to variations in quarterly and
yearly operating results, general trends in the Company's industry, the overall
performance of the stock market and other factors. See "Underwriting."
USE OF PROCEEDS
Of the net proceeds to the Company from this Offering, estimated to be
$17.7 million (or approximately $21.2 million if the Underwriters'
over-allotment option is exercised in full), $16.0 million will be contributed
by the Company to the capital of FPIC, thereby increasing its capacity to write
additional premiums and retain a greater percentage of direct premiums written
which has historically been ceded to reinsurers. Simultaneously with this
Offering, all of the outstanding Senior Note Warrants will be exercised and the
aggregate exercise price of $3.3 million will be offset against the $5 million
outstanding principal balance of the Senior Notes. The balance of the Senior
Notes, $1.7 million, will be paid with a portion of the proceeds from this
Offering. The Senior Notes bear interest at an annual rate of 12% and mature on
January 1, 2001. The remainder of the estimated net proceeds, if any, is
expected to be utilized by the Company for general corporate purposes including
expansion of its business. The portion of the proceeds contributed to FPIC will
initially be invested in short-term, investment grade, interest-bearing
securities pending orderly reinvestment in accordance with the Company's
investment policies. See "Business -- Regulation -- Limits on Writing Business"
and "Business -- Investments."
The Company will not receive any proceeds from the sale of the shares by
the Selling Stockholders.
DIVIDEND POLICY
The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future, but instead intends to retain its earnings in order
to fund the continued development and growth of the Company's business.
All dividends from FPIC require prior notice to the DOI. All
"extraordinary" dividends must be approved in advance by the DOI. A dividend is
deemed "extraordinary" if, when aggregated with all other dividends paid within
the preceding 12 months, the dividend exceeds the greater of: (i) FPIC's
statutory net income (excluding unrealized capital gains) for the preceding
calendar year or (ii) 10% of surplus as regards policyholders as of the
preceding December 31st. Additionally, unless approved in advance by the DOI, no
dividend may be paid by FPIC except from unassigned funds or earned surplus. The
DOI may disallow the payment of any dividend if, in the DOI's opinion, the
payment would in any way violate the Code or be hazardous to policyholders,
creditors or the public. See "Business -- Regulation of Dividends and Other
Payments from Insurance Subsidiaries."
For further discussion of these restrictions, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Business -- Regulation" and Notes to Consolidated Financial
Statements.
13
<PAGE> 15
DILUTION
At March 31, 1998, the outstanding shares of Common Stock had a pro forma
net tangible book value per share of $6.18. Assuming the 2,000,000 shares of
Common Stock offered by the Company hereby had been sold at March 31, 1998 and
without reflecting the effect of operations subsequent to that date, the net
tangible book value per share for all outstanding shares of Common Stock (after
deducting estimated offering expenses, including underwriting discount) would
have been $7.29. This represents an immediate increase in net tangible book
value of $1.11 per share to existing stockholders and an immediate dilution of
$2.71 per share to new investors, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Estimated public offering price per share................... $10.00
------
Pro forma net tangible book value per share before
offering............................................... 6.18
Increase per share attributable to new investors.......... 1.11
------
Pro forma net tangible book value per share after
offering.................................................. 7.29
------
Immediate dilution to new investors......................... 2.71
------
</TABLE>
If the Underwriters exercise in full their right to purchase an additional
375,000 shares of Common Stock to cover over-allotments, the net tangible book
value after the Offering would be $7.43 per share of Common Stock, which would
result in a dilution to public investors of $2.57 per share.
The following table sets forth on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid, and the average price per share paid by the existing
stockholders and by purchasers of the shares of Common Stock offered hereby
(giving effect to the conversion of Series A Stock outstanding as of March 31,
1998 into 1,735,251 shares of Common Stock, the exercise of Warrants to purchase
593,691 shares of Common Stock and the sale of 2,000,000 shares by the Company
at an initial public offering price of $10.00 per share, before deducting the
underwriting discount and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders........ 2,816,897 58.5% 8,286,451 29.3% $ 2.94
New Public Investors......... 2,000,000 41.5% 20,000,000 70.7% $10.00
--------- ----- ---------- -----
Total.............. 4,816,897 100.0% 28,286,451 100.0%
========= ===== ========== =====
</TABLE>
The information set forth above does not give effect to the potential
exercise of options to purchase an aggregate of 37,466 shares and Warrants to
purchase 153,525 shares of Common Stock as of March 31, 1998 at exercise prices
ranging from $2.54 to $4.82 per share to certain individuals, including certain
of the Company's officers, employees and former employees. Some of these options
can be exercised immediately. Purchasers of shares of Common Stock offered
hereby will incur additional dilution to the extent outstanding stock options
are exercised. See "Management."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the consolidated short-term debt and
capitalization of the Company as of March 31, 1998, and as adjusted to reflect
the restatement of the Company's Certificate of Incorporation to increase the
authorized number of shares of Preferred Stock and Common Stock, effective April
14, 1998, a 394.375 for 1 split of the Common Stock effective on April 14, 1998,
the sale by the Company of 2,000,000 shares of Common Stock to the public at an
assumed initial offering price of $10.00 per share, and the application of the
net proceeds of $17.7 million therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Short-term debt............................................. $ -- $ --
=========== ===========
Long-term debt.............................................. $ 4,985,848 $ --
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value, authorized 5,000 shares
(2,000,000 as adjusted); issued and outstanding 4,400
shares (no shares as adjusted)......................... 5 --
Common stock, $.001 par value, authorized 10,000 shares
(7,500,000 as adjusted); issued and outstanding 487,955
shares (4,816,897 shares as adjusted)(1)............... 488 4,817
Additional paid-in capital................................ 4,954,508 25,981,184
Net unrealized loss on available for sale securities, net
of deferred federal income taxes....................... (1,862) (1,862)
Retained earnings......................................... 9,134,820 9,134,820
----------- -----------
Total stockholders' equity........................ 14,087,959 35,118,959
=========== ===========
Total capitalization.............................. $19,073,807 $35,118,959
=========== ===========
</TABLE>
- ---------------
(1) Excludes 82,819 and 153,525 shares of Common Stock reserved for issuance
upon exercise of options outstanding as of March 31, 1998 pursuant to grants
to officers and employees of the Company and certain Warrants to purchase
Common Stock, respectively, outstanding as of March 31, 1998. Includes
593,691 shares of Common Stock to be issued upon exercise of certain
Warrants to purchase Common Stock and 1,735,251 shares of Common Stock to be
issued upon the conversion of the Series A Stock concurrently with the
closing of the Offering. See Notes to Consolidated Financial Statements.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company at the dates and for the periods indicated. All information is presented
in accordance with GAAP, except for the statutory property/ casualty ratios and
surplus as regards policyholders, which are presented in accordance with SAP.
The financial data is derived from the consolidated financial statements and
accounting records of the Company. The consolidated financial statements as of
December 31, 1996 and 1997 and for each of the years in the three-year period
ended December 31, 1997 and the report thereon are included elsewhere in the
Prospectus and have been audited by KPMG Peat Marwick, LLP, independent
certified public accountants. The selected data presented below as of and for
the three months ended March 31, 1997 and 1998 is derived from the unaudited
consolidated financial statements of the Company. The information furnished with
respect to the unaudited periods reflects all adjustments which, in the opinion
of management, are necessary for a fair presentation of results for the interim
periods. All such adjustments are, in the opinion of management, of a normal and
recurring nature. The results for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998. The industry combined ratio data presented under "Statutory
Ratios" is unaudited. The selected consolidated financial data set forth below
is qualified by reference to, and should be read in conjunction with, the
consolidated financial statements of the Company and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- -------------------
1993(1) 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- --------- -------- --------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Direct premiums written............... $ 6,094 $15,072 $ 24,695 $ 31,927 $ 39,512 $ 9,203 $ 10,384
Premiums ceded........................ (2,345) (5,785) (10,653) (13,674) (12,576) (2,941) (3,096)
------- ------- -------- -------- --------- -------- --------
Net premiums written............ 3,749 9,287 14,042 18,253 26,936 6,262 7,288
------- ------- -------- -------- --------- -------- --------
Net premiums earned............. 2,380 6,701 12,060 14,987 22,854 4,741 6,583
Commissions........................... 159 213 105 628 709 170 207
Investment income, net of expenses.... 523 750 1,028 1,449 1,720 405 510
Net realized gains (losses) on sales
of investments...................... 68 (246) 466 52 (46) -- --
Other income, net..................... (107) 502 578 547 800 178 220
------- ------- -------- -------- --------- -------- --------
Total revenues...................... 3,023 7,920 14,237 17,663 26,037 5,494 7,520
Expenses:
Losses and loss adjustment expenses... (273) 2,944 6,325 9,750 12,748 2,541 3,415
Policy acquisition costs.............. 610 1,493 3,957 4,785 7,440 1,524 2,383
Contingent ceding commission.......... -- (422) (1,246) (3,222) (1,511) (450) (62)
General operating costs............... 731 2,297 1,712 1,929 2,443 760 437
Agency expenses....................... 136 253 145 688 721 167 202
Interest expense...................... 21 113 128 693 617 163 151
------- ------- -------- -------- --------- -------- --------
Total expenses...................... 1,225 6,678 11,021 14,623 22,458 4,705 6,526
------- ------- -------- -------- --------- -------- --------
Income before taxes................... 1,798 1,242 3,216 3,040 3,579 789 994
------- ------- -------- -------- --------- -------- --------
Income tax provision............ 588 465 1,066 1,037 1,237 271 341
------- ------- -------- -------- --------- -------- --------
Net income...................... $ 1,210 $ 777 $ 2,150 $ 2,003 $ 2,342 $ 518 $ 653
======= ======= ======== ======== ========= ======== ========
EARNINGS PER SHARE(2):
Basic............................... $ 5.41 $ 1.60 $ 4.42 $ 4.12 $ 4.82 $ 1.06 $ 1.34
Diluted............................. $ 1.22 $ 0.40 $ 0.94 $ 0.69 $ 0.79 $ 0.17 $ 0.22
Weighted average diluted shares..... 988 1,956 2,292 2,901 2,970 2,972 2,972
GAAP RATIOS(3):
Loss ratio.......................... (7.0)% 43.9% 52.4% 65.1% 55.8% 53.6% 51.9%
Expense ratio....................... 56.1 52.0 36.6 23.3 36.3 38.7 41.7
------- ------- -------- -------- --------- -------- --------
Combined ratio...................... 49.1% 95.9% 89.0% 88.4% 92.1% 92.3% 93.6%
======= ======= ======== ======== ========= ======== ========
STATUTORY RATIOS(3)(6):
Loss ratio.......................... (7.0)% 43.9% 52.4% 65.1% 55.8% 53.6% 51.9%
Expense ratio....................... 42.6 51.5 36.9 25.2 36.5 37.8 40.9
------- ------- -------- -------- --------- -------- --------
Combined ratio...................... 35.6% 95.4% 89.3% 90.3% 92.3% 91.4% 92.8%
======= ======= ======== ======== ========= ======== ========
Industry combined ratio(4).......... 112.2% 110.1% 110.5% 111.0% 101.8% -- --
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------ -----------------
1993 1994 1995 1996 1997 1997 1998
-------- ------- ------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total cash and investments..... $115,203 $13,530 $23,608 $24,543 $30,609 $27,666 $34,855
Total assets................... 24,839 31,308 47,339 54,684 65,893 58,738 72,651
Unpaid losses and loss 7,125 10,141 12,013 13,944 19,592 15,018 22,236
adjustment expenses..........
Total debt(5).................. 1,633 1,225 5,901 5,479 4,985 5,481 4,986
Stockholders' equity........... 5,410 6,908 9,142 10,615 13,398 10,792 14,088
OTHER DATA:
Book value per common $ 2.81 $ 3.11 $ 4.43 $ 4.95 $ 5.94 $ 5.02 $ 6.18
share(2).....................
Surplus as regards $ 5,890 $ 5,773 $12,387 $13,788 $14,262 $12,970 $14,075
policyholders(5)(6)..........
Underwriting profit(7)......... 1,312 389 1,585 1,745 1,734 366 410
</TABLE>
- ---------------
(1) Effective November 12, 1993, the Group completed the acquisition of FPIC and
FPIA pursuant to the Stock Purchase Agreement dated June 2, 1993. Because
management of the Group had effective control of FPIC and FPIA as of May 26,
1993, the acquisition has been accounted for as of that date. Accordingly,
the 1993 consolidated financial statements include results of operations for
the period of May 26, 1993 through December 31, 1993.
(2) All periods adjusted to reflect a 394.375 for 1 stock split effective April
14, 1998. Book value per common share is based on stockholders' equity
adjusted for anticipated proceeds from the exercise of the Senior Note
Warrants and outstanding shares as of the calculation date. Outstanding
shares include Common Stock issued and outstanding as of the calculation
date as well as Common Stock issued in conjunction with the anticipated
conversion of Series A Stock and exercise of Senior Note Warrants.
(3) During 1993, in conjunction with the acquisition, management determined that
the Company's IBNR reserves were redundant and recorded a reserve reduction
of $2.4 million.
(4) Source: "Best's Insurance Reports Property/Casualty United States, 1997
Edition." The 1997 ratio is based on A.M. Best's estimate contained in the
January 1998, "Review Preview -- Property/Casualty." A comparison of a
company's combined ratio with the industry combined ratio does not
necessarily indicate that a company has performed well or poorly as compared
with its peers.
(5) Effective December 28, 1995, the Company issued $5 million in Senior Notes.
The Senior Notes were issued in conjunction with the Senior Note Warrants.
The proceeds from the issuance of the Senior Notes were contributed to
FPIC's capital.
(6) Surplus as regards policyholders is derived from financial statements
prepared in accordance with SAP prescribed or permitted by the DOI, a
comprehensive basis of accounting other than GAAP. Statutory financial
information, and the ratios derived from such information, should not be
considered an alternative to information derived from financial position,
results of operations or cash flows determined in accordance with GAAP.
(7) Underwriting profit represents the difference between premiums earned and
underwriting expenses. Underwriting profit may not provide an accurate
comparison among companies because it is not necessarily computed
identically by all companies. The use of such information is intended only
to supplement the conventional income statement presentation and is not to
be considered as an alternative to net income, cash flows or any other
indicator of the Company's operating performance which is presented in
accordance with GAAP.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Group is a Delaware holding company formed in 1993 for the purpose of
acquiring 100% of the outstanding shares of M.L. Oates Insurance Company
("Oates"), a Sacramento-based property/casualty insurance company domiciled in
California, and its affiliated agency. The name of the insurance company was
changed to Financial Pacific Insurance Company following the acquisition in
1993. FPIC underwrites primarily CMP policies through its office in Rocklin,
California, which is approximately 20 miles northeast of Sacramento. FPIC also
underwrites commercial automobile insurance as a companion coverage to its CMP
business, and surety bonds. The Group also owns FPIA, an insurance agency
acquired in 1993 and renamed in 1995 that specializes in the direct mail
distribution of license and permit surety bonds in 36 states on behalf of Markel
Corporation.
The Company markets commercial property/casualty insurance through 232
independent insurance agents, as of March 31, 1998, located primarily throughout
northern and central California. The Company believes its relationship with
these agents allows it to provide ongoing and attentive service to its targeted
customer base -- small to medium-sized commercial establishments. Management
believes this market has been overlooked by many of the larger insurance
companies as a result of the lower premiums per policy and, in some cases, the
remote locations of its clients and the agents.
The following table sets forth the Company's direct premiums written, net
premiums earned and losses and LAE ratios by line of business and combined
ratios since 1993.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- ----------------
1993(1) 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
DIRECT PREMIUMS WRITTEN:
CMP-Property.................... $1,190 $ 1,570 $ 2,668 $ 3,728 $ 4,490 $ 969 $ 1,198
CMP-Liability................... 6,270 9,435 14,167 17,767 22,766 5,403 6,470
Commercial Auto Liability....... 1,037 2,678 4,982 6,414 6,825 1,521 1,539
Commercial Auto Physical 387 683 1,182 1,748 2,244 497 504
Damage.......................
Inland Marine................... 398 645 1,142 1,536 1,884 403 465
Surety.......................... 133 47 500 589 1,129 383 162
Fidelity........................ 4 14 54 145 174 27 46
------ ------- ------- ------- ------- ------ -------
Total................... $9,419 $15,072 $24,695 $31,927 $39,512 $9,203 $10,384
====== ======= ======= ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- ----------------
1993(1) 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
NET PREMIUMS EARNED:
CMP-Property.................... $ 201 $ 298 $ 548 $ 882 $ 1,134 $ 247 $ 316
CMP-Liability................... 2,444 4,652 7,180 9,261 14,872 2,993 4,460
Commercial Auto Liability....... 453 1,037 2,973 3,126 4,919 1,041 1,371
Commercial Auto Physical 233 462 948 892 768 231 158
Damage.......................
Inland Marine................... 43 136 275 379 486 110 135
Surety.......................... 128 108 115 353 517 86 99
Fidelity........................ 2 8 21 94 158 33 44
------ ------- ------- ------- ------- ------ -------
Total................... $3,504 $ 6,701 $12,060 $14,987 $22,854 $4,741 $ 6,583
====== ======= ======= ======= ======= ====== =======
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ ---------------
1993(1)(2) 1994 1995 1996 1997 1997 1998
---------- ---- ---- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
LOSS AND LAE RATIOS:
CMP-Property....................... 21.4% 43.0% 70.8% 38.5% 107.1% 56.3% 102.2%
CMP-Liability...................... (10.4) 46.8 45.5 59.1 50.4 53.2 48.6
Commercial Auto Liability.......... 21.0 43.8 62.1 97.2 66.2 59.8 54.7
Commercial Auto Physical Damage.... 18.5 32.3 72.0 82.1 54.7 46.8 56.3
Inland Marine...................... 48.8 33.1 50.9 25.1 53.5 40.9 50.4
Surety............................. (2.3) (7.4) 2.6 19.5 14.5 24.4 15.2
Fidelity........................... --(3) 0.0 0.0 0.0 19.0 36.4 4.5
----- ---- ---- ---- ----- ---- -----
Total...................... (7.0%) 43.9% 52.4% 65.1% 55.8% 53.6% 51.9%
===== ==== ==== ==== ===== ==== =====
STATUTORY COMBINED RATIOS:
Loss Ratio(4)........................ (7.0%) 43.9% 52.4% 65.1% 55.8% 53.6% 51.9%
Expense Ratio........................ 42.6 51.5 36.9 25.2 36.5 37.8 40.9
----- ---- ---- ---- ----- ---- -----
Combined Ratios............ 35.6% 95.4% 89.3% 90.3% 92.3% 91.4% 92.8%
===== ==== ==== ==== ===== ==== =====
</TABLE>
- ---------------
(1) Although the Group assumed control of FPIC's operations effective May 26,
1993, for comparison purposes the above table reflects underwriting results
for the year ended December 31, 1993.
(2) During 1993, in conjunction with the acquisition, management determined that
the Company's IBNR reserves were redundant and recorded a reserve reduction
of $2.4 million.
(3) Not meaningful based on immateriality of fidelity earned premium of $2,000
in 1993.
(4) The increase in the loss ratio from 52.4% in 1995 to 65.1% in 1996 resulted
primarily from the effects of the Montrose Decision in July 1995. As a
result of the Montrose Decision, the Company retroactively incurred
construction defect claims for which, prior to this decision, there would
have been no liability. The Company has subsequently revised its
underwriting practices in response to the Montrose Decision. See "Risk
Factors -- Regulation, Pending Legislation and Case Law."
Because insurance companies derive revenues (and incur losses) from
investing activities as well as underwriting activities, an underwriting loss in
a period does not necessarily preclude profitability for that period. A combined
ratio of under 100% indicates an underwriting profit. A combined ratio in excess
of 100% indicates an underwriting loss. Persistent underwriting losses reduce
profitability and, when coupled with investment losses in any period, result in
negative earnings which reduce the insurer's capital and therefore its ability
to underwrite further business.
RESULTS OF OPERATIONS
Three months ended March 31, 1997 versus three months ended March 31, 1998
Direct premiums written. Direct premiums written for the three months ended
March 31, 1997 and 1998 were $9.2 million and $10.4 million, respectively,
representing an increase of 13%. Direct premiums written increased primarily due
to the attraction of a larger percentage of business from each of the Company's
existing agents and the appointment of new agents. During the three months ended
March 31, 1998, total production from agents appointed as of March 31, 1997
increased by approximately 10%. The number of appointed agents also increased by
approximately 14% from 203 as of March 31, 1997 to 232 as of March 31, 1998.
Premiums ceded. Premiums ceded for the three months ended March 31, 1997
and 1998 were $2.9 million and $3.1 million, respectively, representing an
increase of 5%. Premiums ceded as a percentage of direct premiums written
decreased from 32.0% in 1997 to 29.8% in 1998. The decrease in premiums ceded as
a percentage of direct premiums written was due to changes in FPIC's reinsurance
structure. Effective January 1, 1997, FPIC increased its retention on casualty
lines of business from $100,000 to $250,000 per
19
<PAGE> 21
occurrence in order to retain more of its underwriting income and reduce the
underwriting income ceded to reinsurers. See further discussion of the
reinsurance structure in "Business -- Reinsurance."
Net premiums earned. Net premiums earned for the three months ended March
31, 1997 and 1998 were $4.7 million and $6.6 million, respectively, representing
an increase of 39%. The increase in net premiums earned is reflective of the
growth in direct premiums written and reduction in premiums ceded.
Commissions. Commissions earned for the three months ended March 31, 1997
and 1998 were $170,000 and $207,000, respectively, representing an increase of
22%. The increase reflects the continued growth of FPIA premium production.
Investment income. Investment income for the three months ended March 31,
1997 and 1998 was $405,000 and $510,000, respectively, representing an increase
of 26%. The increase in investment income is consistent with the 27% increase in
the average invested assets balance from $25.1 million for the three months
ended March 31, 1997 to $31.7 million for the three months ended March 31, 1998.
The growth in invested assets reflects the investment of cash flows generated by
operations. The weighted average annualized investment yield decreased from 6.5%
for 1997 to 6.4% for 1998.
Net realized gains (losses) on sales of investments. Net realized gains
(losses) on sales of investments were $0 for the three months ended March 31,
1997 and 1998, respectively, reflecting a lack of sales activity.
Other income (expense). Other income (expense) for the three months ended
March 31, 1997 and 1998 was $178,000 and $220,000, respectively. Other income
(expense) consists primarily of policyholder service fees related to the direct
bill installment payment plan. The increase in other income (expense) is due
primarily to the increase in direct premiums written as approximately 80% of
policies issued are on the direct bill installment pay plan.
Losses and loss adjustment expenses. Losses and LAE decreased as a
percentage of net premiums earned from 53.6% to 51.9% for the three months ended
March 31, 1997 and 1998, respectively. The decreased loss ratio is due in part
to a reduced "Montrose effect" as compared to 1997. The "Montrose effect"
relates to the Montrose Decision and is discussed in detail at "Risk
Factors -- Regulations, Pending Legislation and Case Law" and
"Business -- Reserves." The reduced loss ratio is also attributed to the
formation in 1997 of in-house legal defense capability and the subsequent
assignment of new legal defense work, as well as reassignment of open files
previously handled by external attorneys.
Policy acquisition costs. Policy acquisition costs increased as percentage
of net premiums earned from 32.1% to 36.2% for the three months ended March 31,
1997 and 1998, respectively. The increase is due primarily to the bonus
commission earned by agents which increased from $140,000 in 1997 to $245,000 in
1998. Additionally, the increase in policy acquisition costs was due in part to
the decrease in ceding commission as a percentage of direct premiums written
from 12.1% to 11.0% for the three months ended March 31, 1997 and 1998,
respectively. The decrease in ceding commission was consistent with the decrease
in premiums ceded.
Contingent ceding commission. Contingent ceding commission decreased from
$450,000 or 15.3% of premiums ceded for the three months ended March 31, 1997 to
$62,000 or 2.0% of premiums ceded for the three months ended March 31, 1998. On
certain of the Company's reinsurance contracts, the reinsurers allow the Company
to participate, within predetermined limits, in the profits of the ceded
business. The Company records an estimate of its ultimate participation in the
profits, if any, through increases or decreases to contingent ceding commission.
The majority of the decrease in 1998 is attributable to loss development on
prior years.
General operating costs. General operating costs decreased as a percentage
of net premiums earned from 16.0% to 6.6% for the three months ended March 31,
1997 and 1998, respectively. The decrease is attributed primarily to the growth
in net earned premium. Additionally, during the three months ended March 31,
1997 the Company incurred approximately $160,000 in non-recurring costs
primarily related to software/system recovery expenses.
20
<PAGE> 22
Agency expenses. Agency expenses for the three months ended March 31, 1997
and 1998 were $167,000 and $202,000, respectively, representing a 21% increase.
The increase is consistent with the growth in commissions over the same period.
Interest expense. Interest expense decreased from $163,000 to $151,000 for
the three months ended March 31, 1997 and 1998, respectively. The decrease in
interest expense related to the repayment of the $500,000 bank line of credit in
April 1997.
Income before federal income taxes. Income before federal income tax
increased by 26% from $789,000 to $994,000 for the three months ended March 31,
1997 and 1998, respectively.
Net income. Net income increased from $518,000 or $0.17 per diluted share
for the three months ended March 31, 1997 to $653,000, or $0.22 per diluted
share, for the three months ended March 31, 1998, representing an increase of
26%.
Year ended December 31, 1996 versus December 31, 1997
Direct premiums written. Direct premiums written for the years ended
December 31, 1996 and 1997 were $31.9 million and $39.5 million, respectively,
representing an increase of 24%. Direct premiums written increased by the
attraction of a larger percentage of business from each of the Company's
existing agents, appointment of new agents and continued expansion of specialty
program business (i.e., bowling centers, refuse haulers, farm labor contractors
and restaurants). During 1997, total production from agents appointed as of
December 31, 1996 increased by approximately 20%. The number of appointed
independent agents also increased by approximately 15% from 198 as of December
31, 1996 to 227 as of December 31, 1997. The specialty program business direct
premiums written increased from $6.2 million in 1996 to $8.0 million in 1997.
Premiums ceded. Premiums ceded for the years ended December 31, 1996 and
1997 were $13.7 million and $12.6 million, respectively, representing a decrease
of 8%. Premiums ceded as a percentage of direct premiums written decreased from
42.8% in 1996 to 31.8% in 1997, as FPIC changed its reinsurance structure to
increase its retention. As discussed further in "Business -- Reinsurance,"
effective July 1, 1996, FPIC increased its retention on property lines of
business from $300,000 to $600,000 and effective January 1, 1997, FPIC increased
its retention on casualty lines of business from $100,000 to $250,000. FPIC
increased its retention in order to retain more of its underwriting income and
reduce the underwriting income ceded to reinsurers.
Net premiums earned. Net premiums earned for the years ended December 31,
1996 and 1997 were $15.0 million and $22.9 million, respectively, representing
an increase of 52%. The increase in net premiums earned is reflective of the
growth in direct premiums written and reduction in premiums ceded.
Commissions. Commissions earned for the years ended December 31, 1996 and
1997 were $628,000 and $709,000, respectively, representing an increase of 13%.
The increase reflects the continued growth of FPIA premium production.
Investment income. Investment income for the years ended December 31, 1996
and 1997 was $1.4 million and $1.7 million, respectively, representing an
increase of 19%. The increase in investment income is consistent with the 16%
increase in the average invested assets balance from $23.4 million in 1996 to
$27.0 million in 1997. The growth in invested assets reflects the investment of
cash flows generated by operations. The weighted average investment yield also
increased from 6.2% for 1996 to 6.4% for 1997.
Net realized gains (losses) on sales of investments. Net realized gains
(losses) on sales of investments were a $52,000 net realized gain and a
($46,000) net realized loss for the years ended December 31, 1996 and 1997,
respectively.
Other income (expense). Other income (expense) for the years ended
December 31, 1996 and 1997 was $547,000 and $800,000, respectively. Other income
(expense) consists primarily of policyholder service fees related to the direct
bill installment payment plan. The increase in other income (expense) is due
21
<PAGE> 23
primarily to the increase in direct premiums written as approximately 80% of the
policies issued are on the direct bill installment pay plan.
Losses and loss adjustment expenses. Losses and LAE decreased as a
percentage of net premiums earned from 65.1% in 1996 to 55.8% in 1997. The
decreased loss ratio is due in part to a reduced "Montrose effect" as compared
to 1996. The net impact to the Company was the creation of a retroactive
liability for construction defect claims previously denied. The "Montrose
effect" relates to the Montrose Decision and is discussed in detail at "Risk
Factors -- Regulations, Pending Legislation and Case Law" and "Business --
Reserves." The reduced loss ratio is also attributed in part to the formation in
1997 of in-house legal defense capability and the subsequent assignment of all
new legal defense work, as well as reassignment of open files previously handled
by external attorneys.
Policy acquisition costs. Policy acquisition costs increased as a
percentage of net premiums earned from 31.9% in 1996 to 32.6% in 1997. The
increase is due primarily to the bonus commission earned by agents which
increased from $431,000 in 1996 to $639,000 in 1997. Agents earn a bonus
commission ranging from 1.5% to 4.0% based on their annual production volume.
Contingent ceding commission. Contingent ceding commission decreased from
$3.2 million, or 23.6% of premiums ceded in 1996, to $1.5 million, or 12% of
premiums ceded in 1997. On certain of the Company's reinsurance contracts, the
reinsurers allow the Company to participate, within predetermined limits, in the
profits of the ceded business. The Company records an estimate of its ultimate
participation in the profits, if any, through increases or decreases to
contingent ceding commission. Approximately one-half of the decrease in 1997 is
attributable to loss development on prior years. The remaining decrease is
largely attributable to a decrease in the ceded premium subject to adjustment as
a result of the Company increasing its retention on the first casualty excess of
loss treaty from $100,000 to $250,000 effective January 1997.
General operating costs. General operating costs decreased as a percentage
of net premiums earned from 12.9% in 1996 to 10.7% in 1997. The decrease is
attributed to the 52% increase in net premiums earned exceeding the 27% increase
in general operating expenses from 1996 to 1997, respectively. During 1997 the
Company incurred approximately $300,000 in non-recurring costs primarily related
to software/system recovery expenses and relocation of the Company headquarters.
Agency expenses. Agency expenses for the years ended December 31, 1996 and
1997 were $688,000 and $721,000, respectively, representing a 5% increase. The
increase is consistent with the growth in commissions over the same period.
Interest expense. Interest expense decreased from $693,000 to $617,000 for
the years ended December 31, 1996 and 1997, respectively. The decrease in
interest expense related to reductions in the outstanding debt due to the
prepayment of the original seller financing debt in May 1996 and the payoff of
the $500,000 bank line of credit in April 1997.
Income before federal income taxes. Income before federal income tax
increased by 18% from $3.0 million in 1996 to $3.6 million in 1997.
Net income. Net income increased from $2.0 million, or $0.69 per diluted
share, for the year ended December 31, 1996 to $2.3 million, or $0.79 per
diluted share, for the year ended December 31, 1997, representing an increase of
17%.
Year ended December 31, 1995 versus December 31, 1996
Direct premiums written. Direct premiums written for the years ended
December 31, 1995 and 1996 were $24.7 million and $31.9 million, respectively,
representing a 29% increase. Direct premiums written increased due to the
attraction of a larger percentage of business from each of the Company's agents,
appointment of new agents and expansion of the specialty program business.
During 1996, the total production increased by approximately 25% for agents who
were appointed as of December 31, 1995. The number of appointed agents also
increased by approximately 13% from 176 as of December 31, 1995 to 198 as of
December 31, 1996. Additionally, the Company continued to diversify its
geographic and portfolio risk by expanding its operating territory and adding
specialty program business such as refuse haulers, farm labor
22
<PAGE> 24
contractors, bowling centers and restaurants. The specialty programs accounted
for direct premiums written of $4.7 million in 1995 and $6.2 million in 1996.
Premiums ceded. Premiums ceded for the years ended December 31, 1995 and
1996 were $10.7 million and $13.7 million, respectively, representing an
increase of 28%. Premiums ceded as a percentage of direct premiums written
decreased from 43.1% in 1995 to 42.8% in 1996 as FPIC changed its reinsurance
structure to increase its retention. As discussed further in
"Business -- Reinsurance," effective July 1, 1996, FPIC increased its retention
on property lines of business from $300,000 to $600,000 to retain more of its
underwriting income and reduce the underwriting income ceded to reinsurers.
Net premiums earned. Net premiums earned for the years ended December 31,
1995 and 1996 were $12.1 million and $15.0 million, respectively, representing
an increase of 24%.
Commissions. Commissions earned for the years ended December 31, 1995 and
1996 were $105,000 and $628,000, respectively. The increase reflects expanded
production of surety premiums by FPIA during 1996. FPIA commenced operations
during 1995.
Investment income. Investment income for the years ended December 31, 1995
and 1996 was $1.0 million and $1.4 million, respectively, representing a 41%
increase. The increase in investment income is due primarily to the investment
of the proceeds from the $5.0 million Senior Notes issuance which occurred on
December 28, 1995. Additionally, invested assets increased from $22.7 million at
December 31, 1995 to $24.0 million at December 31, 1996 due to the investment of
cash flow generated by operations. The average investment yield decreased from
6.6% (adjusted to reflect $5 million in investments purchased on December 29,
1995) in 1995 to 6.2% in 1996 due to declining interest rates.
Net realized gains on sales of investments. Net realized gains on sales of
investments were $466,000 in 1995, as compared to $52,000 in 1996. The increased
realized gains in 1995 resulted from a reclassification of the investment
portfolio from held to maturity to available for sale and the related sale of
certain securities to take advantage of favorable market conditions.
Other income (expense). There was no material change in the amount of other
income from 1995 to 1996.
Losses and loss adjustment expenses. Losses and loss adjustment expenses
increased as a percentage of net premiums earned from 52.4% in 1995 to 65.1% in
1996. The increased loss ratio is due to the "Montrose effect". The net impact
to the Company was the creation of a retroactive liability for construction
defect claims previously denied. The "Montrose effect" relates to the Montrose
Decision which is discussed in detail at "Risk Factors -- Regulations, Pending
Legislation and Case Law" and "Business -- Reserves."
Policy acquisition costs. There was no material change in the relationship
of policy acquisition costs to net premiums earned between 1995 and 1996.
Contingent ceding commission. Contingent ceding commission increased from
$1.2 million or 11.7% of premiums ceded in 1995 to $3.2 million or 23.6% of
premiums ceded in 1996. On certain of the Company's reinsurance contracts, the
reinsurers allow the Company to participate, within predetermined limits, in the
profits of the ceded business. The Company records an estimate of its ultimate
participation in the profits, if any, through increases or decreases to
contingent ceding commission. The increase in contingent ceding commission is
due to loss development on the reinsurance treaties.
General operating costs. General operating costs decreased as a percentage
of net premiums earned from 14.2% in 1995 to 12.9% in 1996. The decrease is
attributed to the 24% increase in net premiums earned exceeding the 13% increase
in general operating costs and expenses from 1995 to 1996.
Agency expenses. Agency expenses for the years ended December 31, 1995 and
1996 were $145,000 and $688,000, respectively. The increase is consistent with
the growth in commissions over the same period.
Interest expense. Interest expense increased from $128,000 to $693,000 for
the years ended December 31, 1995 and 1996, respectively. The increase in
interest expense is due to the issuance of $5.0 million of Senior Notes
effective December 28, 1995 and is offset in part by the prepayment of the
original seller financing in May 1996.
23
<PAGE> 25
Income before federal income tax. Income before federal income tax
decreased by 5% from $3.2 million in 1995 to $3.0 million in 1996.
Net income. Net income decreased from $2.1 million, or $0.94 per diluted
share for the year ended December 31, 1995, to $2.0 million, or $0.69 per
diluted share, for the year ended December 31, 1996, representing a decrease of
27%. The Senior Note Warrants issued on December 28, 1995 increased the dilution
of earnings per share in 1996 but had little effect in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Operations
The Company receives substantial cash from premiums, and to a lesser
extent, reinsurance recoverables, investment income and other income. The
principal cash outflows are for the payment of claims, premiums paid to
reinsurers, LAE, policy acquisition costs, operating costs and taxes.
Substantially all of the Company's revenue is received by, and expenses are
incurred on behalf of, FPIC. Net cash provided by operations was $3.8 million
and $4.3 million for the three months ended March 31, 1997 and 1998,
respectively, and $2.5 million and $6.6 million for the years ended December 31,
1996 and 1997, respectively. Amounts due from reinsurers increased 72% from $4.5
million to $7.7 million as of March 31, 1997 and 1998, respectively, and 54%
from $4.0 million to $6.2 million as of December 31, 1996 and 1997,
respectively. Such increases were primarily due to the increase in covered
losses and LAE. See Notes to Consolidated Financial Statements.
Because the Company collects cash now for liabilities that may not require
payment for a number of years, an increase in the Company's direct premiums
written will result in an increase in its cash and investment portfolio. Since
acquiring the Company in 1993, the Company's investment portfolio has increased
substantially. The increase was ratable with the increase in the Company's
direct premiums written.
Investing
Net funds used in investing activities of the Company were $2.8 million and
$3.6 million for the three months ended March 31, 1997 and 1998, respectively,
and $2.5 million and $6.0 million for the years ended December 31, 1996 and
1997, respectively. These comparative increases were attributable to the
investment of cash provided by operating activities.
The Company maintains a sufficient level of cash and liquid short-term
investments to meet anticipated obligations, including claim payments. As of
March 31, 1998, the Company had cash and short-term investments of approximately
$1.4 million. The Company's remaining investment portfolio on such date
consisted of $33.5 million of fixed maturity securities, which could provide
additional liquidity and cash for operations. All of the Company's investments
are investment grade, short and intermediate-term fixed income securities. See
"Business -- Investments."
Capital Expenditures
During 1996, 1997 and the three months ended March 31, 1998, the Company
purchased approximately $400,000, $700,000 and $130,000, respectively, in
capital equipment. The capital expenditures consisted primarily of computer and
office equipment acquired in conjunction with the upgrade and standardization of
the Company's computer and office equipment and the move to its new headquarters
in Rocklin, California. No significant future capital expenditures are currently
planned.
Financing
Net funds used in financing activities of the Company were $0 for the three
months ended March 31, 1998 and $0.4 and $0.5 million for the years ended
December 31, 1996 and 1997, respectively.
The Company has a bank line of credit agreement which provides for a
$530,000 credit facility bearing interest (payable monthly) on outstanding
balances at an annual rate of prime plus 1.00%. As of March 31,
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1998, $500,000 of this credit facility was available. The bank line of credit
matures on July 1, 1998 and will most likely be renewed.
The Company believes its cash resources are adequate to meet its operating
requirements.
Reinsurance
FPIC has quota share reinsurance, excess of loss reinsurance and
semi-automatic facultative reinsurance contracts, under which certain types of
policies are automatically reinsured to a predetermined amount. Due to these
reinsurance agreements, the maximum exposure to the Company is $600,000 on any
one property claim and $250,000 on any one liability claim. The reinsurance
contracts renew annually. FPIC's reinsurers are rated "A-" or better by A.M.
Best. See "Business -- Reinsurance."
Dividend Restrictions
Dividends paid by a California domiciled insurance company are subject to
limitations imposed by the Code. Under the Code, cash dividends may be paid by
an insurance company only from statutory earnings. In addition, a California
domiciled insurer may not pay an "extraordinary" dividend to its stockholders
without prior approval of the DOI.
An extraordinary dividend or distribution is defined as a dividend or
distribution of cash or other property whose fair market value, together with
other dividends and distributions made within the preceding 12 months, exceeds
the greater of 10% of earned surplus as regards policyholders as of December 31
of the preceding year or statutory net income (excluding unrealized capital
gains) for the immediately preceding calendar year. As of January 1, 1998, the
maximum dividend payable by FPIC without approval of the DOI is $1,426,000. A
dividend in the amount of $300,000 was declared and paid on January 1, 1998 to
fund the debt service on the Senior Notes. See
"Business -- Regulation -- Regulation of Dividends and Other Payments From
Insurance Subsidiaries."
The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future, but instead intends to retain its earnings in order
to fund the continued development and growth of the Company's business.
Impact of Inflation
The Company's operations, like those of other property/casualty insurers,
are susceptible to the effects of inflation, as premiums are established before
the ultimate amounts of losses and LAE are known. Management considers the
potential effects of inflation when setting premiums. Nonetheless, such premiums
may not fully compensate for the effects of inflation.
In addition, inflation may adversely affect the rate of return on the
Company's investment portfolio, as well as its portfolio market value.
New Accounting Standards
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income," and Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise
and Related Information," were issued in June 1997 and are effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income, which includes net income and
changes in equity except those resulting from investments by, or distributions
to, stockholders. SFAS No. 130 was adopted during the first quarter of 1998.
SFAS No. 131 establishes standards for disclosures related to business operating
segments. The Company is currently evaluating the impact that these statements
will have on the consolidated financial statements.
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PRIMARY DIFFERENCES BETWEEN GAAP AND SAP
The financial statements contained herein have been prepared in conformity
with GAAP, as opposed to SAP, which is prescribed for insurance companies by
insurance regulatory authorities. SAP differs from GAAP principally in the
following respects: (a) premium income is taken into operations over the periods
covered by the policies, whereas the related acquisition and commission costs
are expensed when incurred; (b) deferred income taxes are not recognized; (c)
certain assets such as agents' balances over 90 days due and prepared expenses
are nonadmitted assets; (d) policyholder dividends are accrued when declared;
(e) the cash flow statement is not consistent with classifications and the
presentation under GAAP; (f) bonds are recorded at amortized cost, regardless of
trading activities; and (g) loss and loss adjustment expense reserves and
unearned premium reserves are stated net of reinsurance.
YEAR 2000 COMPLIANCE
The Company's systems are compliant with Year 2000 requirements with the
exception of the claims accounting system, which the Company plans to replace
before the end of 1999. The Company plans to use its existing internal
programming staff to effect the replacement and does not expect to incur any
significant additional costs for equipment or outside programming support.
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BUSINESS
GENERAL
The Company is a regional, custom-underwriting insurance company. The
Company writes policies for small and medium-sized commercial customers within
specified niche markets which are typically overlooked by large insurance
companies. During 1997, the Company derived direct premiums written from artisan
contractors (40%), commercial property owners (5%), light industrial businesses
(5%), a variety of other businesses (25%) and special programs (25%). The
special programs were designed for refuse haulers, farm labor contractors,
bowling centers and restaurants. For these programs, the Company has developed
underwriting expertise and focused marketing materials and applies rate
deviations or coverage extensions. The Company writes the vast majority of its
business in rural markets in California. FPIC is currently rated A-(excellent)
by A.M. Best.
Direct premiums written increased from $15.1 million in 1994, the Company's
first full year of operation, to $39.5 million in 1997. Net income increased
from $777,000 in 1994 to $2.3 million in 1997. The Company's combined ratio,
which is a measure of underwriting profitability, was 92% in 1997, well below
the industry average of 102%. Much of the Company's growth and profitability is
attributable to its retention of renewal policies. Renewal retention rates were
81%, 83% and 84% in the three years ended 1995, 1996 and 1997, respectively.
The Company markets insurance through 232 independent insurance agents, as
of March 31, 1998, all of which are located in California. The Company believes
its relationship with its agents allows it to provide ongoing and attentive
service to its targeted customer base. The Company's strategy is to focus on
writing policies that typically generate between $1,100 to $5,000 in annual
premiums. These policies are typically written for small businesses having one
to five employees and for medium-sized businesses having more than five but less
than 50 employees. Management believes this market has been overlooked by many
of the larger insurance companies as a result of lower annual premiums per
policy, and in some cases, the remote locations of the policyholders and the
agents.
During 1997, FPIC wrote 100% of its business in California. In that year,
approximately 58% of FPIC's direct premiums written was for CMP-Liability
coverages, 17% was for Commercial Automobile Liability coverages, 11% was for
Commercial Property coverages, 6% was for Commercial Automobile Physical Damage
coverages, and the remainder was for Inland Marine, Surety and Fidelity. The
Company is also engaged, through its wholly owned insurance agency, FPIA, in the
mail order distribution of license and permit surety bonds in 36 states on
behalf of Markel Corporation. These bonds are low limit surety commitments
pledged to a regulatory agency as a condition of obtaining and maintaining a
business license.
There are two general categories of commercial property/casualty insurance:
custom underwritten policies and business owner policies ("BOPs"). The Company
focuses exclusively on custom underwritten accounts, typically with an annual
premium less than $25,000 (the Company's average premium per account is $4,500).
While price is an important part in the purchase of any insurance policy, it is
not necessarily the basis of competition for custom underwritten policies. The
Company believes that by carefully underwriting individual risks, it is able to
select the best risks. Most national insurance companies focus on larger custom
underwritten property/casualty policies or BOPs. As a result, the Company does
not directly compete with most national insurers. A BOP is a low price business
insurance policy that provides broad coverages. BOPs are marketed to businesses
with little differentiation from location to location, such as mini-marts and
dry cleaners. BOPs' key point of differentiation is price. Management believes
it obtains better risk selection and pricing by avoiding BOPs and focusing on
custom underwritten property/casualty policies.
The Company operates primarily in the agrarian valleys and coastal regions
of California which tend to be less litigious than Southern California and the
San Francisco Bay area. The Company will continue to focus on the rural regions
of California, and other states, as it expands. In line with this small town
strategy, the Company appoints small to mid-sized agents. The Company carefully
selects its agents and closely monitors their flow of business and profitability
primarily through the use of its proprietary QuoteTracker(TM) software. The
Company believes that, as a specialty regional company, it provides more value
to small to mid-sized
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insurance agents than it provides to large agents or national brokerages.
Consequently, the Company believes it has an important role in most of its
agents' offices. The value of its agency relations is a key advantage for the
Company.
The Company strives to provide competitive base pay and attractive bonus
opportunities. More than two-thirds of the Company's employees participate in
objectively measured bonus plans that provide bonus opportunities of up to 50%
of their annual salary. This and other employee-focused benefits make for
extremely low employee turnover. Low turnover is a significant advantage both in
terms of cost savings and in providing consistent relationships with the
independent agents.
BUSINESS STRATEGY
Management attributes its success to date to the following business
philosophies/strategies: (i) concentrating in its niche market segments,
developing specialty insurance programs, carefully selecting its geography and
avoiding market segments which the Company believes would be unprofitable; (ii)
maintaining strong relationships with independent insurance agents by providing
prompt underwriting decisions, competitive rates and coverages and competitive
commissions; (iii) controlling losses by vigorously defending claims which the
Company believes to be fraudulent, overstated or without merit; (iv) maintaining
control of, and emphasizing the importance, of underwriting every risk; and (v)
attracting and retaining a highly talented management team and staff.
GROWTH STRATEGY
The Company's long term growth strategies, while continuing to emphasize
small to medium-sized businesses as its primary target markets, are to:
Retain More Direct Premiums Written. The Company has historically ceded a
large portion of its direct premiums written to reinsurers. This was necessary
due to the relatively small surplus as regards policyholders the Company had
maintained. The capital infusion provided by this Offering will allow the
Company to retain more of its direct premiums written. As an example,
immediately following this Offering, the Company plans to convert its expensive
property quota share reinsurance contract into a less costly excess of loss
reinsurance program. See "-- Reinsurance."
Expand Existing Business. According to A.M. Best, the Company's market
share in California for CMP insurance has increased each of the last five years.
Management attributes the Company's growth to its strong relations with its
independent agents, its ability to identify and launch insurance programs for
specialty niches of the commercial market and its underwriting expertise. The
Company intends to pursue further growth in California by selectively appointing
new agents and by attracting a larger percentage of business from each of its
existing agents.
Develop New Programs. The Company will continue to research and develop
new specialty insurance programs for small to mid-sized businesses. The Company
attempts to identify business segments that are not being adequately served by
the insurance market. By focusing on businesses that are not directly targeted
by existing insurance programs, the Company is able to avoid competing solely on
price. The Company is also negotiating with other insurers to offer products
they developed through the Company's agents. This will enable the Company to
enhance further its value to the agency force and earn a return on the products
while avoiding the cost of developing the programs.
Expand Surety Business. The Company began writing surety in 1995 to
complement CMP. This business provides payment or performance guarantees on
construction contracts or other obligations. In 1997, the Company wrote nearly
$1.2 million in profitable surety premium using one staff underwriter. The
Company plans to emphasize surety as a line of business by increasing its
marketing efforts and adding to its staff. Though the market is highly
competitive, the Company believes it can attract profitable surety business by
focusing on providing a high level of service.
Expand Geographically. The Company intends to expand its specialty
insurance business into other states. Beginning with the states adjoining
California, the Company will select and appoint agents in rural
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<PAGE> 30
areas of those states to sell its products. The Company does not intend to open
branch offices. Its marketing efforts will focus on the insurance programs in
which the Company has developed an expertise in underwriting. The Company is
licensed currently to do business in Arizona, California, Idaho, Missouri,
Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota and Utah and has
license applications pending in eight additional states.
INDUSTRY OVERVIEW
According to A.M. Best, in 1996, the property/casualty insurance industry
wrote over $270 billion of insurance premiums. The industry remains fragmented
with approximately 3,000 insurance companies and 400 insurance groups licensed
to transact property/casualty insurance business in the U.S. Last year, the ten
largest companies accounted for less than a 43% national market share.
California is the largest individual state market for insurance in the U.S., and
its market characteristics are similar to the national market. California
insurance premiums totaled $32.8 billion in 1996, and the ten largest companies
captured only a 45% market share.
MARKETING
One of the Company's key competitive advantages is its excellent agency
relations. The Company targets independent agents in small, rural central and
northern California towns with existing books of commercial property casualty
business. These agents are generally ignored by the larger companies because
they cannot meet stiff production goals (usually $500,000 or more per year) or
rigid account minimums (typically $25,000). The Company believes that smaller
agents tend to be more loyal to an insurance company and their customers tend to
be more loyal to their insurance agent. While the Company is most heavily
represented in Fresno, Sacramento, Bakersfield and Santa Barbara, it is
represented in approximately 100 communities across the state by 232 agents, as
of March 31, 1998.
The Company's four field marketing representatives visit each of the
Company's agents at least once per month. The purpose of these visits is to
communicate to the agents the Company's preference for specific classes of
business, to identify and resolve problems and to maintain awareness of the
Company's activities. The marketing representatives also review pending quotes
with the agents and, on occasion, conduct brief inspections of risks submitted
to the Company. The field marketing representatives do not have underwriting
authority.
The Company actively manages its agency force by closely monitoring the
quality of submissions, hit/decline ratios, renewal retention and profitability.
Semi-annually, the Company reviews its agents for application count, win ratio,
average premiums per account, production and subjective factors primarily
through the use of its proprietary QuoteTracker(TM) software. Over the past
three years, this review has resulted in the termination of approximately 5% of
the agents and placement of another 10% on rehabilitation. Over time, the
Company believes that this process allows it to retain the best agents.
The Company provides its agents with limited binding authority. Binding
authority is extended to its agents for a few artisan contractors classes for
general liability only. The Company believes that underwriting is the
responsibility of the Company, and it tightly controls risk selection and
pricing. Most agents want binding authority, primarily because it takes
companies so long to quote a risk. The Company believes its exceptional service
overcomes this concern, and consequently most agents readily accept their
limited binding authority.
The Company pays a 15% commission on new business and 15% on renewal
business. From time to time, the Company may offer a higher commission on
special programs or accounts above a certain size. These promotions usually
involve paying the agent an additional 5% commission for a limited period of
time. During 1997, commission payments under these promotions totaled $250,000
or 4% of commission expense. The Company also pays additional commissions to its
agents based on volume. To qualify for additional commission an agent must
produce at least $250,000 of written premium during the preceding year. In 1997,
additional commissions based on volume totaled $639,000 or 9.0% of commission
expense. In 1997, the Company implemented an incentive program to reward agents
for retaining their business with the Company.
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At the end of each year, agents who maintain better than 90% of their renewals
will receive an additional 2% commission. The Company believes its commission
schedules are competitive.
By providing a market for difficult risks, by rewarding agent loyalty
through incentive commissions and by maintaining consistency in the marketplace,
the Company's agents place a significant value on an FPIC appointment. The
Company believes that these efforts lead to high renewal retention ratios and
more profitable renewal business.
CUSTOMERS
The Company's ultimate customers are small to mid-sized businesses. The
Company reaches these customers through 232 independent insurance agents, as of
March 31, 1998, who are appointed to represent the Company. The average customer
pays approximately $4,500 per year for its insurance policy. During 1997, the
Company derived direct premiums written from artisan contractors (40%),
commercial property owners (5%), light industrial businesses (5%), a variety of
other businesses (25%) and special programs (25%). The special programs were
designed for refuse haulers that haul standard household and industrial waste,
farm labor contractors, bowling centers and restaurants. For the refuse haulers,
the Company provides, as part of its automobile coverage, sudden and accidental
pollution coverage with a sublimit of $100,000 per occurrence. All other
pollution or environmental liability is excluded by the Company's policy forms.
For the special programs, the Company has developed underwriting expertise and
focused marketing materials and applies rate deviations or coverage extensions.
The Company is currently developing other specialty niche programs. Most
customers choose to pay for their policies over nine months following a 25% down
payment. The Company developed a payment plan to respond to the cash flow needs
of small businesses and to respond to competitive pressures.
LINES OF BUSINESS
The Company writes an insurance policy which always, except for surety
bonds, includes Commercial Multiple Peril-Liability ("CMP-Liability") and
generally one or more additional lines of business. The lines of business are
described below:
CMP-Liability -- Insures businesses against third party bodily injury and
property damage claims caused by or allegedly caused by acts or omissions of the
insured. This coverage part also includes a duty to defend the insured against
lawsuits filed alleging bodily injury, property damage or advertising injury
caused by acts or omissions of the insured.
CMP-Property -- First party insurance coverage for businesses for real and
personal property, as well as ancillary coverages such as loss of income and
loss of use. The insurance protects insureds against economic loss for damage or
loss of use of their property as a result of a specified cause of loss.
Commercial Auto Liability -- Similar to a personal auto insurance policy,
this third party coverage protects businesses against third party bodily injury
and property damage claims caused by or allegedly caused by drivers operating an
insured's vehicle.
Commercial Auto Physical Damage -- First party insurance coverage for
businesses against loss or damage to one of its vehicles. The coverage pays to
fix or replace damaged vehicles.
Inland Marine -- First party business coverage for personal property and
equipment which is generally mobile in nature. The coverage pays to fix or
replace the mobile property.
Surety -- The Company guarantees that one party, the principal, will
perform pursuant to a contract for a second party, the obligee. If the principal
fails to perform, the Company is obligated to complete the contract.
Fidelity -- First party coverage for businesses against loss of money,
securities and property due to burglary, theft, robbery and employee dishonesty.
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FINANCIAL PACIFIC INSURANCE AGENCY
Prior to the acquisition of FPIC, FPIA employed agents who served as the
direct sales force for Oates and also placed workers' compensation policies with
other insurance companies. Immediately following the acquisition, the direct
sales strategy was abandoned due to the Company's expansion of independent
agency appointments.
In 1995, FPIA became a general agent for Markel American Insurance Company
and Markel Insurance Company (unaffiliated members of Markel Corporation, a Glen
Allen, Virginia-based specialty property/casualty insurance group). As such,
FPIA produces license and permit surety bonds in 36 states. A license bond is a
low limit (typically $10,000 to $15,000) surety commitment pledged to an obligee
(regulatory agency) as a condition of obtaining and maintaining a business
license. According to the Surety Association of America, the nationwide market
for license bonds is $300 million with a loss ratio of 15%. There are more than
1,000 different types of license bonds throughout the United States. The typical
license bond is underwritten with an application, financial statement and credit
report. In 1997 and the three months ended March 31, 1998, FPIA generated
$1,256,000 and $370,000, respectively, in direct premiums written, of which
$709,000 and $207,000, respectively, was commission income to the Company.
FPIA's net income for the year ended December 31, 1997 and the three months
ended March 31, 1998 was $5,000 and $7,000, respectively.
The Company solicits customers for license and permit surety bonds through
the mail. The Company believes its direct mail distribution strategy will begin
to reap substantial returns as its renewal business grows and when FPIC becomes
the issuing insurance company for the license and permit bonds. Once FPIC
becomes licensed in all of the states in which FPIA operates, FPIC can become
the issuing insurance company for FPIA.
UNDERWRITING
The Company places a high degree of emphasis on underwriting and pricing
discipline. More than 50% of the Company's employees work in underwriting roles,
and the average underwriter has 16.6 years of experience. The underwriting
department has 13 underwriters, along with support staff.
The Company uses Insurance Services Offices ("ISO") underwriting rates,
rules and guidelines. However, most of the Company's current rates are
determined utilizing 1988 ISO loss costs, which are 35% higher, on average, than
loss cost assumptions utilized in current ISO rates for the classes and
territories that the Company writes. While the rates have remained the same
since the Company's inception, the pricing strategy has become more
conservative. The use of schedule rating credits, which are used to reduce the
price of insurance for individual policies, has been substantially restricted.
The limits of liability for each of the types of policies written by the
Company are tailored to the needs of the insured. Approximately 90% of the CMP
liability policies sold by the Company are for limits of $1,000,000. Limits are
available under existing treaties with reinsurance companies up to $11,000,000.
Subject to the judgment of the underwriting department, property insurance is
also available under certain existing treaties with reinsurance companies up to
a limit of $10,000,000. Additional insurance is available for each line of
insurance provided that a facultative arrangement is obtained from an
appropriate reinsurer. See "-- Reinsurance."
Since price is a competitive factor in the sale of property/casualty
insurance, the underwriting department attempts to ensure that prices quoted by
the Company are competitive or that its product is sufficiently differentiated
from less expensive alternatives.
Each full-time employee of the underwriting department has the opportunity
to earn an incentive bonus for meeting objective standards for service,
production and quality. Management believes this plan makes the Company's
underwriters and underwriting technicians the highest paid in the area. Because
an underwriting job with the Company is highly desirable, turnover in the
underwriting department is extremely low.
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The Company also writes surety bonds through its agents. In 1996, its first
full year of operations, the surety department wrote $589,000 of nearly
loss-free surety business. In 1997 and the three months ended March 31, 1998,
the Company wrote $1,129,000 and $162,000, respectively, in surety premium. The
Company's surety customers are primarily small contractors with infrequent bond
needs. These accounts require a high level of attention that many other sureties
are not willing to provide.
For a five-year comparison of the Company's combined ratio and the average
for the property/casualty industry, see "Selected Consolidated Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
REINSURANCE
Due to capital constraints, the Company has historically ceded large
amounts of its premium to reinsurers. In 1996 and 1997, on a direct pre-tax
basis, the Company earned $4.7 million and $4.0 million, respectively, of
underwriting income. After ceding the reinsurer's portion of the premium and
losses, the net underwriting income for the Company was approximately $1.7 in
each of 1996 and 1997. The reinsurers received $3.0 million and $2.3 million of
the Company's underwriting income in 1996 and 1997, respectively. The results
from the last two years are not necessarily indicative of results in the future
and the ultimate development of business ceded to the reinsurers could deviate,
perhaps substantially, from such results. However, the Company believes that as
a result of this Offering, it will decrease amounts ceded to reinsurers and
retain a greater share of the corresponding risks. As a consequence, the Company
believes it will also retain some portion of the underwriting profit, if any,
related to the premiums that are no longer ceded. See "Use of Proceeds."
The Company maintains reinsurance on its property, casualty, and surety
businesses. On its property business, the Company has a 30% quota share on the
first $2 million of any risk with a syndicate of reinsurers, resulting in a
maximum company exposure of $600,000 related to any one occurrence. In excess of
$2 million, the Company has an $8 million per risk semi-automatic facultative
reinsurance arrangement with General Reinsurance Corporation. On the casualty
business, the Company maintains a $750,000 excess of $250,000 treaty with a
syndicate of reinsurers led by Gerling Global Reinsurance Company. The Company's
maximum exposure on any one casualty risk is $250,000. In excess of $1 million,
the Company has a semi-automatic facultative agreement with American Reinsurance
Company which provides $10 million of coverage in excess of $1 million. For the
Company's surety bond product line, the Company maintains a variable quota share
reinsurance arrangement with General Reinsurance Company which provides various
levels of participation depending on the size of a bond. The Company's current
reinsurance structure has been in place since January 1, 1997 with the exception
of the surety reinsurance contract which incepted in July 1995 and the $10
million excess $1 million casualty semi-automatic facultative agreement which
incepted on January 1, 1998.
Prior to January 1, 1997, the Company maintained a $400,000 excess $100,000
and $500,000 excess $500,000 casualty treaties and a $4 million excess $1
million casualty semi-automatic facultative agreement.
The Company purchases Extra Contractual Obligations and Excess Policy
Limits ("ECO/XPO") coverage through the London market. This coverage reinsures
the Company's exposure for any punitive, exemplary, compensatory, or
consequential damages in excess of policy limits because of alleged or actual
bad faith or negligence on the Company's part in rejecting a settlement within
policy limits, discharging its duty to defend or prepare the defense in the
trial of an action against a policyholder of the Company, or in discharging its
duty to prepare or prosecute an appeal consequent upon such an action, or
otherwise handling a claim under a policy subject to this reinsurance. Prior to
July 1, 1996, $1 million of this coverage was included in the Company's $1
million excess of $1 million reinsurance treaty. However, when the Company
restructured its reinsurance treaty effective July 1, 1996, it began purchasing
this coverage separately in the London markets, as it was more cost effective to
do so. The Company currently purchases $2 million of ECO/XPO coverage through
this facility.
The reinsurance programs renew on an annual basis. Reinsurance coverages
are placed both directly by the Company and through professional intermediaries.
The Company's 1997 reinsurance costs for liability
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coverage were reduced from 1996 levels due to favorable results achieved and the
retention by the Company of larger portions of the risk.
Although reinsurance does not discharge the original insurer from its
primary liability to its policyholders, under SAP, it is the practice of
insurers to treat reinsured risks as risks of the reinsurer since the primary
insurer is indemnified by the reinsurers for ceded losses and LAE unless the
reinsurer is unable to meet the obligations it assumed under the reinsurance
agreements. The collectability of reinsurance is subject to the solvency of the
reinsurers.
All of the Company's reinsurance is currently placed with A- or better
rated reinsurers. See "-- Ratings." In accordance with customary industry
practice, the Company maintains no reserves for reinsured liabilities. In 1997,
FPIC ceded $12.6 million in written premium to 17 reinsurers and reinsurer
syndicates. Premiums ceded to the five largest reinsurers were: $2.9 million,
Gerling Global Reinsurance; $1.7 million, SOREMA North America Reinsurance; $1.3
million, St. Paul Fire and Marine; $1.3 million, Constitution Reinsurance; and
$1.2 million, Winterthur Reinsurance Corporation of America.
At December 31, 1997, the Company had unsecured reinsurance recoverables
for paid and unpaid losses and LAE and unearned premiums in excess of 10% of
stockholders' equity from the following reinsurers:
<TABLE>
<S> <C>
Gerling Global Reinsurance.................................. $3,398,002
SOREMA North America Reinsurance............................ 2,049,891
Winterthur Reinsurance Corporation of America............... 1,567,208
St. Paul Fire and Marine.................................... 1,396,365
Constitution Reinsurance.................................... 1,348,644
</TABLE>
The Company reviews information concerning the Company's reinsurers,
including ratings published by A.M. Best and other similar organizations. The
Company is not aware of any financial difficulties being experienced by any of
its reinsurers.
The Company is selective in its choice of reinsurers and considers numerous
factors, the most important of which is the financial stability of the
reinsurer. At January 1, 1998, reinsurance arrangements were in place with one
foreign and 11 domestic reinsurers.
Following this Offering, the Company may convert its costly property quota
share reinsurance contract to an excess of loss contract. It may also convert
its surety quota share contract to an excess of loss contract. See "Use of
Proceeds."
CLAIMS
The claims department pays claims and establishes losses and LAE reserves.
In connection therewith, it resolves questions concerning policy coverage and
manages reinsurance recoveries with the accounting department. Claims in
litigation are defended by a staff of attorneys employed by the Company under
the direction of its Vice President and General Counsel. In order to reduce the
cost of defending its policyholders, the Company began hiring attorneys in late
1996 to build in-house defense capabilities. The Company has hired seven
experienced insurance defense attorneys, all of whom have at least seven years
of experience. As of March 31, 1998, 82% of the Company's insurance defense
files were being adjusted by staff attorneys. By managing the majority of the
cases with staff attorneys, the Company believes it will save a substantial
amount of LAE.
The Company's claims department is staffed by five claims examiners with an
average of 18 years of claim adjustment experience. The claims examiners'
caseloads average approximately 125 claims per examiner. Due to the combination
of experience and manageable caseloads, the Company's claims personnel are
effective in managing claims through frequent contact with claimants.
The Company believes that a distinguishing factor between its claims
department and other insurance companies' claims departments is that its claims
examiners are incentivized to close claim files, all of the adjusters and
attorneys are seasoned professionals and they are closely supervised by the Vice
President of Claims and the Vice President and General Counsel. Senior
management reviews and approves all reserves in
33
<PAGE> 35
excess of $30,000. The Company recently established a special investigation unit
which is used to investigate cases which are suspected to be fraudulent.
RESERVES
Loss reserves are estimates at a given point in time, based on facts and
circumstances then known, of the amount the insurer anticipates it will have to
pay claimants plus investigation and litigation costs. The ultimate liability in
each case may differ from such estimates. During the loss settlement period,
additional facts regarding individual claims may become known and, consequently,
it frequently becomes necessary to refine and adjust the estimates of liability.
The Company's reserving process, following industry practices, is based on
the assumption that past experiences, adjusted for the effect of current
developments and likely trends, is appropriate for predicting future events. The
process also assumes that the legal climate regarding the claims process and
legal liability theories remain constant. Any other assumptions employed by the
Company or its actuaries are not readily quantifiable and are subject to
revision as circumstances change.
Reserves are initially set to take into account both a possible payment for
the loss involved and the anticipated LAE. Adjustments to initial reserves are
made periodically pursuant to the continuing investigation and evaluation by the
claims department. Reserves for other claims, such as property damage by fire or
other causes, are established and revised on a case-by-case basis pursuant to
which a reserve amount is assigned to each claim when reported, based primarily
upon an investigation of the circumstances surrounding each claim, consideration
of the liability and the damages, and the insurance policy provisions relating
to the claim.
The Company also establishes IBNR reserves utilizing its historical
experience. The IBNR reserve is established to provide for future case reserves
and loss payments on claims which have been incurred but not yet reported to the
Company. A significant portion of the Company's total loss reserve is the IBNR
reserve. However, IBNR reserves, by definition, are not established for specific
cases. In calculating IBNR reserves, the Company estimates the ultimate
liability for losses and LAE by using both individual estimates for reported
claims and generally accepted actuarial reserving techniques. IBNR reserve
adjustments also are made to take into account changes in the volume of business
written, claims frequency and severity, the mix of business, claims processing
and other items that can be expected to affect the Company's liability for
losses over time. IBNR reserves are periodically adjusted to correct historical
deficiencies or redundancies in the reserves on a case-by-case basis. On a
quarterly basis, the Company's independent actuary reviews the Company's loss
data and recommends IBNR reserves.
Inflation is implicitly provided for in the reserving function through
analysis of cost trends and reviews of historical results. Reserves are closely
monitored and are recomputed periodically using new information on reported
claims and a variety of statistical techniques. The Company does not discount
loss reserves.
The following table sets forth a reconciliation of beginning and ending
losses and LAE reserves for each of the periods shown.
34
<PAGE> 36
Activity in the liability for unpaid losses and LAE is summarized as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------------------- MARCH 31,
1995 1996 1997 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance of unpaid losses and loss
adjustment expense reserves,
beginning of year................. $10,140,556 $12,013,317 $13,944,397 $19,592,060
Less reinsurance recoverables..... 4,902,732 4,349,118 4,007,047 6,184,927
----------- ----------- ----------- -----------
Net balance at beginning of year.... 5,237,824 7,664,199 9,937,350 13,407,133
----------- ----------- ----------- -----------
Incurred losses and loss adjustment
expenses:
Provision for insured events of
the current year............... 6,490,825 7,394,848 10,991,179 3,112,070
Increase (decrease) in provision
for insured events of prior
years.......................... (165,766) 2,355,565 1,756,992 302,661
----------- ----------- ----------- -----------
Total incurred losses and loss
adjustment expenses............... 6,325,059 9,750,413 12,748,171 3,414,731
----------- ----------- ----------- -----------
Payments:
Losses and loss adjustment
expenses attributable to
insured events of the current
year........................... 1,975,694 2,413,980 3,370,671 508,924
Losses and loss adjustment
expenses attributable to
insured events of prior
years.......................... 1,922,990 5,063,282 5,907,717 1,727,486
----------- ----------- ----------- -----------
Total payments...................... 3,898,684 7,477,262 9,278,388 2,236,410
----------- ----------- ----------- -----------
Net balance at December 31.......... 7,664,199 9,937,350 13,407,133 14,585,454
Plus reinsurance recoverables..... 4,349,118 4,007,047 6,184,927 7,650,187
----------- ----------- ----------- -----------
Balance of unpaid losses and
loss adjustment expense
reserves, at December 31..... $12,013,317 $13,944,397 $19,592,060 $22,235,641
=========== =========== =========== ===========
</TABLE>
35
<PAGE> 37
The following table sets forth the development of net reserves for unpaid
losses and LAE from 1989 (the first full year of operations) through 1997. In
evaluating the following information, it should be noted that each amount
includes the effects of all changes in amounts for prior years. For example, the
amount of redundancy related to losses settled in 1997 but incurred in 1989 is
included in the cumulative redundance amount of each of the years for 1989 to
1996. The table does not present injury or policy-year development data.
Conditions and trends that have affected development of the reserves in the past
may not necessarily occur in the future. Accordingly, the data in the table may
not be indicative of future redundancies or deficiencies.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------- ------- ------- ------- ------- -------
($'s in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for losses and
LAE(1).................. $1,243 $3,119 $7,189 $ 6,964 $ 4,533 $ 5,238 $ 7,664 $ 9,938 $13,407
Paid (cumulative) as
of:(2)
One year later.......... 391 1,148 1,550 1,676 1,503 1,923 5,063 5,908 --
Two years later......... 967 2,307 3,038 2,883 2,537 4,574 8,903
Three years later....... 1,351 2,728 3,734 3,366 3,243 6,648
Four years later........ 1,594 3,012 4,074 3,601 3,897
Five years later........ 1,845 3,096 4,322 3,829
Six years later......... 1,883 3,308 4,512
Seven years later....... 1,976 3,487
Eight years later....... 2,002
Liability re-estimated as
of:(3)
One year later.......... 1,217 3,696 4,098 2,606 2,279 3,150 5,169 5,786 --
Two years later......... 1,141 1,731 1,717 1,059 1,011 2,409 2,927
Three years later....... 774 832 723 527 795 1,747
Four years later........ 398 445 347 397 738
Five years later........ 291 280 302 738
Six years later......... 169 224 336
Seven years later....... 22 251
Eight years later....... 42
REDUNDANCY
(DEFICIENCY):........... $ (801) $ (619) $2,341 $ 2,397 $ (102) $(3,157) $(4,166) $(1,756) --
Redundancy (deficiency) as
% of initial
reserve(4),(5),(6)...... (64.4)% (19.8)% 32.6% 34.4% (2.3)% (60.3)% (54.4)% (17.7)% --
Gross liability for losses
and loss adjustment
expenses................ 10,060 7,125 10,141 12,013 13,945 19,592
Ceded liability for losses
and loss adjustment
expenses................ (3,096) (2,592) (4,903) (4,349) (4,007) (6,185)
------- ------- ------- ------- ------- -------
Net liability for losses
and loss adjustment
expenses................ 6,964 4,533 5,238 7,664 9,938 13,407
Gross liability
re-estimated as of
December 31, 1997....... 987 987 2,580 4,089 8,480
Gross paid cumulative as
of December 31, 1997.... 6,301 6,094 8,550 10,405 6,580
------ ------ ------ ------- ------- ------- ------- -------
Gross liability
re-estimated............ 7,288 7,081 11,130 14,494 15,060
Gross reserve redundancy
(deficiency)............ 2,772 44 (989) (2,481) (1,115)
Gross reserve redundancy
(deficiency) as % of
initial reserve......... 27.6% 0.6% (9.8)% (20.7)% (8.0)%
</TABLE>
- ---------------
(1) Sets forth the estimated liability for unpaid losses and LAE recorded at the
balance sheet date for each of the indicated years; represents the estimated
amount of losses and LAE for claims arising in the current and all prior
years that are unpaid at the balance sheet date, including IBNR.
(2) Cumulative losses and LAE payments made in succeeding years for losses
incurred prior to the balance sheet date.
36
<PAGE> 38
(3) Re-estimated amount of the previously recorded liability based on experience
for each succeeding year, increased or decreased as payments are made and
more information becomes known about the severity of remaining unpaid
claims.
(4) Shows the cumulative redundancy or deficiency at December 31, 1997 of the
reserve estimate shown on the top line of the corresponding column. A
redundancy in reserves means that reserves established in prior years
exceeded actual losses and LAE or were reevaluated at less than the
originally reserved amount. A deficiency in reserves means that the reserves
established in prior years were less than actual losses and LAE or were
reevaluated at more than the originally reserved amount.
(5) Prior to 1994, fluctuation in the net reserve redundancy was attributable to
a $2.4 million reserve reduction in 1993 and a $2.4 million reserve increase
in 1991. In 1991, the Company posted an IBNR reserve of approximately $2.4
million. The result was a net incurred losses and LAE ratio of 165%. During
1993, in conjunction with the acquisition, management determined that the
Company's IBNR reserves were redundant and recorded a reserve reduction of
$2.4 million. As a result, the redundancy trend in 1992 and 1993 ended.
(6) The reserve deficiency noted in 1994 to 1996 resulted primarily from the
effects of the Montrose Decision in July 1995. The impact to the Company was
the creation of retroactive liability for construction defect claims
previously denied. The Company has subsequently revised its underwriting
practices in response to the Montrose Decision. See "Risk
Factors -- Regulations, Pending Legislation and Case Law."
Reserve variances have been affected by continued growth in premium volume
and increases in IBNR, particularly in the CMP liability line between 1993 and
1994. The reserves for IBNR losses and the LAE anticipated changes in costs
related to each prior year's claims. At the same time, the insurance industry
was experiencing inflation in the ultimate resolution values of personal injury
claims. The inflation of personal injury claim values has been principally
attributed to rapidly increasing medical treatment costs, increasing jury awards
for pain and suffering and increased loss adjustment and related litigation
costs. In addition to the adjusted IBNR, specific measures undertaken include
monitoring the actual paid medical, vigorous defense of claims deemed to be
nuisance suits, and ongoing monitoring of pain and suffering awards and related
LAE and litigation expenses. Adjustments are made in IBNR reserves on a periodic
basis to account for documented cost increases, and similar adjustments are made
to case reserves based on individual claim reviews and audits. Actual reserve
development due to IBNR claims and underreported claims is continually monitored
and adjustments to reserves are made consistent with this actual experience.
During the loss adjustment period, additional facts regarding individual
claims may become known. As the Company becomes aware of additional facts, it
may become necessary to refine and adjust liability estimates. Accordingly, the
ultimate liability may be less than or greater than the revised estimates.
INVESTMENTS
Substantially all investments are held by FPIC and are subject to
regulation by the DOI. Investments are made under the direction of the Company's
Chief Executive Officer and Chief Financial Officer pursuant to written
guidelines approved by the Board of Directors. The written guidelines establish
specific criteria for quality, marketability, holding size and maturity for each
type of investment. Furthermore, the criteria are set to meet the Company's
anticipated liquidity needs and tax positions.
The Company's investment portfolio is managed with the intent to provide
growth and safety of surplus as regards policyholders in order to facilitate
increased premium writings over the long-term while maintaining the ability to
service current insurance operations.
37
<PAGE> 39
The following table shows the composition of the Company's investment
portfolio by type of security as of December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------------- -----------------
1995 1996 1997 1998
----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
($'s in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BY TYPE OF SECURITY:
United States government
and agencies............ $ 6,449 28.4% $ 9,870 41.1% $15,628 52.1% $17,074 51.0%
States, municipalities and
political
subdivisions............ 1,289 5.7% 268 1.1% 71 0.2% 70 0.2%
Corporate................. 14,951 65.9% 13,708 57.0% 14,065 46.9% 16,144 48.2%
Certificates of deposit... -- 0.0% 200 0.8% 213 0.8% 216 0.6%
------- ----- ------- ----- ------- ----- ------- -----
Total
investments... $22,689 100.0% $24,046 100.0% $29,977 100.0% $33,504 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Fixed maturity investments are valued in the above table at market value.
The amortized cost of fixed maturities was $22,604,000, $24,764,000 and
$30,028,000 at December 31, 1995, 1996 and 1997, respectively.
Fixed maturity investments held by the Company generally have an investment
quality rating of "A" or better by independent rating agencies. The following
table shows the composition of the Company's fixed maturity investments (at
amortized cost), by rating as of December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------------------
1995 1996 1997 1998
----------------- ----------------- ----------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ----------- -------
($'s in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BY RATING(1):
U.S. Treasury and U.S.
Agency Bonds........ $ 6,449 28.4% $ 9,870 41.0% $15,628 52.1% $ 17,074 51.0%
AAA to A.............. 15,023 66.2% 12,259 51.0% 11,515 38.4% 13,578 40.5%
BBB................... 1,217 5.4% 1,717 7.2% 2,621 8.8% 2,636 7.9%
Certificates of
Deposit............. -- 0.0% 200 0.8% 213 0.7% 216 0.6%
------- ----- ------- ----- ------- ----- ----------- -----
Total
Investments.. $22,689 100.0% $24,046 100.0% $29,977 100.0% $ 33,504 100.0%
======= ===== ======= ===== ======= ===== =========== =====
</TABLE>
- ---------------
(1) Represents the lower of the ratings assigned by Moody's Investor's Services,
Inc. or Standard and Poor's Corporation.
The amortized cost of fixed maturity investments exceeded the market value
by approximately $51,000 at December 31, 1997. At the same date, the Company
held callable fixed maturities with an aggregate market value of $13.2 million.
The amortized cost of fixed maturities as of December 31, 1995, 1996 and
1997 is shown by contractual maturity below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Management projects
the anticipated weighted average maturity of the fixed maturities to be 6.7
years. Management attempts to generally match its property/casualty assets and
liabilities. The maturity of claim and benefit liabilities of property/casualty
insurance companies can only be estimated by using actuarial methods. Although a
single figure for weighted average maturity of liabilities is not available, the
Company's actuaries continually review historical data on claims maturation. In
light of the review, management structures its fixed income portfolio
38
<PAGE> 40
accordingly. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------------- -----------------
1995 1996 1997 1998
----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
($'s in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BY MATURITY:
One year and under........ $ 77 0.3% $ 1,830 7.6% $ 1,152 3.8% $ 1,152 3.4%
Over one year through five
years................... 6,364 28.1% 8,287 34.5% 9,954 33.2% 10,916 32.6%
Over five years through
ten years............... 9,330 41.1% 8,662 36.0% 14,681 49.0% 17,969 53.6%
Over ten years............ 6,918 30.5% 5,267 21.9% 4,190 14.0% 3,467 10.4%
------- ----- ------- ----- ------- ----- ------- -----
Total
Investments... $22,689 100.0% $24,046 100.0% $29,977 100.0% $33,504 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Investment results of the Company for the periods indicated are shown in
the following table.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS
----------------------------- ENDED
1995 1996 1997 MARCH 31, 1998
------- ------- ------- --------------
($'s in thousands)
<S> <C> <C> <C> <C>
Invested assets(1)..................... $17,812 $23,368 $27,012 $31,741
Investment income(2)................... $ 1,029 $ 1,449 $ 1,720 $ 510
Average yield(3)....................... 5.8% 6.2% 6.4% 6.4%
Net realized gain (losses)............. $ 466 $ 52 $ (46) --
</TABLE>
- ---------------
(1) Average of the aggregate invested amounts at the beginning and end of the
period.
(2) Investment income is net of investment expenses and does not include
realized or unrealized investment gains or losses or provision for income
taxes.
(3) The 1995 average yield was impacted by the $5 million capital infusion from
the sale of the Senior Notes which funded the purchase of $5 million in
investments on December 28, 1995.
COMPETITION
The property/casualty insurance industry is highly competitive. The Company
competes with other property/casualty insurers both in the recruitment and
retention of qualified independent agents to sell its products. Success in
recruiting and retaining independent agents willing to sell the Company's
products or services is dependent upon the commission rates, services and the
ability of the insurer to provide products that meet the needs of the agent and
the agent's customers.
In selling its insurance products, the Company competes with other insurers
through independent agents (including insurers represented by the independent
agents who represent the Company), with insurers having their own agency
organizations and with direct sellers of insurance products. There are numerous
companies competing for business in the geographic areas in which the Company
operates. No single company dominates the marketplace, but many of the Company's
competitors have more established national reputations and substantially greater
financial resources and market share than the Company.
The Company pays its agents a base commission of 15% with additional
commission for meeting increasing volume levels. Should other insurers begin
paying higher commissions than the Company, this would present a competitive
disadvantage in attracting and retaining high-quality agents. While recognizing
the significance of the rate of commission, the Company believes its efforts to
serve the agents and their customers by providing superior service in
underwriting and claims processing will allow it to continue to compete with
other insurers.
Twice per year, the Company surveys its agents to understand the nature of
the competitive environment. The agents indicate that the Company competes with
many companies, but few consistently. According to its
39
<PAGE> 41
agents, FPIC's most consistent competitor is Allied Group. Agents were asked
which companies they viewed as FPIC's main competitors.
The following table summarizes the results of the last agent survey,
conducted in August 1997:
<TABLE>
<CAPTION>
COMPETITORS % of Agents(1)
- ----------- --------------
<S> <C>
Allied Group................................................ 17%
Golden Eagle Insurance Company.............................. 10%
Maryland Casualty Insurance Company......................... 10%
Valley Insurance Company.................................... 7%
CNA......................................................... 5%
Fireman's Fund Insurance Company............................ 5%
10 Other Companies.......................................... 27%
</TABLE>
- ---------------
(1) Represents the percentage of survey respondents indicating that these
companies compete with FPIC.
RATINGS
The oldest and most widely quoted insurance financial rating firm is Best's
Insurance Reports, published by the firm of A.M. Best.
Based on 1993 and prior results, FPIC was assigned an initial rating in
April 1994 of B++ (Very Good) by A.M. Best. An A.M. Best rating is assigned
after an extensive quantitative and qualitative evaluation of a company's
financial condition and operating performance. An A.M. Best rating represents
the current and independent opinion of a company's financial strength and
ability to meet obligations to policyholders. Such ratings do not relate to the
protection of investors or indicate expected investment results, and therefore
do not address the quality of the insurer's securities or the advisability of an
investment in such securities. In March 1996, A.M. Best upgraded FPIC's rating
to A- (excellent) and in 1997 the A- rating was re-affirmed.
A.M. Best rates firms both on quality and on size. The size categories
range from I, which represents surplus as regards policyholders of less than $1
million, to XV, which represents surplus as regards policyholders of greater
than $2 billion. Prior to the Offering, FPIC was financial size V, representing
surplus as regards policyholders between $10 million and $25 million. Following
this Offering, it is expected that FPIC will be category VI, representing
surplus as regards policyholders between $25 million and $50 million. When
considering whether to accept an FPIC policy, customers often review both the
rating and the financial category size. While many customers view an A rating as
sufficient, there are others that require financial category sizes of VII and
greater. There can be no assurance that customers will continue to accept FPIC's
rating and financial category size regardless of the Offering.
A.M. Best provides ratings based on an insurer's annual financial reports
and survey information for several years of operations. A.M. Best rates over
2,300 property/casualty insurers each year. For years prior to the 1994, FPIC
was not assigned a letter rating by A.M. Best due to what A.M. Best described as
"insufficient experience," A.M. Best requires five full years of operating
activity before assigning a rating. Ratings above B+ are B++ (Very Good), A- and
A (excellent), A+ and A++ (Superior). Ratings below B+ are B, B-, C++, C+, C,
C-, D, E, F and NA (not issued).
REGULATION
National Association of Insurance Commissioners
In order to enhance the regulation of insurer solvency, the NAIC adopted a
formula and model law to implement risk-based capital ("RBC") requirements for
property/casualty insurance companies designed to assess the minimum capital
requirements for the protection of policyholder obligations. The RBC model law
provides for four levels of regulatory action. The extent of regulatory
intervention and action increases as a level of surplus to RBC falls. The first
level, the Company Action Level (as defined by the NAIC), requires an insurer to
submit a plan of corrective actions to the regulator if surplus falls below 200%
of the RBC amount. The Regulatory Action Level (as defined by the NAIC) requires
an insurer to submit a plan
40
<PAGE> 42
containing corrective actions and requires the relevant insurance commissioner
to perform an examination or other analysis and issue a corrective order if
surplus falls below 150% of the RBC amount. The Authorized Control Level (as
defined by the NAIC) gives the relevant insurance commissioner the option either
to take the aforementioned actions or to rehabilitate or liquidate the insurer
if surplus falls below 100% of the RBC amount. The fourth action level is the
Mandatory Control Level (as defined by the NAIC) which requires the relevant
insurance commissioner to rehabilitate or liquidate the insurer if surplus falls
below 70% of the RBC amount. Based on the foregoing formulae, as of December 31,
1997, FPIC's ratio of total adjusted surplus to Authorized Control Level RBC was
340%.
The NAIC's Insurance Regulatory Information System ("IRIS") was developed
by a committee of state insurance regulators and is primarily intended to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies 12 industry ratios and specifies "usual values" for each ratio.
Departure from the usual values on more than four of the ratios may lead to
increased regulatory oversight. Based on its 1997 statutory financial statement,
FPIC was within the usual range for eight of the 12 IRIS tests.
FPIC was not within the usual range of ratios for Change in Net Writings
and Surplus Aid to Surplus due to growth in net written premium and contingent
ceding commission related to favorable loss experience on the swing-rated
reinsurance treaties. A swing-rated reinsurance treaty allows the ceding company
to share in the profitability of its reinsurance program by receiving a portion
of a reinsurance contract's profits. During 1997, net written premium increased
by 48% which exceeded the upper limit of the NAIC usual range of 33%.
Additionally during 1997 FPIC recorded $1.5 million in contingent ceding
commission related to the swing-rated reinsurance treaties.
Unusual values were also noted for IRIS ratios for the Two-Year Reserve
Development to Surplus and Estimated Current Reserve Deficiency to Surplus.
These ratios were both impacted by the results of the Montrose Decision and the
resultant retroactive liability. See "Risk Factors -- Regulations, Pending
Legislation and Case Law" and "-- Reserves."
General
The Company is principally regulated by the DOI and the Commissioner.
California and various other states have established supervisory agencies with
broad authority to regulate, among other things, licenses to transact business,
premium rates for certain coverages, trade practices, agent licensing, policy
forms, underwriting and claims practices, reserve adequacy and insurer solvency.
California, like many jurisdictions, also regulates investment activities on the
basis of quality, distribution and other quantitative criteria. The Company's
insurance operations and accounts are subject to examination upon request by
California insurance regulators. The Company is also subject to examination by
all other states in which it is licensed to do business. California has also
enacted legislation which regulates insurance holding company systems, including
acquisitions, dividends, the use of surplus, the terms of affiliate transactions
and other related matters. The last DOI examination of the Company was for the
three years ended December 31, 1994.
The California insurance holding company law also requires the Group to
register with the DOI and file certain reports containing information concerning
its capital structure, ownership, financial conditions and general business
operations.
Recently, the insurance industry has been subject to increased scrutiny. A
number of state legislatures have considered or enacted legislative proposals
that alter and, in many cases, increase the authority of state agencies to
regulate insurance companies and holding company systems. In addition,
legislation has been introduced in several of the past sessions of Congress
which, if enacted, could result in the federal government assuming some role in
the regulation of the insurance industry. Several committees of Congress have
made inquiries and conducted hearings as part of a broad study of the regulation
of United States insurance companies.
In partial response to Congress' initiatives, the NAIC and insurance
regulators are re-examining existing laws and regulations and their application
to insurance companies. In particular, this re-examination has
41
<PAGE> 43
focused on insurance company investment and solvency issues and, in some
instances, has resulted in new guidelines. The NAIC has formed groups to study
and formulate regulatory proposals on such diverse issues as the use of surplus
debentures, accounting for reinsurance transactions and the adoption of RBC
rules. In addition, in connection with its accreditation of states and as part
of its program to monitor the solvency of insurance companies, the NAIC requires
states to adopt model NAIC laws and regulations on specific topics, such as
holding company regulations and the definition of extraordinary dividends.
California is accredited by the NAIC. Accordingly, California has followed
regulatory rule-making that makes the form of its insurance regulation generally
consistent with the model NAIC laws.
It is not possible to predict the future impact of changing state and
federal regulations on the Company's operations.
California and most other states have insurance laws requiring that
property/casualty rate schedules, policy or coverage forms, and other
information be filed with the states' regulatory authority. In many cases, such
rates and/or policy forms must be approved prior to use. There can be no
assurance that state or federal regulatory requirements will not become more
stringent in the future and have an adverse effect on the operations of the
Company's insurance subsidiary or on stockholder values.
Insurance companies are required to file detailed annual reports with the
state insurance regulator in each of the states in which they do business and
their business and accounts are subject to examination by such agencies at any
time. The Company files these reports with the DOI, the NAIC and in all other
states in which it is licensed to do business. In addition, insurance regulators
occasionally examine the insurer's financial condition, adherence to statutory
accounting principles, and compliance with insurance department rules and
regulations.
In the event of a default on FPIC's liabilities or the insolvency,
liquidation or other reorganization of FPIC, the rights of the creditors and
stockholders of FPIC to proceed against the assets of FPIC, would be governed by
state insurance laws relating to liquidation and rehabilitation. Therefore, if
FPIC were to be liquidated or the subject of rehabilitation proceedings, such
liquidation or rehabilitation proceedings would be conducted by the Commissioner
as the receiver with respect to all FPIC's assets and business. Under the Code,
all creditors of FPIC, including policyholders, would be entitled to payment in
full from such assets before the Group, as a stockholder, would be entitled to
receive any distribution thereof.
Insurance Regulation Concerning Change or Acquisition of Control
The Code contains provisions to the effect that the acquisition or change
of "control" of a domestic insurer or of any person (e.g. parent or holding
company) that controls a domestic insurer cannot be consummated without the
prior approval of the Commissioner. In general, a presumption of "control"
arises from the ownership, control, possession with the power to vote or
possession of proxies with respect to 10% or more of the voting securities of a
domestic insurer or of a person that controls a domestic insurer. A person
seeking to acquire control, directly or indirectly, of a domestic insurance
company or of any person controlling a domestic insurance company must generally
file with the Commissioner a statement relating to the acquisition of control
containing certain information required by statute and published regulations and
provide a copy of such statement to the domestic insurer.
In addition, certain state insurance laws contain provisions that require
pre-acquisition notification to state agencies of a change in control of a
non-domestic insurance company admitted in the state. While such pre-acquisition
notification statutes do not authorize the state agency to disapprove the change
of control, such statutes do authorize certain remedies, including the issuance
of a cease and desist order with respect to the non-domestic admitted insurer if
certain conditions exist such as undue market concentration.
Any future transactions involving the acquisition of 10% or more of the
Company's Common Stock by any one person or affiliated group would also
currently require approval by the Commissioner and, should the Company expand
its operations to other states, would require the pre-acquisition notification
in those states which have adopted pre-acquisition notification provisions. Such
requirements may deter, delay or prevent certain transactions affecting the
ownership of the Company's Common Stock.
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<PAGE> 44
Limits on Writing Business
The Commissioner has extremely broad power to evaluate insurance companies
on a case-by-case basis, without specific regard to published rules or
standards. That is, if the Commissioner deems an insurer to be in a potentially
hazardous condition detrimental to the interests of the public, the Commissioner
has the authority to issue orders to a particular company, restrict a company's
writings, or place it under supervision or into receivership. Management of the
Company is aware that the Commissioner is always concerned with companies being
overly leveraged by writing large volumes of premium even though they may
possess limited surplus as regards policyholders.
Regulation of Dividends and Other Payments from Insurance Subsidiaries
The Company is a legal entity separate and distinct from its subsidiaries.
As a holding company with no other significant business operations, its primary
sources of cash to meet its obligations, including principal and interest
payments with respect to indebtedness, or to be able to make stockholder
distributions, are dividends and other statutory permitted payments from FPIC.
The payment of dividends to the Company by FPIC is subject to limitations
imposed by the Code which provides that cash dividends may be paid by FPIC only
from retained earnings and surplus as regards policyholders. In addition, an
insurer subject to the insurance holding company law may not pay an
"extraordinary" dividend to its stockholders without the prior approval of the
Commissioner of Insurance.
An extraordinary dividend or distribution includes any dividend or
distribution of cash or other property, the fair market value of which, together
with that of other dividends or distributions made within the preceding 12
months, exceeds the greater of (i) 10% of such insurer's surplus as regards
policyholders as of the preceding December 31, or (ii) 100% of the insurer's
statutory net income (excluding unrealized capital gains) for the preceding
year.
FPIC presently pays the Company to service the interest payments on the
Company's $5 million Senior Notes. For the 12 months ended December 31, 1997,
these interest payments totaled $600,000.
The authority of the Commissioner and government regulators in a number of
other states is such that, if insurance regulators determine that payment of a
dividend or any other payments to an affiliate would, because of the financial
condition of the paying insurance company or otherwise, be hazardous to such
insurance company's policyholders or creditors, the regulators may disapprove,
prohibit, or mandate return of such payments that would otherwise be permitted
without prior approval.
If the ability of FPIC to pay dividends or make other payments to the
Company is materially restricted by regulatory requirements, it could affect the
Company's ability to pay dividends to stockholders and/or service debt. No
assurance can be given that California (or other states in which the Company is
licensed or may someday be licensed) will not adopt statutory provisions more
restrictive than those currently applicable. The Company presently has no plans
to pay dividends to its stockholders. See "Dividend Policy."
Surplus as Regards Policyholders
As a California admitted insurer, FPIC is subject to the primary
jurisdiction of the insurance regulations of California. As the Company expands
its operations, it will also be subject to the regulators of each state in which
it does business. Such regulators have the authority, in connection with
continued licensing (or where not yet doing business, in the granting of
licensing), to limit or prohibit writing new business within their jurisdiction
when, in the state's judgment, the insurance subsidiary is not maintaining
adequate capital and surplus as regards policyholders. Surplus as regards
policyholders is the excess of all assets over all liabilities under SAP. This
amount is regarded as a measure of financial protection to policyholders in the
event an insurance company suffers unexpected or catastrophic losses. At March
31, 1998, the Company's surplus as regards policyholders under SAP was
$14,075,000. See "Risk Factors -- Regulations, Pending Legislation and Case
Law."
43
<PAGE> 45
Investment Regulations
The Company is subject to state laws and regulations that require
diversification of its investment portfolio. Such regulations could cause
non-conforming investments to be treated as non-admitted assets for purposes of
measuring surplus as regards policyholders and, in some instances, could require
divestiture. As of March 31, 1998, the Company's investments complied with such
laws and regulations in all material respects. The NAIC has proposed the
development of a model investment code ("Model Code") which would provide
uniform regulation of insurance company investments in those states that adopt
the Model Code. Although insurance industry and regulatory groups have been
working on the development of the Model Code for several years, it is unclear at
this time what the final provisions will be. The Company believes that FPIC
could comply with the existing proposals without adverse consequences.
Membership in Solvency Funds and Associations
FPIC, like other insurers, is required to participate in insolvency funds
and associations in each state in which FPIC is licensed, and may be subject to
assessments from time to time to cover unpaid policyholder claims of insolvent
insurers participating in the same lines of business as the Company. The maximum
assessment authorized by law in California in any one year has varied between 1%
and 2% of annual premiums written in California. Most of these payments are
recoverable through future policy surcharges and premium tax reductions. No
material assessments have been made on FPIC.
Shared Markets
As a condition of receiving a license to do business in California and most
other states, a property-casualty insurance company is required to participate
in mandatory property-casualty shared market mechanisms or pooling arrangements
which provide various insurance coverages to individuals and other entities that
otherwise are unable to purchase such coverage voluntarily through private
insurers. These shared market mechanisms are structured differently depending on
the state in which they are established and the particular type of insurance
provided through the mechanism. Included within the shared market mechanisms are
structures generally referred to as assigned risk plans, reinsurance facilities,
limited liability pools and property shared markets or "fair plans." The
Company's participation in such shared market mechanisms is generally in amounts
related to the amount of the Company's direct premiums written for the types of
coverage. The cost of mandatory participation in such shared market mechanisms
has not had a materially adverse effect on the Company's operations, liquidity
and capital resources in the past. For the past three years, the Company
incurred no costs to participate in these mechanism. The amount of future losses
or assessments from the commercial lines shared market mechanisms and pooling
arrangements cannot be predicted with certainty.
Federal Legislative Proposals
For the past several years, Congress and certain federal agencies have been
investigating the current condition of the insurance industry (encompassing both
life and property-casualty insurance) in the United States to determine whether
such form of federal role in the regulation of insurance companies would be
appropriate. Congress has conducted several hearings and issued reports relating
in general to the solvency of insurers as well as the effectiveness of state
regulation. Over the past several years Congress has investigated whether it
should establish an independent federal agency to regulate the financial
condition of federally-certified life and property-casualty insurers and
reinsurers in the United States. Among several proposals considered in Congress,
which may be introduced in the future, was a bill which would allow insurers and
reinsurers to elect voluntarily to obtain a certificate of solvency from this
federal agency or to conduct regulation. Additionally, such insurers and
reinsurers would also remain subject to state regulation. At least one
congressional initiative has been introduced in Congress to modify or repeal the
McCarran-Ferguson Act (which provides a limited exemption to the "business of
insurance" from federal antitrust laws, to the extent it is subject to state
regulation). Additionally, judicial decisions narrowing the definition of
"business of insurance" for McCarran-Ferguson Act purposes may limit the ability
of insurance companies in general to share information with respect to rate
setting, underwriting and claims management practices in general. It is
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<PAGE> 46
not possible to predict whether or in what form this proposed legislation will
be enacted or the potential effects thereof on the Company and its competitors.
It is not possible to predict the outcome of any of the foregoing legislative,
administrative or congressional activities nor the potential effects thereof on
the Company.
EMPLOYEES
As of March 31, 1998, the Company had 93 full-time and 26 part-time
employees. The Company is not a party to any collective bargaining agreement.
The Company believes relations with its employees are good.
PROPERTIES
The Company leases a 25,000 square foot office building as its headquarters
in Rocklin, California. Currently all but three employees work at the Rocklin
location. It is anticipated that the existing premises will be suitable for at
least several years. The Company owns a vacant 2.91 acre lot adjacent to the
Company's headquarters for future expansion.
LEGAL PROCEEDINGS
Except for ordinary, routine litigation incidental to the Company's
business, there are no pending legal proceedings to which the Company is a
party. The nature of the Company's business subjects it to claims or litigation
relating to policies of insurance it has issued. Management believes that the
Company is not a party to any pending legal proceedings which are likely to have
a material adverse effect on its business, financial conditions or results of
operations.
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<PAGE> 47
MANAGEMENT
The following table provides information regarding the executive officers
and directors of the Company. Biographical information for each of the
individuals set forth in the table is presented below:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Robert C. Goodell..... 43 Chairman of the Board, President, Chief Executive Officer,
Director
Robert T. Kingsley.... 32 Executive Vice President, Chief Operating Officer,
Treasurer, Secretary
Artur A. Terner....... 31 Vice President and Chief Financial Officer
Timothy N. Blaede..... 37 Vice President of Information Services
John R. Hollingshead.. 45 Vice President and General Counsel
Edward J. Paoletti.... 52 Vice President of Underwriting
Wallace G. Rascher.... 67 Vice President of Sales and Marketing
Charles E. Wardlaw.... 56 Vice President of Claims
Stephen E. Adamson.... 41 Director
Patrick C. Haden...... 45 Director
Michael J. Morrissey.. 50 Director
Richard G. Pfeiffer... 53 Director
</TABLE>
Mr. Goodell has served as President and Chief Executive Officer and a
Director of the Company since June 1993 when he and the current stockholders
acquired the Company. From 1992 to 1993, Mr. Goodell provided management
consulting services at CAST Management Consultants, Inc. From 1984 to 1992, Mr.
Goodell served as Executive Vice President and Chief Financial Officer of Amwest
Insurance Group, Inc. From 1983 to 1984, he served as Vice President Financial
Systems at California Federal Savings and Loan. From 1980 to 1983, he served as
a Manager-Management Consulting for Peat, Marwick, Mitchell & Co. Between 1977
and 1980, Mr. Goodell held positions as Controller/Treasurer of Insurance
Subsidiaries of Teledyne, Inc.
Mr. Kingsley, Executive Vice President and Chief Operating Officer, joined
the Company in August 1993, prior to the acquisition of the Company. Mr.
Kingsley worked for Xerox Corporation as a Financial Analyst from 1992 to 1993
following the completion of his MBA. From 1987 to 1991, Mr. Kingsley was
Assistant Treasurer for Amwest Surety Insurance Company. From 1985 to 1987, Mr.
Kingsley served as Senior Insurance Analyst with the Surety Bond Branch of the
U.S. Treasury Department.
Mr. Terner joined the Company in 1994 as Controller, succeeding to his
current position of Vice President and Chief Financial Officer in 1997. Mr.
Terner was employed from 1989 to 1994 in various positions of increasing
responsibility culminating in the position of Supervising Senior Accountant at
KPMG Peat Marwick concentrating primarily in the financial institution practice.
Mr. Blaede joined the Company as Vice President of Information Services in
January 1997. Prior to joining the Company, he was Manager of Special Projects
at ISI Systems, Inc. From 1995 to 1996, he worked as Senior Project Manager for
Innovative Computer Systems. During the period from 1983 to 1995, Mr. Blaede
served in positions of increasing responsibility at ISI Systems, Inc.
culminating in the post of Manager, Custom Development.
Mr. Hollingshead joined the Company in November 1996 as its senior in-house
defense counsel and was promoted to Vice President and General Council in 1997.
From 1995 to 1996, he was Managing Attorney for Marlin & Saltzman, a San
Francisco Bay Area insurance defense firm which provided litigation services
exclusively for Atlantic Mutual Insurance Co. From 1982 to 1995, Mr.
Hollingshead was an attorney with Capps, Staples et al, in Walnut Creek,
California.
Mr. Paoletti became Vice President of Underwriting in 1996. From 1982 to
1996 he was Vice President/ Branch Manager in the Sacramento office for CIGNA
Corporation. From 1978 to 1982, Mr. Paoletti was employed by CG/Aetna Insurance
as Casualty Supervisor in Orange County, California and Underwriting Manager in
Portland, Oregon. Previously, he was Personal and Commercial Lines Underwriter
at Ohio
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<PAGE> 48
Casualty Insurance from 1976 to 1978 and Casualty Underwriter for Safeco
Insurance based in Fountain Valley, California from 1974 to 1976.
Mr. Rascher joined Financial Pacific in 1992 as Vice President of Sales and
Marketing. From 1991 to 1992, he was Field Auditor at DJ Insurance Services,
where he provided workers' compensation and general liability audits to
insurance company clients. From 1989 to 1991, Mr. Rascher was Branch
Manager/Regional Business Manager in Fresno, California for Sequoia Insurance
Company. From 1970 to 1989, Mr. Rascher served in positions of increasing
responsibility with California Insurance Group, including Manager of the
Sacramento Branch Office, Vice President of Marketing and Sales, and various
underwriting positions.
Mr. Wardlaw joined the Company in November 1997 as its Vice President of
Claims. From 1985 to 1997, Mr. Wardlaw was the owner of an independent
property/casualty claims adjusting firm in Sacramento, California. From 1972 to
1985, Mr. Wardlaw held various claims positions with United Pacific/Reliance
Insurance Company including manager of the Sacramento service center branch. In
1971, Mr. Wardlaw began his career with Safeco Insurance Company.
Mr. Adamson became a member of the Board in 1993. Mr. Adamson is a managing
member of Celerity Partners, a private equity firm specializing in leveraged
buyouts. Prior to forming Celerity Partners in 1995, Mr. Adamson was a managing
director of W.E. Myers & Co., a merchant banking firm. Mr. Adamson serves as
Chairman of the Board of Dynamic Circuits, Inc. and is a director of several
private companies.
Mr. Haden became a member of the Board in 1993. Since 1987, Mr. Haden has
been a general partner of Riordan, Lewis & Haden ("RLH"), a Los Angeles based
partnership which invests in management buy-out and venture capital
transactions. Mr. Haden also serves as a director of Tetra Tech, Inc., Data
Processing Resources Corporation, PIA Merchandising Services, Inc. and several
private companies.
Mr. Morrissey became a member of the Board in 1993. Since 1983, Mr.
Morrissey has been the Chairman and Chief Executive Officer of Firemark Group, a
merchant banking firm specializing in insurance related investments. Mr.
Morrissey also serves as a director of Pembridge, Inc. and New Cap Re Holdings,
Limited.
Mr. Pfeiffer became a member of the Board in 1995. Mr. Pfeiffer has worked
for St. Paul Fire and Marine Insurance Company in various capacities since 1971.
He is currently a Vice President working on St. Paul's worldwide insurance
operations.
The directors were each elected in accordance with the Stockholders
Agreement dated September 7, 1993, as amended (the "Stockholders Agreement"),
which requires that each stockholder will vote for the election of directors,
such that the following persons are elected to the Board: (i) one nominee
designated by FinPac Partners ("FinPac"), (ii) one nominee designated by St.
Paul Fire and Marine Insurance Company ("St. Paul"), (iii) one nominee
designated by Firemark Global Insurance Fund, L.P. ("Firemark"), (iv) the Chief
Executive Officer; and (v) one nominee designated by the above four nominees.
The Stockholders Agreement will terminate upon the conclusion of this Offering.
See "Principal and Selling Stockholders" and "Certain Transactions."
The Audit Committee of the Board of Directors consists of Messrs. Adamson,
Haden, Morrissey and Pfeiffer. The Audit Committee meets privately once per year
with the Company's independent auditor and actuary.
Directors of the Company who are not employed by the Company or any
subsidiary receive a fee of $5,000 per quarter. Directors are also entitled to
reimbursement for reasonable out-of-pocket expenses related to travel for Board
meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has formed a Compensation Committee of its Board of Directors
which consists of Messrs. Haden and Adamson. Mr. Haden is the nominee of RLH,
the general partner of FinPac, to the Board, and Mr. Adamson is the nominee of
FinPac, St. Paul, Firemark and the Chief Executive Officer to the Board.
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<PAGE> 49
See "Certain Transactions" for information regarding the interests of RLH in
certain transactions and arrangements involving the Company.
The Compensation Committee evaluates executive performance in relationship
to individual efforts and contributions to corporate earnings and makes
recommendations for raises and merit bonuses. The Compensation Committee is also
responsible for administration of the Company's 1993 Stock Incentive Plan.
Neither Mr. Haden nor Mr. Adamson was at any time during the year ended
December 31, 1997, or at any other time, an officer or employee of the Company.
No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board or Compensation Committee.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned
by (i) the Company's Chief Executive Officer; (ii) the other four most highly
compensated executive officers at the end of 1997; and (iii) a former executive
officer who would have been one of the other four most highly compensated
executive officers if he remained employed with the Company (the "Named
Executive Officers") for services rendered in all capacities to the Company for
each of the fiscal years in the three year period ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
SECURITIES ALL
NAME AND FISCAL UNDERLYING OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
------------------ ------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Robert C. Goodell.................. 1997 $244,043 $ 76,795 -- $ 2,684
President, Chief Executive
Officer 1996 $219,734 $ 25,000 -- $ 2,079
and Chairman of the Board 1995 $175,676 $118,148 -- $ 1,402
Robert T. Kingsley................. 1997 $135,580 $ 38,475 -- $ 2,642
Executive Vice President and 1996 $117,517 $ 39,250 15,776 $ 2,152
Chief Operating Officer 1995 $ 89,464 $ 50,000 1,972 $ 1,580
Wallace G. Rascher................. 1997 $103,778 $ 34,200 -- $ 3,379
Vice President -- Sales and 1996 $ 91,508 $ 25,000 5,916 $ 2,745
Marketing 1995 $ 84,488 $ 45,000 1,972 $ 2,203
Edward J. Paoletti................. 1997 $108,516 $ 38,475 -- $ 2,288
Vice President -- Underwriting 1996 $ 78,366 $ 55,000 9,860 $ 216
1995 -- -- -- --
Timothy N. Blaede.................. 1997 $ 87,461 $ 51,813 9,860 $ 94
Vice President -- 1996 -- -- -- --
Information Services 1995 -- -- -- --
John R. Aye........................ 1997 $112,228 $ -- -- $55,788
Vice President -- Claims(2) 1996 $100,260 $ 25,000 5,916 $ 1,788
1995 $ 87,162 $ 50,000 1,972 $ 1,122
</TABLE>
- ---------------
(1) Consists of excess premiums paid by the Company for group term life
insurance, contributions by the Company to the executive's 401(k) benefit
plan and, when applicable, value of personal use of automobiles and
severance benefits.
(2) Effective December 15, 1997, Mr. Aye no longer served as an officer of the
Company. He received $53,500 in severance benefits in 1997.
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<PAGE> 50
The following table sets forth information concerning options granted to
the Named Executive Officers of the Company during the 1997 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
NUMBER OF RATES OF STOCK
SECURITIES PERCENT OF PRICE APPRECIATION
UNDERLYING TOTAL OPTIONS FOR OPTION TERMS
OPTIONS GRANTED TO EXERCISE ($)(2)
GRANTED EMPLOYEES IN PRICE EXPIRATION --------------------
NAME (#)(1) FISCAL YEAR (%) ($/SHARE) DATE 5% 10%
---- ------------- --------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Timothy N. Blaede....... 9,860 100% $4.82 2/12/07 $77,401 $123,250
</TABLE>
- ---------------
(1) Option vests ratably over the succeeding five anniversary dates.
(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the option immediately prior to its
expiration, assuming the Common Stock appreciates at the compounded annual
rates specified over the term of the option. These numbers do not take into
account provisions of the option providing termination of the option
following termination of employment or nontransferability of the option and
do not make any provision for tax associated with exercise. Because actual
gains will depend upon, among other things, future performance of the Common
Stock, there can be no assurance that the amounts reflected in this table
will be achieved.
The following table sets forth information concerning the number of options
owned by the Named Executive Officers and the value of any in-the-money
unexercised stock options as of December 31, 1997. No options were exercised by
the Named Executive Officers during fiscal 1997.
AGGREGATE OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT DECEMBER 31, DECEMBER 31,
1997(#) 1997($)(1)(2)
------------------- ---------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ------------------- ---------------
<S> <C> <C> <C> <C>
Robert C. Goodell............. -- -- 0/0 $0/$0
Robert T. Kingsley............ -- -- 11,832/7,888 $23,309/$12,148
Wallace G. Rascher............ -- -- 5,916/3,944 $14,198/$6,074
Edward J. Paoletti............ -- -- 1,972/7,888 $2,781/$11,122
Timothy N. Blaede............. -- -- 0/9,860 $0/$9,071
John R. Aye................... -- -- 5,916/3,944 $14,198/$6,074
</TABLE>
- ---------------
(1) Because there is no established public trading market for Common Stock, the
Board of Directors of the Company must, under certain circumstances,
determine the fair market value of the Common Stock. The Company believes
that the fair market value of the Common Stock was $5.94 per share as of
December 31, 1997.
(2) Values for "in-the-money" outstanding options represent the positive spread
between the respective exercise prices of the outstanding options and the
fair market value of the underlying Common Stock of $5.94 per share as
described in Note 1.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Robert C. Goodell, pursuant to
which Mr. Goodell holds the position of Chief Executive Officer and Director,
for a one-year term. This agreement will renew automatically at the end of such
term and each anniversary thereafter for another one-year term unless
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<PAGE> 51
terminated in accordance with such agreement. Mr. Goodell is paid a salary of
$250,000 per annum subject to increase as agreed to by Mr. Goodell and the
Board. He is also eligible to receive a bonus of up to 50% of his annual base
salary, as determined by the Board of Directors. The agreement also provides for
an automobile allowance not to exceed $900 per month and standard benefits under
any Company employee benefits plan and any additional benefits that are approved
by the Board. Upon termination of employment due to disability or by the Company
(with or without cause), Mr. Goodell will receive a severance payment equal to
the monthly portion of his annual base salary for the first 12 months after
termination of employment regardless of any amounts earned by him from other
employment during such period. During this 12 month period, Mr. Goodell will be
entitled to all standard employee benefits. Also, upon such termination or upon
termination due to death, Mr. Goodell will receive the unpaid portion of his
annual base salary and the prorated portion of his bonus. If Mr. Goodell
voluntarily terminates his employment, he is entitled only to the unpaid portion
of his annual base salary.
During his employment and at all times thereafter, Mr. Goodell will be
subject to disclosure restrictions regarding confidential information of the
Company. For 36 months after his termination, Mr. Goodell also may not solicit
any employees of the Company to become employed by Mr. Goodell or his subsequent
employer.
In February 1997, the Company entered into an employment agreement with
Robert T. Kingsley pursuant to which Mr. Kingsley became Executive Vice
President and Chief Operating Officer of the Company. The agreement provides for
an unspecified annual salary. Upon termination of his employment by the Company
or by mutual agreement with the Company, Mr. Kingsley will receive a severance
of six months his annual base salary. This severance payment will not be offset
by any amounts earned by him from any other employment during such six month
period. Mr. Kingsley will not receive a severance payment upon termination as a
result of his death or resignation.
The Company entered into employment agreements with Messrs. Rascher,
Blaede, Terner, Wardlaw and Hollingshead with terms identical to those of Mr.
Kingsley's contract. All of these contracts, including Mr. Kingsley's, are
terminable upon 30 days written notice by the Company.
In February 1996, the Company entered into an employment agreement with
Edward J. Paoletti, pursuant to which Mr. Paoletti became Vice President of
Underwriting. The agreement calls for an annual salary of $100,000 and a bonus
equal to 50% of his base salary based on achievement targets regarding
production, quality and service goals for the underwriting department. If the
Company terminates Mr. Paoletti's employment for any reason, it will pay
severance equal to 36 weeks of his annual salary. He will receive no other
benefits other than those provided by COBRA during such severance period.
RESTRICTED STOCK AGREEMENT
The Company entered into a Restricted Stock Agreement dated September 7,
1993 with Mr. Goodell in which the Company has the right to repurchase for
cancellation up to 268,819 shares of Common Stock (the "Initial Shares") held by
Mr. Goodell upon the occurrence of certain events at a purchase price of
$0.00394 per share. These events include: Mr. Goodell's termination, a change in
control of the Company and December 31, 1998. A "change in control" includes a
merger or consolidation of the Company into another company, the sale of all or
substantially all of the assets of the Company or a sale of all or substantially
all of the capital stock of the Company.
From 1994 to 1998, a portion of the Initial Shares became exempt from
repurchase (the "Exempt Shares") upon the Company meeting certain net income
thresholds. These net income targets will be adjusted if the Company consummates
a public offering in which the Series A Stock is converted into Common Stock.
Further, upon a "change in control" of the Company, all Initial Shares will
become Exempt Shares. As of December 31, 1997, 209,021 Initial Shares had become
Exempt Shares.
In addition, if Mr. Goodell terminates his employment for any reason on or
before December 31, 1998, the Company may repurchase all shares of Common Stock
(including Exempt Shares) held by Mr. Goodell (including shares held by trusts
established for the benefit of Mr. Goodell or his spouse) except for Initial
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<PAGE> 52
Shares, at a price equal to "book value" per share. The "book value" per share
will be the initial price paid for such shares plus the net income of the
Company determined in accordance with GAAP, calculated from the date of the
agreement to the end of the fiscal quarter immediately preceding the fiscal
quarter in which Mr. Goodell is terminated. The Company may purchase Initial
Shares at $0.00394 per share. If the Company fails to repurchase all of Mr.
Goodell's shares upon such termination, the other stockholders of the Company
may repurchase his shares at the same price offered to the Company.
In the event of the death of Mr. Goodell, his estate has the right to cause
the Company to repurchase any shares not repurchased in the manner described
above at the price the shares were first offered to the Company, provided that,
the estate may not the cause a repurchase to exceed the amount of proceeds from
any key man life insurance covering Mr. Goodell.
1993 STOCK INCENTIVE PLAN
The Company's 1993 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors on September 7, 1993. The Company has reserved 109,420
shares for issuance under the Incentive Plan. As of March 31, 1998, 1,972 shares
had been issued upon exercise of options granted under the Incentive Plan,
options for 82,819 shares were outstanding and 24,629 shares remained available
for future grant. Shares of Common Stock subject to outstanding options, which
expire or terminate prior to exercise, will be available for future issuance
under the Incentive Plan.
Under the Incentive Plan, employees and consultants may be awarded any form
of Company securities (an "Award"), including without limitation, options to
purchase shares of Common Stock, shares of Common Stock, warrants, phantom
stock, stock appreciation rights, restricted shares, stock units or a
combination thereof. These individuals may also receive cash bonuses under the
Incentive Plan. Options may be incentive stock options designed to satisfy
Section 422 of the Internal Revenue Code or nonstatutory stock options not
designed to meet such requirements.
The Incentive Plan is administered by the Compensation Committee. The
Compensation Committee has the complete discretion to determine which eligible
individuals are to receive Awards; determine the Award type; determine the
number of shares subject to an Award, vesting requirements and other features
and conditions of such Awards; interpret the Incentive Plan; and make all other
decisions relating to the operation of the Incentive Plan.
Upon a change in control, the Compensation Committee may accelerate the
receipt of benefits pursuant to an Award. A change in control includes a merger
or consolidation of the Company, the dissolution or liquidation of the Company,
a sale of all or substantially all of the assets of the Company and acquisition
of a specified percentage of the combined voting power of the Company's
outstanding stock.
The Board may amend or terminate the Incentive Plan at any time. Amendments
may be subject to stockholder approval to the extent required by applicable
laws. In any event, the Incentive Plan will terminate on September 7, 2003,
unless sooner terminated by the Board.
401(K) PLAN
The Company sponsors a contributory 401(k) Plan. All full-time employees of
the Company 21 years of age or older who have completed one year of service are
eligible for participation in the Plan. Currently, the Company matches 100% of
the employee's pre-tax contribution up to $2,000 and matched 100% of each
employee's contribution up to $1,000 and $1,500 in 1995 and 1996, respectively,
to the Plan. The total amount matched for 1995, 1996 and 1997 was $20,565,
$61,435, and $87,980, respectively.
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<PAGE> 53
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of April 1, 1998 and as
adjusted to reflect the sale of Common Stock offered hereby, by: (i) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock; (ii) each of the Company's directors; (iii) each of the Named
Executive Officers; (iv) each Selling Stockholder; and (v) all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
BENEFICIAL SHARES
OWNERSHIP NUMBER OF BENEFICIALLY
PRIOR TO SHARES TO OWNED AFTER
OFFERING BE SOLD OFFERING(1)
---------------------- IN THE ----------------------
SHARES PERCENTAGE OFFERING SHARES PERCENTAGE
--------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Robert C. Goodell(2)................... 381,265 12.7% 381,265 7.6%
Robert T. Kingsley(3).................. 15,776 * 15,776 *
Wallace G. Rascher(4).................. 7,888 * 7,888 *
Edward J. Paoletti(5).................. 3,944 * 3,944 *
Timothy N. Blaede(6)................... 1,972 * 1,972 *
Riordan, Lewis & Haden(7).............. 771,712 25.7% 136,971 634,741 12.7%
Patrick C. Haden(7).................... 771,712 25.7% 634,741 12.7%
Firemark Advisors, Inc.(8)............. 771,712 25.7% 136,971 634,741 12.7%
Michael J. Morrissey(8)................ 771,712 25.7% 634,741 12.7%
St. Paul Fire & Marine Insurance
Company(9)........................... 771,712 25.7% 136,972 634,740 12.7%
Richard G. Pfeiffer(9)................. -- -- -- --
Celerity Partners, L.P.(10)............ 59,367 2.0% 59,367 -- --
Stephen E. Adamson(11)................. 110,542 3.7% 51,175 1.0%
Robert S. Goodell(12).................. 39,438 1.3% 10,000 29,438 *
W.E. Myers(13)......................... 40,940 1.4% 40,940 *
Brian Sanderson(14).................... 10,235 * 10,235 *
David Rogers(15)....................... 70,894 2.4% 19,719 51,175 *
All Directors and Executive Officers as
a Group (11 persons)................. 2,072,697 68.9% 1,739,388 34.8%
</TABLE>
- ---------------
* Less than 1%
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Includes 321,211 shares held jointly by Robert C. and Suzanne M. Goodell as
of April 1, 1998. The address of such persons is c/o Financial Pacific
Insurance Group, Inc., 3850 Atherton Road, Rocklin, California 95765.
(3) Consists of 15,776 shares issuable upon exercise of options which are
exercisable as of, or will be exercisable within 60 days of, April 1, 1998.
(4) Consists of 7,888 shares issuable upon exercise of options which are
exercisable as of, or will be exercisable within 60 days of, April 1, 1998.
(5) Consists of 3,944 shares issuable upon exercise of options which are
exercisable as of, or will be exercisable within 60 days of, April 1, 1998.
(6) Consists of 1,972 shares issuable upon exercise of options which are
exercisable as of, or will be exercisable within 60 days of, April 1, 1998.
(7) Includes 178,108 shares issuable upon exercise of warrants which are
exercisable as of April 1, 1998. Shares are owned by FinPac Partners, L.P.,
the general partner of which is RLH. Mr. Haden, a Director
52
<PAGE> 54
of the Company, may be deemed to share voting and investment power with
respect to all such shares as a general partner of RLH. Mr. Haden does not
own any shares directly. The address of such persons is 300 S. Grand
Avenue, 29th Floor, Los Angeles, California 90071
(8) Includes 178,108 shares issuable upon exercise of warrants which are
exercisable as of April 1, 1998. Shares are owned by Firemark. Mr.
Morrissey, a Director of the Company, may be deemed to have voting and
investment power with respect to all such shares as the Chairman and Chief
Executive Officer of Firemark. Mr. Morrissey does not own any shares
directly. The address of such persons is 67 Park Place, Morristown, New
Jersey 07960.
(9) Includes 178,108 shares issuable upon exercise of warrants which are
exercisable as of April 1, 1998. The address of such persons is 385
Washington Street, MC 516A, St. Paul, Minnesota 55102. Mr. Pfeiffer has
disclaimed beneficial ownership of the shares owned by St. Paul.
(10) Consists of 59,367 shares issuable upon exercise of warrants which are
exercisable as of April 1, 1998.
(11) Includes 59,367 shares held by Celerity Partners, L.P. Mr. Adamson, a
Director of the Company, may be deemed to have voting and investment power
with respect to all such shares as the managing member of Celerity
Partners. Mr. Adamson also owns 51,175 shares directly, that are issuable
upon exercise of warrants which are exercisable as of April 1, 1998.
(12) Mr. Goodell is the father of Robert C. Goodell.
(13) Consists of 40,940 shares issuable upon exercise of warrants which are
exercisable as of April 1, 1998.
(14) Consists of 10,235 shares issuable upon exercise of warrants which are
exercisable as of April 1, 1998.
(15) Includes 51,175 shares issuable upon exercise of warrants held by UMB Bank
NA as successor trustee of Latham & Watkins Thrift & Profit Sharing
Retirement Plan-10A FBO D. Rogers, which are exercisable as of April 1,
1998.
CERTAIN TRANSACTIONS
On December 28, 1995, the Company entered into a Note and Warrant Purchase
Agreement (the "Agreement") with Firemark, FinPac, St. Paul, and Celerity
FinPac, LLC ("Celerity"). Pursuant to the Agreement, the Company issued and
sold: (i) $5,000,000 aggregate principal amount of its 12% Senior Notes due
January 1, 2001 (the "Senior Notes") and (ii) Common Stock Purchase Warrants for
the purchase of up to 593,691 shares of the Company's Common Stock (the "Senior
Note Warrants"), as follows: Firemark, FinPac and St. Paul each acquired a
Senior Note in the principal amount of $1,500,000 and Senior Note Warrants to
acquire 178,108 shares of Common Stock, and Celerity acquired a Senior Note in
the principal amount of $500,000 and Senior Note Warrants to acquire 59,367
shares of Common Stock.
In accordance with the terms of the Senior Notes, the Company has paid
interest at the rate of 12% per annum thereon on July 1, 1996, January 1 and
July 1, 1997, and January 1, 1998 to Firemark, FinPac, St. Paul and Celerity.
The Company intends to prepay the Senior Notes with a portion of the proceeds
from this Offering. See "Use of Proceeds." The Senior Note Warrants may be
exercised at any time prior to January 1, 2004, and have an exercise price of
$5.61 per share. However, such Senior Note Warrants must be exercised in
connection with an underwritten public offering of the Company's Common Stock in
which the gross proceeds to be received by the Company equal or exceed
$10,000,000 and the public offering price of the Common Stock is not less than
$12.69 per share (as adjusted for stock splits, dividends or other
recapitalization transactions). Holders of the Senior Note Warrants are entitled
to certain registration rights. See "Description of Capital
Stock -- Registration Rights."
Patrick C. Haden, a Director of the Company, is a general partner of RLH,
the general partner of FinPac. Mr. Haden is also of counsel to Riordan &
McKinzie, the Company's legal counsel.
Michael J. Morrissey, a Director of the Company, is the Chairman and Chief
Executive Officer of Firemark Advisors, Inc. ("Advisors"), the general partner
of Firemark. In June 1997, the Company contracted with Advisors to render
financial advisory services. Advisors was paid a fee of $50,000 plus expenses of
$13,099 for its services.
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<PAGE> 55
Since 1995, St. Paul, through its reinsurance affiliate, has participated
on the Company's property quota share and casualty excess of loss reinsurance
treaties. St. Paul has a 7.5% participation on the property quota share
reinsurance treaty and a 15% participation on the casualty excess of loss
reinsurance treaty. St. Paul is subject to the same terms and conditions as all
other reinsurance treaty participants. During 1997, the Company ceded $1,269,000
of written premium to St. Paul. At December 31, 1997, the Company had a
reinsurance recoverable under its reinsurance treaties of $1,336,000 due from
St. Paul which consists of paid and unpaid losses and loss adjustment expenses
and unearned premiums, net of amounts payable by the Company to St. Paul.
During 1997, Mr. Goodell sold 15,187 shares of Common Stock to each of
FinPac, St. Paul and Firemark at a price of $9.88 per share. The total proceeds
to Mr. Goodell were $450,000.
The Company has entered into indemnification agreements with its directors
and executive officers for the indemnification of and advancement of expenses to
such persons to the full extent permitted by law. The Company also intends to
execute such agreements with its future directors and executive officers.
The Company believes that the foregoing transactions were in its best
interest and were made on terms no less favorable to the Company than could have
been obtained for unaffiliated third parties. All future transactions between
the Company and any of its officers, directors or principal stockholders will be
approved by a majority of the independent and disinterested members of the Board
of Directors, will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and will be in connection with bona
fide business purposes of the Company.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 7,500,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock. The following is a
description of the authorized capital stock of the Company as of April 15, 1998.
At such date, there were seven holders of record of the Common Stock and three
holders of record of the Series A Stock.
COMMON STOCK
As of April 15, 1998, there were 487,955 shares of Common Stock and 4,400
shares of Series A Stock outstanding. There will be 4,816,897 shares of Common
Stock outstanding (assuming conversion of all shares of Series A Stock into
1,735,521 shares of Common Stock, the full exercise of all Senior Note Warrants
into 593,691 shares of Common Stock and no exercise after April 1, 1998, of
outstanding options) after giving effect to the sale of shares of Common Stock
to the public offered hereby.
Holders of Common Stock are entitled to one vote per share and have no
cumulative voting rights. In general, action to be taken by a vote of the
stockholders of the Company requires the affirmative vote of at least a majority
of the votes cast by the holders of Common Stock entitled to vote, except that
the election of directors requires a plurality of the votes cast at an election.
Consequently, the holder or holders of record of more than 50% of the
outstanding shares of Common Stock can elect all of the Company's directors.
Subject to any preferences that may be applicable to subsequently issued
shares of Preferred Stock, if and when issued, the holders of Common Stock are
entitled to receive such dividends as may be declared from time to time by the
Board of Directors in its discretion from funds legally available therefor, and
upon liquidation, winding up and/or dissolution of the Company are entitled,
after payment of liabilities and preferences of outstanding Preferred Stock, if
any stock, to share ratably in assets available for distribution.
The holders of Common Stock have no preemptive rights, cumulative voting
rights, or rights to convert shares of Common Stock into any other securities
and are not subject to future calls or assessments by the Company. All
outstanding shares of Common Stock of the Company are fully paid and
nonassessable.
Prior to the date of this Registration Statement, there has been no
established public trading market for the Common Stock. The Company has applied
for listing of the Common Stock on the Nasdaq National Market. See "Risk
Factors -- Lack of Prior Public Market for Common Stock."
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<PAGE> 56
PREFERRED STOCK
Upon the consummation of the Offering, the Company will have no outstanding
preferred stock, but the Board of Directors, without further action by the
holders of the Common Stock, is authorized to fix the dividend rights and terms,
conversion or exchange rights, voting rights, redemption rights and terms,
liquidation preferences, sinking fund and any other designations, powers,
rights, preferences, privileges, qualifications, limitations and restrictions
applicable to each series of preferred stock. The issuance of preferred stock
could adversely affect the voting power and other rights of the holders of
Common Stock.
The authority possessed by the Board of Directors to issue preferred stock
could potentially be used to discourage attempts by others to obtain control of
the Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult or more costly to successfully complete. The Board
of Directors may issue preferred stock with voting, dividend or liquidation and
conversion right that could adversely affect the rights of the holders of Common
Stock. There are no agreements or understandings for the issuance of preferred
stock, and the Board of Directors has no present intention to issue any
preferred stock.
As of April 15, 1998, the Board of Directors has designated one series of
preferred stock, Series A Stock, comprised of 5,000 shares of the Preferred
Stock, 4,400 of which were outstanding. Each share of Series A Stock has a
stated value of $1,000. Upon the consummation of the Offering, each share of
Series A Stock will, pursuant to the terms of the Company's Restated Certificate
of Incorporation, convert into 394.375 shares of Common Stock.
WARRANTS
As of April 1, 1998, the Company has outstanding Warrants providing for the
purchase of an aggregate of 747,216 shares of Common Stock (the "Warrants"). The
exercise price of the Warrants range from $2.54 to $5.61 per share, and the
Warrants expire on dates ranging from September 7, 2003 to January 1, 2004.
Warrants to purchase 593,691 shares of Common Stock will be exercised in
connection with this Offering. Under the Warrants, the holder may elect to
exercise its Warrant by payment of the exercise price or on a cashless basis.
The holders of the Senior Note Warrants will exercise their Warrants by
canceling indebtedness under the Senior Notes in the amount of the exercise
price.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
55
<PAGE> 57
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
At April 15, 1998, assuming conversion of all shares of Series A Stock into
1,725,251 shares of Common Stock and the full exercise of the Senior Note
Warrants into 593,691 shares of Common Stock, holders of approximately 2,816,897
shares of Common Stock are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
Stockholders Agreement, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such Common Stock therein. All of these registration rights are subject to
certain conditions and limitations, among them the right of the underwriters of
an offering to limit the number of shares included in such registration. These
rights to cause the Company to register such shares shall terminate once such
shares may be sold in accordance with Rule 144(k) under the Securities Act.
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company of Cranford, New Jersey will be the transfer
agent and registrar for the shares of Common Stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the DGCL authorizes a Delaware corporation to include a
provision in its Certificate of Incorporation limiting or eliminating the
personal liability of its directors to the corporation and its stockholders for
monetary damages for breach of the directors' fiduciary duty of care. The duty
of care requires that, when acting on behalf of the corporation, directors
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by such
provision, directors are accountable to corporations and their stockholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Although Section 102 of the DGCL does not change a
director's duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Company's Certificate
of Incorporation and Bylaws include provisions which limit or eliminate the
personal liability of its directors to the fullest extent permitted by Section
102 of the DGCL. Consequently, a director of officer will not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for (i) any breach of the director's duty
of loyalty to the Company or its stockholders; (ii) acts or omissions not in
good faith or which involved intentional misconduct or a knowing violation of
law; (iii) unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions; and (iv) any transaction from which the
director derived an improper personal benefit.
The Company Certificate of Incorporation and Bylaws also provide, in
effect, that, to the fullest extent and under the circumstances permitted by
Section 145 of the DGCL, the Company will indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is a director or officer of
the Company, or is or was serving at the request of the Company as a director or
officer of another corporation or enterprise. The inclusion of these
indemnification provisions in the Company's Certificate of Incorporation and
Bylaws is intended to enable the Company to attract qualified persons to serve
as directors and officers who might otherwise be reluctant to do so. The Company
may, in its discretion, similarly indemnify its employees and agents.
Depending upon the character of the proceeding, the Company may indemnify
its directors and officers against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding if the person indemnified
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the
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<PAGE> 58
Company, and, with respect to any criminal action or proceeding, had no cause to
believe his or her conduct was unlawful. To the extent that a director or
officer of the Company has been successful in the defense of any action, suit or
proceeding referred to above, under the DGCL, the Company would have the
obligation to indemnify him or her against expenses (including attorneys' fees)
actually and reasonably incurred in connection therewith.
In addition, the limited liability provisions in the Certificate of
Incorporation and the indemnification provisions in the Certificate of
Incorporation and Bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty (including breaches
resulting from grossly negligent conduct) and may have the effect of reducing
the likelihood of derivative litigation against directors and officers, even
through such an action, if successful, might otherwise have benefited the
Company and its stockholders. Furthermore, a stockholder's investment in the
Company may be adversely affected to the extent the Company pays the costs of
settlement and damage awards against directors and officers of the Company
pursuant to the indemnification provisions in the Company's Bylaws. The limited
liability provisions in the Certificate of Incorporation will not limit the
liability of directors under federal securities laws.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 4,816,897 shares of
Common Stock outstanding (assuming conversion of all shares of Series A Stock
into 1,735,221 shares of Common Stock, the full exercise of all Senior Note
Warrants into 593,691 shares of Common Stock and no exercise after April 1, 1998
of outstanding options). All 2,500,000 shares sold pursuant to this Offering
will be freely tradable without restriction or further registration under the
Securities Act, unless held by an "affiliate" of the Company (as that terms is
defined below). Any such affiliate would be subject to the resale limitation of
Rule 144 adopted under the Securities Act.
The remaining shares of outstanding Common Stock are "restricted
securities" (the "Restricted Shares") within the meaning of Rule 144 under the
Securities Act and may not be sold in the absence of a registration under the
Securities Act unless an exemption from registration is available, including an
exemption contained in Rule 144.
Of the Restricted Shares, an aggregate of 2,816,897 shares of Common Stock
will be eligible for sale in the public market subject to Rule 144 and Rule 701
under the Securities Act and the expiration of a contractual lock-up ending 180
days after the date of the Prospectus, unless an earlier release is consented
to, in whole or in part, by the Representative.
In general, under Rule 144 as currently in effect, any person (or person
who shares are aggregate for purpose for Rule 144) who has beneficially owned
restricted securities, as that term is defined in Rule 144, for at least one
year (including, in the case of a nonaffiliated holder, any period of ownership
of preceding nonaffiliate holders) is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock of the Company, or (ii) the average
weekly trading volume in Common Stock during the four calendar weeks preceding
such sale, provided that certain public information about the Company, as
required by Rule 144, is then available and the seller complies with the manner
of sale and notification requirements of the rule. A person who is not an
affiliate and has not been an affiliate within three months prior to the sale
and has, together with any previous owners who were not affiliates, beneficially
owned restricted securities for at least two years is entitled to sell such
shares under Rule 144 (k) without regard to any of the volume limitations
described above.
Rule 701 permits resales of shares issued pursuant to certain compensatory
benefit plans and contracts and prior to the date the issuer becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subject to certain limitations on the aggregate offering
price of a transaction and certain other conditions, commencing 90 days after
the issuer becomes subject to the reporting requirements of the Exchange Act, in
reliance upon Rule 144, but without compliance with certain restrictions,
including the holding period requirements, contained in Rule 144. In addition,
the Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer
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<PAGE> 59
before it becomes subject to the reporting requirements of the Exchange Act,
along with the shares acquired upon exercise of such options (including
exercises after the date of this Prospectus).
No predictions can be made of the effect, if any, that future sales of
shares of Common Stock, and grants of options to acquire shares of Common Stock,
or the availability of shares for future sale, will have on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception that such sales could
occur, could adversely affect the prevailing market prices of the Common Stock.
See "Principal and Selling Stockholders," "Description of Capital Stock" and
"Underwriting."
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<PAGE> 60
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom EVEREN Securities, Inc.
is acting as representative (the "Representative"), have severally agreed to
purchase from the Company and the Selling Stockholders, and the Company and the
Selling Stockholders have agreed to sell to the Underwriters, the respective
number of shares of Common Stock set forth opposite each Underwriter's name
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
EVEREN Securities, Inc......................................
Total............................................. 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligation is such that they are committed to purchase and pay for all the
shares of Common Stock if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain securities dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow,
and such selected dealers may reallow, a concession not in excess of $
per share to certain brokers and dealers. After this Offering, the price to the
public, concession, allowance and reallowance may be changed by the
representatives of the Underwriters.
The Company has granted the Underwriters an option, exercisable during the
45-day period after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock to cover over-allotments, if any, at the same
price per share as the initial 2,500,000 shares purchased by the Underwriters of
the Company. To the extent that the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares of Common Stock in approximately the same proportions as
set forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this Offering.
At the close of this Offering, the Company has agreed to pay the
Representative a non-accountable expense allowance of one percent of the total
offering proceeds, which will include proceeds from the Underwriters' exercise
of the over-allotment option to the extent exercised. The Representative's
expenses in excess of the non-accountable expense allowance will be borne by the
Underwriters.
The Company has agreed to issue to the Representative warrants (the
"Representative's Warrants") to purchase up to 143,750 shares of Common Stock,
at an exercise price per share equal to 110% of the initial public offering
price per share. The Representative's Warrants are exercisable for a period of
four years, commencing one year from the effective date (the "Effective Date")
of the Registration Statement of which this Prospectus is a part and expire five
years from the Effective Date. The Representative's Warrants will not be sold,
offered for sale, transferred, assigned or hypothecated for a period of one year
from the effective date of the Offering other than to officers or partners of
the Underwriters and members of the selling group and their officers and
partners. The holders of the Representative's Warrants will have no voting,
dividend or other
59
<PAGE> 61
shareholders' rights until the Warrants are exercised. The Company has granted
the Representative certain demand and piggy-back registration rights related to
the Representative's Warrants, which are applicable during the period that the
Representative's Warrants are exercisable and expire five years from the
Effective Date.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Company has agreed not to issue, and all the Company's officers and
directors, the Selling Stockholders, and all of the other stockholders, who in
the aggregate hold 100% of the shares of the Common Stock of the Company
outstanding immediately prior to the completion of this Offering, have agreed
not to sell, or otherwise dispose of, any shares of Common Stock or other equity
securities of the Company for a period of 180 days after the date of this
Prospectus (other than shares sold pursuant to this Prospectus) without the
prior written consent of the Representative.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
Prior to this Offering, there has been no trading market for the Common
Stock. Consequently, the initial public offering price was negotiated among the
Company, the Selling Stockholders and the Representative. Among the factors
considered in such negotiations were the history of and the prospects for the
Company and the industry in which it competes; an assessment of the Company's
management; the past earnings of the Company and the trend and future prospects
of such earnings; the present state of the Company's development; the general
conditions of the securities markets at the time of the Offering; and the market
prices of publicly traded common stocks of comparable companies in recent
periods. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to this Offering at or above the initial public offering price.
The initial public offering price set forth on the cover page of this
Prospectus should not be considered an indication of the actual value of the
Common Stock. Such price is subject to change as a result of market conditions
and other factors. No assurances can be given that Common Stock can be resold at
or above the initial public offering price.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Riordan & McKinzie, a Professional Corporation, Los Angeles,
California and for the Underwriters by Morrison & Foerster LLP, Los Angeles,
California. Certain principals and employees of Riordan & McKinzie are limited
partners of a partnership which is a limited partner of FinPac Partners, a
California limited partnership and one of the Company's principal stockholders.
Certain insurance regulatory matters will be passed upon by LeBoeuf, Lamb,
Greene & MacRae L.L.P., San Francisco, California. See "Principal and Selling
Stockholders" and "Certain Transactions."
EXPERTS
The financial statements and schedules of Financial Pacific Insurance
Group, Inc. as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
60
<PAGE> 62
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement (which term
shall include all amendments, exhibits and schedules thereto) on Form S-1 under
the Securities Act, with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission, to which Registration Statement reference is hereby made. Statements
contained in this Prospectus as to the contents of any contract, agreement or
other document referred to are complete in all material respects. However, with
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved. The Registration Statement may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C., at the Commission's regional offices located at Seven World Trade Center,
13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may also
be obtained from the Public Reference Section of the Commission, Washington,
D.C. 20549, at prescribed rates. The Commission maintains a website that
contains reports, proxy and information statements and other information
regarding issuers who file electronically with the Commission. The Commission's
address on the worldwide web is: http://www.sec.gov.
61
<PAGE> 63
GLOSSARY OF SELECTED INSURANCE TERMS
Artisan contractor......... A person who is skilled in and specializes in one
particular facet of the building process, such as
plumbing or electrical. An artisan contractor
performs its services as a subcontractor of a
general contractor.
Cede....................... To transfer to another insurer by way of
reinsurance all or a part of the liability or
expenses of insurance written by an insurer.
CMP -- Liability
Insurance.................. Insurance for business operations that provides
protection for a business against liability for
bodily injury or property damage of a third party.
CMP -- Property
Insurance.................. Insurance that indemnifies a person with an
insurable interest in tangible property for his/her
loss related to damage to or loss of use of his/her
subject property. This is intended as indemnity for
the insured-owner as compared to CMP -- liability
insurance which is intended to provide the insured
with coverage for bodily injury and property damage
to others.
Combined ratio............. The sum of the expense ratio and the loss ratio,
determined in accordance with SAP. A combined ratio
under 100% indicates an underwriting profit and a
combined ratio over 100% indicates an underwriting
loss. The extent by which the combined ratio
deviates from 100% indicates the relative
underwriting profit or loss from the business
operation of issuing policies of insurance. The
combined ratio does not reflect investment income,
federal income taxes or other non-underwriting
income or expense, all of which are included in
determining net income.
Commercial lines........... Insurance policies written by the Company for
business operations, as opposed to personal
coverages, that provide commercial general
liability insurance (protection for a business
operation against general liability for bodily
injury and/or property damage), CMP or property
insurance (protection against business property
damage from fire, lightning, windstorm and certain
other perils), and crime insurance (protection
purchased by businesses to insure against losses
caused by crimes).
Direct premiums written.... Total premiums for insurance sold to insureds, as
opposed to, and not including, premiums received
for reinsuring risks written by other insurance
companies.
Excess of loss
reinsurance................ Reinsurance which indemnifies the reinsured against
all or a specified portion of losses on reinsured
policies in excess of a specified dollar amount or
"retention."
Expense ratio.............. Under SAP, the ratio (expressed as a percentage) of
underwriting expenses to net premiums written.
Under GAAP, the ratio (expressed as a percentage)
of underwriting expenses to premiums earned.
Facultative reinsurance.... Individual risks offered by an insurer for
acceptance or rejection by a reinsurer. Both
parties are free to act in their own best
interests. The reinsurer is liable only for losses
which exceed the insurer's retention level.
Premiums vary with loss expectation.
General agent.............. Agents granted broad authority by an insurance
company it represents to underwrite, bind, cancel,
and collect money on the company's behalf.
Gross premiums written..... Total premiums written by an insurer during a
specified period of time, before ceding any portion
of such insurance risks to reinsurers.
62
<PAGE> 64
Hard Market................ An insurance market in which the demand for
insurance exceeds the readily available supply and
premiums are relatively high.
Incurred but Not Reported
("IBNR") Reserves...... Reserves for estimated losses which have been
incurred by insureds but not yet reported to the
insurer.
Incurred losses............ The total losses sustained by an insurance company
under a policy or policies, whether paid or unpaid.
Incurred losses include a provision for claims that
have occurred but have not yet been reported to the
insurer.
Industry combined ratio.... An average combined ratio for the property/casualty
insurance industry as compiled by the A.M. Best
which is a broad measure of the property/casualty
insurance industry's performance for a particular
period. The industry combined ratio measures the
overall performance of all property/casualty
insurance companies and for all lines of business.
The industry combined ratio is useful only in
assessing general trends within the industry and
should not be used to evaluate the performance of
the Company relative to other companies
underwriting similar lines of business.
Loss adjustment expenses
("LAE")................ The insurer's cost of investigating and settling
claims, including legal fees, other fees and
related expenses of administering the claims
adjustment process.
Loss ratio................. Under both SAP and GAAP, the ratio (expressed as a
percentage) of incurred losses and LAE to premiums
earned.
Loss reserves.............. Liabilities established by insurers to reflect the
estimated cost of claim payments that the insurer
will ultimately be required to pay on all reported
and unreported losses which are unpaid at the end
of a fiscal period on an undiscounted basis with
respect to insurance it has written. Reserves are
established for losses and LAE.
Net premiums earned........ The amount of net premiums written recognized as
income during a given period.
Net premiums written....... The amount of direct (gross) premiums written of an
insurer plus assumed reinsurance premiums, less
ceded reinsurance premiums.
Policy acquisition costs... The direct expenses associated with the production
of business including agents' or brokers'
commissions, premium taxes, marketing and certain
underwriting expenses.
Premiums earned............ The portion of premiums written that is recognized
for accounting purposes (GAAP and SAP) as income
during a period. Also known as earned premiums.
Quota share reinsurance.... Reinsurance in which the reinsured shares a
proportion of the original premiums and losses
under the reinsurance policy. Also known as pro
rata reinsurance.
Reinsurance................ The acceptance by one or more insurers, called
reinsurers, of all or a portion of the risk
underwritten by another insurer which has usually
directly written the coverage. However, the legal
rights of the insured generally are not affected by
the reinsurance transaction and the insurance
company issuing the insurance policy remains liable
to the insured for payment of full policy benefits.
63
<PAGE> 65
Semi-automatic facultative
reinsurance.............. Individuals risks written within the guidelines of
a reinsurance treaty are automatically ceded to and
accepted by the reinsurer. The reinsurer may reject
any reinsurance bound by notifying the Company
within a specified notice period. The liability of
the reinsurer with respect to any rejected
submission shall continue until the Company is able
to cancel the policy.
Soft Market................ An insurance market in which the supply of
insurance exceeds the current demand and premiums
are relatively low.
Statutory accounting
principles (SAP)......... Recording transactions and preparing financial
statements in accordance with the rules and
procedures prescribed or permitted by insurance
related statutes or regulatory authorities,
generally reflecting a liquidating, rather than a
going concern, concept of accounting. The principal
differences between SAP and GAAP, are: (a) under
SAP, certain assets are eliminated from the balance
sheet; (b) under SAP, policy acquisition costs are
expensed as incurred, while under GAAP, they are
deferred and amortized over the term of the
policies; (c) under SAP, no provision is made for
deferred income taxes; and (d) under SAP, certain
reserves are recognized which are not recognized
under GAAP. All financial data set forth in this
Prospectus is presented in accordance with GAAP
unless specifically otherwise stated.
Surplus as regards
policyholders............ The excess of all assets over all liabilities under
SAP.
Underwriting............... The process whereby an insurer reviews applications
submitted for insurance coverage and determines
whether it will issue all or part of the coverage
being requested and what the applicable premiums
will be. Underwriting also includes an ongoing
review of existing policies and their pricing.
Underwriting expenses...... The aggregate of losses, loss adjustment expenses,
policy acquisition costs, contingent ceding
commissions and general operating costs.
Underwriting profit
(loss)..................... The difference between net premiums earned and
underwriting expenses.
Unearned premiums.......... The pro rata portion of a premium representing the
unexpired term of policies in force as of a certain
date.
64
<PAGE> 66
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS -- FINANCIAL PACIFIC
INSURANCE GROUP, INC.
Independent Auditors' Report -- KPMG Peat Marwick LLP..... 66
Consolidated Balance Sheets of Financial Pacific Insurance
Group, Inc. and Subsidiaries -- December 31, 1996 and
1997, and March 31, 1998 (unaudited)................... 67
Consolidated Statements of Operations of Financial Pacific
Insurance Group, Inc. and Subsidiaries -- Years Ended
December 31, 1995, 1996 and 1997, and Three Months
Ended March 31, 1997 and 1998 (unaudited).............. 68
Consolidated Statements of Comprehensive Income of
Financial Pacific Insurance Group, Inc. and
Subsidiaries -- Years Ended December 31, 1995, 1996 and
1997, and Three Months Ended March 31, 1997 and 1998
(unaudited)............................................ 69
Consolidated Statements of Stockholders' Equity of
Financial Pacific Insurance Group, Inc. and
Subsidiaries -- Years Ended December 31, 1995, 1996 and
1997, and Three Months Ended March 31, 1997 and 1998
(unaudited)............................................ 70
Consolidated Statements of Cash Flows of Financial Pacific
Insurance Group, Inc. and Subsidiaries -- Years Ended
December 31, 1995, 1996 and 1997, and Three Months
Ended March 31, 1997 and 1998 (unaudited).............. 71
Notes to Consolidated Financial Statements of Financial
Pacific Insurance Group, Inc. and Subsidiaries......... 72
</TABLE>
65
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Financial Pacific Insurance Group, Inc.:
We have audited the accompanying consolidated balance sheets of Financial
Pacific Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Financial
Pacific Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Also, in our opinion, the information set forth under the captions "Income
Statement Data" and "Balance Sheet Data" in the selected consolidated financial
data as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, appearing on pages 16 and 17, is
fairly stated, in all material respects, in relation to the consolidated
financial statements from which it has been derived.
/s/ KPMG Peat Marwick LLP
Sacramento, California
January 30, 1998, except as to
Note 16, which is as of
April 14, 1998
66
<PAGE> 68
FINANCIAL PACIFIC INSURANCE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Fixed maturities available for sale, at market value
(cost $24,764,235, $30,027,603 and $33,506,632
in 1996, 1997 and 1998, respectively)............. $24,045,597 $29,976,813 $33,503,811
Cash and cash equivalents........................... 497,388 632,495 1,350,776
Accrued investment income........................... 304,605 426,013 564,911
Receivables:
Premiums receivable, net of allowance for doubtful
accounts of $40,000 in 1996, 1997 and 1998..... 13,016,982 14,631,026 15,209,728
Income taxes receivable........................... 210,099 7,933 --
Notes receivable.................................. 47,859 6,691 5,714
----------- ----------- -----------
Total receivables......................... 13,274,940 14,645,650 15,215,442
Prepaid reinsurance premiums........................ 7,922,096 6,828,703 6,894,189
Reinsurance recoverable on unpaid losses and loss
adjustment expenses............................... 4,007,047 6,184,927 7,650,187
Deferred policy acquisition costs................... 3,778,170 5,356,697 5,603,525
Fixed assets, net................................... 525,208 885,841 942,025
Other assets........................................ 329,440 956,004 926,033
----------- ----------- -----------
Total assets.............................. $54,684,491 $65,893,143 $72,650,899
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses........ $13,944,397 $19,592,060 $22,235,641
Unearned premiums................................. 18,979,533 21,967,648 22,738,357
Deferred income taxes............................. 1,431,342 1,619,483 1,232,772
Reinsurance payable, net.......................... 1,914,378 1,472,807 2,979,179
Income taxes payable.............................. -- -- 720,902
Notes payable, net................................ 5,479,414 4,984,561 4,985,848
Other liabilities................................. 2,320,072 2,858,446 3,670,241
----------- ----------- -----------
Total liabilities......................... $44,069,136 $52,495,005 $58,562,940
----------- ----------- -----------
Stockholders' equity:
Series A convertible preferred stock, $.001 par
value; 2,000,000 shares authorized; 4,400
shares, issued and outstanding at 1996, 1997,
and 1998 respectively.......................... 5 5 5
Common stock, $.001 par value; 7,500,000 shares
authorized; 485,983 shares in 1996 and 1997,
and 487,955 shares in 1998, issued and
outstanding.................................... 486 486 488
Additional paid-in capital........................ 4,949,510 4,949,510 4,954,508
Retained earnings................................. 6,139,655 8,481,658 9,134,820
Accumulated other comprehensive income:
Net unrealized loss on available for sale
securities, net of deferred income tax benefit
of $244,337, $17,269 and $959 in 1996, 1997 and
1998, respectively............................. (474,301) (33,521) (1,862)
----------- ----------- -----------
Total stockholders' equity................ 10,615,355 13,398,138 14,087,959
----------- ----------- -----------
Total liabilities and stockholders'
equity.................................. $54,684,491 $65,893,143 $72,650,899
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
67
<PAGE> 69
FINANCIAL PACIFIC INSURANCE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------ -------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Direct premiums written............ $ 24,694,947 $ 31,926,872 $ 39,511,737 $ 9,202,867 $10,384,879
Premiums ceded..................... (10,653,344) (13,673,996) (12,576,059) (2,940,641) (3,096,432)
------------ ------------ ------------ ----------- -----------
Net premiums written........... 14,041,603 18,252,876 26,935,678 6,262,226 7,288,447
Increase in unearned premiums........ (1,981,731) (3,265,911) (4,081,508) (1,520,795) (705,223)
------------ ------------ ------------ ----------- -----------
Net premiums earned............ 12,059,872 14,986,965 22,854,170 4,741,431 6,583,224
Commissions.......................... 104,985 627,690 709,057 170,319 206,981
Investment income, net of expenses... 1,028,524 1,449,406 1,719,877 405,495 509,943
Net realized gains (losses) on sales
of investments..................... 465,695 52,171 (46,194) (117) --
Other income, net.................... 578,292 547,117 800,697 178,045 219,579
------------ ------------ ------------ ----------- -----------
Total revenues..................... 14,237,368 17,663,349 26,037,607 5,495,173 7,519,727
Expenses:
Losses and loss adjustment
expenses........................... 6,325,059 9,750,413 12,748,171 2,540,998 3,414,731
Policy acquisition costs............. 3,956,595 4,785,460 7,439,612 1,524,381 2,383,144
Contingent ceding commission......... (1,245,755) (3,222,420) (1,511,253) (450,000) (62,571)
General operating costs.............. 1,711,641 1,929,348 2,443,576 760,662 437,100
Agency Expenses...................... 145,720 688,188 721,187 167,164 201,714
Interest expense..................... 128,603 691,957 617,042 163,162 151,287
------------ ------------ ------------ ----------- -----------
Total expenses..................... 11,021,863 14,622,946 22,458,335 4,706,367 6,525,405
------------ ------------ ------------ ----------- -----------
Income before taxes.................. 3,215,505 3,040,403 3,579,272 788,806 994,322
Income tax provision:
Current............................ 428,908 22,051 1,276,196 818,247 743,950
Deferred........................... 637,093 1,015,066 (38,927) (546,957) (402,790)
------------ ------------ ------------ ----------- -----------
Total income tax provision..... 1,066,001 1,037,117 1,237,269 271,290 341,160
------------ ------------ ------------ ----------- -----------
Net income..................... $ 2,149,504 $ 2,003,286 $ 2,342,003 $ 517,516 $ 653,162
============ ============ ============ =========== ===========
Earnings per share:
Basic.............................. $ 4.42 $ 4.12 $ 4.82 $ 1.06 $ 1.34
============ ============ ============ =========== ===========
Diluted............................ $ 0.94 $ 0.69 $ 0.79 $ 0.17 $ 0.22
============ ============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
68
<PAGE> 70
FINANCIAL PACIFIC INSURANCE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------- -------------------
1995 1996 1997 1997 1998
--------- --------- --------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income.......................... 2,149,504 2,003,286 2,342,003 517,516 653,162
--------- --------- --------- -------- -------
Other comprehensive income, net of
tax:
Unrealized holding gain (loss)
arising during the period, net
of taxes of $201,888,
$(255,453), $211,361,
$(175,485) and $16,309,
respectively................... 391,899 (495,876) 410,292 (340,647) 31,659
Less: Reclassification adjustment
for gain (loss) included in net
income, net of taxes of
$158,336, $17,738, $(15,706),
$(40) and $0, respectively..... 307,359 34,433 (30,488) (77) --
--------- --------- --------- -------- -------
Unrealized gain (loss) on
securities, net of taxes of
$43,552 $(273,191), $227,067,
$(175,445) and $16,309,
respectively................... 84,540 (530,309) 440,780 (340,570) 31,659
--------- --------- --------- -------- -------
Comprehensive income................ 2,234,044 1,472,977 2,782,783 176,946 684,821
========= ========= ========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
69
<PAGE> 71
FINANCIAL PACIFIC INSURANCE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND THREE MONTHS ENDED MARCH 31,
1998
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
NUMBER ON
OF NUMBER OF ADDITIONAL AVAILABLE
PREFERRED PREFERRED COMMON COMMON PAID-IN RETAINED FOR SALE
SHARES STOCK SHARES STOCK CAPITAL EARNINGS SECURITIES TOTAL
--------- --------- --------- ------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1994........................... 4,400 $5 485,983 $486 $4,949,510 $1,986,865 $ (28,532) $ 6,908,334
Net income..................... -- -- -- -- -- 2,149,504 -- 2,149,504
Change in unrealized gain
(loss) on available for sale
securities, net of deferred
income taxes of $43,552...... -- -- -- -- -- -- 84,540 84,540
----- -- ------- ---- ---------- ---------- --------- -----------
Balances at December 31,
1995......................... 4,400 $5 485,983 $486 $4,949,510 $4,136,369 $ 56,008 $ 9,142,378
Net income..................... -- -- -- -- -- 2,003,286 -- 2,003,286
Change in unrealized gain
(loss) on available for sale
securities, net of deferred
income taxes of $273,191..... -- -- -- -- -- -- (530,309) (530,309)
----- -- ------- ---- ---------- ---------- --------- -----------
Balances at December 31,
1996......................... 4,400 $5 485,983 $486 $4,949,510 $6,139,655 $(474,301) $10,615,355
Net income..................... -- -- -- -- -- 2,342,003 -- 2,342,003
Change in unrealized gain
(loss) on available for sale
securities, net of deferred
income taxes of $227,067..... -- -- -- -- -- -- 440,780 440,780
----- -- ------- ---- ---------- ---------- --------- -----------
Balances at December 31,
1997......................... 4,400 $5 485,983 $486 $4,949,510 $8,481,658 $ (33,521) $13,398,138
Net income..................... -- -- -- 653,162 -- 653,162
Capital contribution........... 1,972 2 4,998 5,000
Change in unrealized gain
(loss) on available for sale
securities, net of deferred
income taxes of $16,309...... -- -- -- -- -- -- 31,659 31,659
----- -- ------- ---- ---------- ---------- --------- -----------
Balances at March 31, 1998
(unaudited).................. 4,400 $5 487,955 $488 $4,954,508 $9,134,820 $ (1,862) $14,087,959
===== == ======= ==== ========== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
70
<PAGE> 72
FINANCIAL PACIFIC INSURANCE GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
------------ ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 2,149,504 $ 2,003,286 $ 2,342,003 $ 517,516 $ 653,162
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 104,480 260,138 319,029 90,427 74,545
Net realized (gains) losses on sales of
investments....................................... (465,695) (52,171) 46,194 117 --
Net realized losses on sales of fixed assets........ 2,285 6,141 15,574 2,355 1,291
Write-off of note receivable........................ -- 80,000 33,252 6,000 --
Deferred income taxes............................... 637,093 1,015,066 (38,927) (546,956) (403,020)
Increase in premiums receivable, net................ (3,045,663) (3,390,280) (1,614,044) (199,557) (578,702)
Increase in accrued investment income............... (38,205) (40,987) (121,408) (199,908) (138,898)
(Increase) decrease in income taxes receivable...... (84,160) (228,136) 202,166 1,015,247 728,835
(Increase) decrease in prepaid reinsurance
premiums.......................................... (2,579,263) (1,655,441) 1,093,393 550,332 (65,486)
(Increase) decrease in reinsurance recoverable on
unpaid losses and loss adjustment expenses........ 553,614 342,071 (2,177,880) (448,014) (1,465,260)
Increase in deferred policy acquisition costs....... (801,026) (1,147,059) (1,578,527) (532,278) (246,828)
Decrease (increase) in other assets................. 24,476 (81,437) (621,417) (264,441) 29,099
Increase in unpaid losses and loss adjustment
expenses.......................................... 1,872,761 1,931,080 5,647,663 1,074,061 2,643,581
Increase in unearned premiums....................... 4,560,994 4,921,352 2,988,115 970,463 770,709
Increase (decrease) in reinsurance payable, net..... 1,458,042 (2,032,914) (441,571) 1,549,741 1,506,372
Increase in other liabilities....................... 769,277 614,541 538,378 198,131 811,795
------------ ----------- ------------ ----------- -----------
Net cash provided by operating activities...... 5,118,514 2,545,250 6,631,993 3,783,236 4,321,195
------------ ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities available for sale....... (34,281,021) (7,595,264) (15,090,116) (3,031,757) (5,493,489)
Proceeds from sales of fixed maturities available for
sale................................................ 25,055,423 4,868,420 5,870,015 -- --
Proceeds from maturities of fixed maturities available
for sale............................................ 7,408 572,817 3,896,031 410,000 2,000,000
Purchase of equity securities available for sale...... -- -- (118,832) -- --
Proceeds from sales of equity securities available for
sale................................................ 47,177 -- 56,365 -- --
Proceeds from sales of short-term investments......... 935 -- --
Proceeds from principal repayment on note
receivable.......................................... 27,662 3,952 7,916 4,292 977
Purchase of fixed assets, net......................... (337,492) (372,178) (618,265) (139,841) (115,402)
------------ ----------- ------------ ----------- -----------
Net cash used in investing activities.......... (9,479,908) (2,522,253) (5,996,886) (2,757,306) (3,607,914)
------------ ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable............... 5,000,000 500,000 -- -- --
Principal repayment on notes payable.................. (315,000) (945,000) (500,000) -- --
Capital contribution.................................. -- -- -- -- 5,000
------------ ----------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities................................... 4,685,000 (445,000) (500,000) -- 5,000
------------ ----------- ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. 323,606 (422,003) 135,107 1,025,930 718,281
Cash and cash equivalents, beginning of year............ 595,785 919,391 497,388 497,388 632,495
------------ ----------- ------------ ----------- -----------
Cash and cash equivalents, end of year.................. $ 919,391 $ 497,388 $ 632,495 $ 1,523,318 $ 1,350,776
============ =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes during the year.............. $ 513,067 $ 250,187 $ 1,074,030 $ (197,000) $ 15,346
============ =========== ============ =========== ===========
Cash paid for interest expense during the year.......... $ 116,351 $ 381,922 $ 611,583 $ 311,563 $ 300,000
============ =========== ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
71
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
Financial Pacific Insurance Group, Inc. (the "Group") was formed on May 26,
1993 to acquire all of the common stock of Financial Pacific Insurance Company
("FPIC") and Financial Pacific Insurance Agency ("FPIA"). The Group, FPIC and
FPIA are collectively referred to as "the Company".
The Group is primarily owned by Robert C. Goodell, the current President
and Chief Executive Officer, and three other investor groups.
The Company deals principally in commercial property, casualty and surety
lines of insurance. The majority of the Company's business is written for small
to medium sized businesses in California's Central Valley. The Company's
business is primarily written with artisan contractors, commercial property
owners, light industrial risks, and several special programs by a network of
independent agents.
Basis of Presentation
The consolidated financial statements include the accounts of the Group,
FPIC, and the FPIA. All significant intercompany balances and transactions have
been eliminated.
Cash and Cash Equivalents
Cash includes currency on hand with financial institutions. Cash
equivalents represent short-term, highly-liquid investments, readily convertible
to known amounts of cash and near maturity such that there is insignificant risk
of changes in value because of changes in interest rates. Cash equivalents are
carried at cost, which approximates market.
Investments
The Company accounts for investments in accordance with the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115"). Under FAS 115, the
Company classifies its fixed maturity securities as available for sale.
Unrealized holding gains and losses, net of deferred income taxes, on available
for sale securities are reported as a net amount in a separate component of
stockholders' equity until realized. Realized investment gains and losses are
reported based upon specific identification of the investments sold.
Equity securities are classified as available for sale and carried at
market value. Unrealized investment gains and losses, resulting from carrying
equity securities at market value, are recorded net of applicable deferred
income taxes directly in stockholders' equity.
Declines in the value of investments, which are determined to be other than
temporary, are charged to realized losses. Securities are reported at market
values based principally on prices obtained from security exchanges.
Deferred Policy Acquisition Costs
Acquisition costs, consisting of commissions, premium taxes and certain
marketing, policy issuance and underwriting costs, related to the production of
new and renewal business, are deferred and amortized ratably over the terms of
the policies. The method followed in computing deferred acquisition costs limits
the amount of such deferred costs to their estimated realizable value. The
determination of estimated realizable value, gives effect to the premium to be
earned, losses and loss adjustment expenses, investment income to be earned, and
certain other costs expected to be incurred as the premium is earned.
Amortization of deferred policy acquisition costs amounted to $3,683,926,
$4,785,460 and $7,439,613 in 1995, 1996 and 1997, respectively.
72
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
The Company accounts for long-lived assets, which currently consists of
land held for expansion, in accordance with the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be disposed Of " ("FAS 121").
Pursuant to FAS 121, the Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
Federal Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities. The impact on
deferred taxes of changes in tax rates and laws, if any, are applied to the
years during which temporary differences are expected to be settled, and
reflected in the consolidated financial statements in the period of enactment.
Reinsurance
Reinsurance recoverables (including amounts related to losses incurred but
not reported) and prepaid reinsurance premiums are reported as assets. Estimated
reinsurance recoverables are recognized in a manner consistent with the
liabilities relating to the underlying reinsured contracts. Reinsurance premiums
and commissions are recorded based on management's best estimate of the ultimate
amounts to be incurred.
Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses is based upon
the accumulation of individual case estimates for losses reported prior to the
close of the accounting period plus estimates, based on experience and industry
data, for unreported losses and loss adjustment expenses.
There is a high level of uncertainty inherent in the evaluation of the
required loss and loss adjustment expense reserves for the Company. The
long-tailed nature of liability claims exacerbates that uncertainty. Management
has selected target losses and loss adjustment expense ratios that it believes
are reasonable and reflective of anticipated ultimate experience. The ultimate
costs of claims are dependent upon future events, the outcomes of which are
affected by many factors. Company claim reserving procedures and settlement
philosophy, current and perceived social conditions, economic inflation, current
and future court rulings and jury attitudes, improvements in medical technology,
and many other economic, scientific, legal, political, and social factors all
can have significant effects on the ultimate costs of claims. Changes in Company
operations and management philosophy also may cause actual developments to vary
from the past. In addition, the Company relies on policy language, developed by
the Company and by others, to exclude or limit coverage. If such language is
held by a court to be invalid or unenforceable, it could materially adversely
affect the Company's financial position. This possibility of expansion of
insurers' liability either through new concepts of liability or a refusal to
accept restrictive policy language has added to the inherent uncertainty of
reserving for losses. Since the emergence and disposition of claims are subject
to uncertainties, the net amounts that will ultimately be paid to settle the
liability may vary significantly from the estimated amounts provided for in the
accompanying consolidated financial statements. Any adjustments to reserves are
reflected in the operating results of the periods in which they are made.
Stock-Based Employee Compensation
Effective December 31, 1996, the Company adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"). Management has elected to continue
use of the accounting methods prescribed by Accounting Principles
73
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Board Opinion No. 25 and to expand its disclosure of stock-based compensation as
permitted by FAS 123. Accordingly, no related compensation cost has been
recognized.
Revenue Recognition
Insurance premiums are earned ratably over the terms of the policies.
Unearned premiums are computed on a daily pro-rata basis. Agency commission and
related fees for the direct mail surety program are recognized based on the
policy issue date. Revenue related to service fees is earned as billed. Costs
related to service fees are predominantly incurred and recognized when policies
are issued.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards No. 131
("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," were issued in June 1997 and are effective for fiscal years
beginning after December 15, 1997. FAS 130 establishes standards for the
reporting and display of comprehensive income and its components, which includes
net income and changes in equity during the period except those resulting from
investments by, or distributions to, stockholders. FAS 131 establishes standards
for disclosures related to business operating segments. As of January 1, 1998,
the Company adopted the provisions of FAS 130, which have been applied
retroactively to all periods presented in these financial statements. The
Company is currently evaluating the impact that FAS 131 will have on the
consolidated financial statements.
Earnings per Share
Effective December 31, 1997, the Company adopted SFAS No. 128 "Earnings per
Share."
Interim Financial Statements
The unaudited consolidated financial statements as of March 31, 1998 and
for the three months ended March 31, 1998 and 1997, have been prepared in
conformity with generally accepted accounting principles (GAAP) and include all
adjustments which, in the opinion of management, are necessary for fair
presentation of the results for the interim periods. All such adjustments are,
in the opinion of management, of a normal and recurring nature. All significant
intercompany balances and transactions have been eliminated.
Reclassifications
Certain reclassifications have been made from amounts reported in prior
years in order to be consistent with the March 31, 1998 presentation. Results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of results to be expected for the full year.
74
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 INVESTMENTS
The amortized cost and estimated market values of fixed maturities
available for sale at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1996:
U.S. government and agencies............... $ 9,976,614 $ 6,173 $113,239 $ 9,869,548
Obligations of states and political
subdivision.............................. 262,587 5,906 -- 268,493
Corporate securities....................... 14,325,034 -- 617,478 13,707,556
Certificates of deposit.................... 200,000 -- -- 200,000
----------- ------- -------- -----------
Total fixed maturities........... $24,764,235 $12,079 $730,717 $24,045,597
=========== ======= ======== ===========
1997:
U.S. government and agencies............... $15,619,552 $31,245 $ 22,234 $15,628,563
Obligations of states and political
subdivisions............................. 65,524 5,093 -- 70,617
Corporate securities....................... 14,129,816 37,415 102,309 14,064,922
Certificates of deposit.................... 212,711 -- -- 212,711
----------- ------- -------- -----------
Total fixed maturities........... $30,027,603 $73,753 $124,543 $29,976,813
=========== ======= ======== ===========
</TABLE>
The amortized cost and estimated market value of fixed maturities at
December 31, 1997 by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
----------- ------------
<S> <C> <C>
Maturity distribution of fixed maturities available for
sale:
Due in one year or less..................................... $ 1,151,399 $ 1,151,609
Due after one year through five years....................... 9,976,255 9,953,837
Due after five years through ten years...................... 14,723,380 14,681,344
Due after ten years......................................... 4,176,569 4,190,023
----------- -----------
Total fixed maturities............................ $30,027,603 $29,976,813
=========== ===========
</TABLE>
Proceeds from the sale of investments in fixed maturities available for
sale were $25,055,423, $4,868,420 and $5,870,015 for the years ended December
31, 1995, 1996 and 1997, respectively.
75
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 INVESTMENTS (CONTINUED)
Summary of investment income, net of expenses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Investment income, net of expenses of $6,604,
$13,481 and $14,944 in 1995, 1996 and 1997,
respectively
Fixed maturities............................. $1,000,235 $1,421,463 $1,681,025
Equity securities............................ 460 -- 42
Other investments............................ 27,829 27,943 38,810
---------- ---------- ----------
Investment income, net of expenses........ $1,028,524 $1,449,406 $1,719,877
========== ========== ==========
Realized gains (losses) on sales of
investments:
Fixed maturities available for sale:
Gains..................................... $ 592,097 $ 63,114 $ 22,222
Losses.................................... (125,204) (10,943) (5,949)
---------- ---------- ----------
Total................................ 466,893 52,171 16,273
---------- ---------- ----------
Equity securities available for sale:
Gains..................................... -- -- 3,684
Losses.................................... (2,133) -- (66,151)
---------- ---------- ----------
Total................................ (2,133) -- (62,467)
---------- ---------- ----------
Other investments:
Gains..................................... 935 -- --
Losses.................................... -- -- --
---------- ---------- ----------
Total..................................... 935 -- --
---------- ---------- ----------
Net realized gains (losses) on sales
of investments..................... $ 465,695 $ 52,171 ($ 46,194)
========== ========== ==========
</TABLE>
Investments with the following issuers exceeded 10% of total stockholders
equity at December 31, 1997:
<TABLE>
<CAPTION>
ISSUER ESTIMATED MARKET VALUE
------ ----------------------
<S> <C>
Federal Home Loan Mortgage Corporation...................... $3,507,500
==========
Federal National Mortgage Association....................... $7,494,531
==========
</TABLE>
The Company has securities on deposit with state regulatory agencies of
approximately $1,761,000 as of December 31, 1997 and 1996. The deposits
approximate market value.
76
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 INCOME TAXES
The income tax expense reflected in the accompanying consolidated
statements of operations varied from amounts computed at the statutory rate of
35% in 1995, 1996 and 1997 on income before income taxes for the following
reasons:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense at statutory rate...... $1,125,427 $1,064,141 $1,252,745
Adjust graduated tax rate.............................. (32,155) (30,404) (35,792)
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income........................... (31,860) (13,635) 2,442
Other, net........................................... 4,589 17,015 17,874
---------- ---------- ----------
Total income tax provision................... $1,066,001 $1,037,117 $1,237,269
========== ========== ==========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1996 and 1997, respectively, are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Loss and loss adjustment expense reserves................... $ 551,955 $ 709,150
Unearned premiums........................................... 548,343 769,025
Unrealized loss on securities available for sale............ 244,337 17,269
Allowance for doubtful accounts............................. 13,600 13,600
----------- -----------
Total gross deferred tax assets................... $ 1,358,235 $ 1,509,044
=========== ===========
Deferred Tax Liabilities:
Policy acquisition costs.................................... ($1,284,578) ($1,821,277)
Contingent ceding commission................................ (1,409,488) (1,178,787)
Other....................................................... (95,511) (128,463)
----------- -----------
Total gross deferred tax liabilities.............. (2,789,577) (3,128,527)
----------- -----------
Net deferred tax liabilities...................... ($1,431,342) ($1,619,483)
=========== ===========
</TABLE>
Management believes it is more likely than not the deferred tax assets will
reverse during periods in which the Company generates net taxable income or may
recover taxes paid in prior years. Accordingly, a valuation allowance has not
been recorded.
NOTE 4 REINSURANCE
The Company cedes insurance to reinsurers under various contracts that
cover individual risks or entire classes of business. Although the ceding of
insurance does not discharge the Company from its primary liability, the
insurance company that assumes the coverage assumes the related risk, and it is
the practice of insurers to treat reinsured risks, to the extent of the
reinsurance ceded, as though they were risks for which the original insurer is
not liable.
The Company is allowed a ceding commission on each of its reinsurance
contracts. Additionally, the Company's property quota share and first casualty
excess of loss reinsurance treaties contain provisions that establish minimum
and maximum cessions and allow limited participation in the profit of the ceded
business. Generally, the Company shares, on a limited basis, in the
profitability through contingent ceding commissions. The Company's exposure in
the loss experience is contractually defined at minimum and maximum levels. The
terms of such contracts are fixed at inception. Increases in the Company's
retention under such contracts reduces the level of profit participation. Since
estimating the emergence of claims to the applicable
77
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 REINSURANCE (CONTINUED)
reinsurance layers in subject to significant uncertainty, the net amounts that
will ultimately be realized may vary significantly from the estimated amounts
recorded in the accompanying financial statements.
At December 31, 1996 and 1997, all property and casualty policies written
by the Company are reinsured with reinsurers rated as A or A minus by A.M. Best.
The Company has both a quota share agreement and a semi-automatic facultative
excess of loss agreement on property and two excess of loss agreements for
casualty. On its property business, the Company has a 30% quota share on the
first $2 million of any risk, resulting in a maximum company exposure of
$600,000 related to any one occurrence. Excess of $2 million, the Company has a
semi-automatic-facultative agreement which provides $8 million of coverage
excess of $2 million. On the casualty business, the Company presently maintains
a $750,000 excess of $250,000 treaty with a syndicate of reinsurers. Prior to
January 1, 1997, the Company maintained $400,000 excess of $100,000 and $500,000
excess of $500,000 casualty treaties. Excess of $1 million, the Company has a
semi-automatic-facultative agreement which provides $10 million of coverage
excess of $1 million. For the Company's surety line of business, the Company
maintains a variable quota share reinsurance arrangement which provides various
levels of participation depending on the size of the bond. The Company also
maintains Extra Contractual Obligation/Loss in Excess of Policy Limits (ECO/XPO)
coverage through the London markets. The Company currently purchases $2 million
worth of ECO/XPO coverage through this facility.
The property quota share and casualty excess of loss reinsurance treaties
include commission adjustment provisions. The Company records such adjustments
based upon estimates of cumulative experience under the contracts at each
reporting period.
At December 31, 1997, the Company had unsecured reinsurance recoverables
for paid and unpaid losses and loss adjustment expenses and unearned premiums in
excess of 10% of stockholders' equity from the following reinsurers:
<TABLE>
<S> <C>
Gerling Global Reinsurance.................................. $3,398,002
SOREMA North America Reinsurance............................ 2,049,891
Winterthur Reinsurance Corporation of America............... 1,567,208
St. Paul Fire and Marine.................................... 1,396,365
Constitution Reinsurance.................................... 1,348,644
</TABLE>
78
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 REINSURANCE (CONTINUED)
Reinsurance activity as reported in the accompanying consolidated financial
statements is as follows:
<TABLE>
<CAPTION>
DIRECT REINSURANCE NET ACTIVITY
BUSINESS CEDED OR BALANCE
----------- ----------- ------------
<S> <C> <C> <C>
1995:
Premiums written.................................... $24,694,947 $10,653,344 $14,041,603
Premiums earned..................................... 20,533,128 8,473,256 12,059,872
Losses and loss adjustment expenses incurred........ 7,977,514 1,652,455 6,325,059
=========== =========== ===========
Unpaid losses and loss adjustment expenses.......... $12,013,317 $ 4,349,118 $ 7,664,199
=========== =========== ===========
Unearned premiums................................... $13,659,006 $ 5,867,480 $ 7,791,526
=========== =========== ===========
1996:
Premiums written.................................... $31,926,872 $13,673,996 $18,252,876
Premiums earned..................................... 26,606,345 11,619,380 14,986,965
Losses and loss adjustment expenses incurred........ 11,131,863 1,381,450 9,750,413
=========== =========== ===========
Unpaid losses and loss adjustment expenses.......... $13,944,397 $ 4,007,047 $ 9,937,350
=========== =========== ===========
Unearned premiums................................... $18,979,533 $ 7,922,096 $11,057,437
=========== =========== ===========
1997:
Premiums written.................................... $39,511,737 $12,576,059 $26,935,678
Premiums earned..................................... 36,523,622 13,669,452 22,854,170
Losses and loss adjustment expenses incurred........ 17,844,735 5,096,564 12,748,171
=========== =========== ===========
Unpaid losses and loss adjustment expenses.......... $19,592,060 $ 6,184,927 $13,407,133
=========== =========== ===========
Unearned premiums................................... $21,967,648 $ 6,828,703 $15,138,945
=========== =========== ===========
</TABLE>
NOTE 5 LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period.............. $10,140,556 $12,013,317 $13,944,397
Less reinsurance recoverables............. 4,902,732 4,349,118 4,007,047
----------- ----------- -----------
Net balance at beginning of period.......... 5,237,824 7,664,199 9,937,350
----------- ----------- -----------
Incurred related to:
Current year.............................. 6,490,825 7,394,848 10,991,179
Prior years............................... (165,766) 2,355,565 1,756,992
----------- ----------- -----------
Total incurred.............................. 6,325,059 9,750,413 12,748,171
----------- ----------- -----------
Paid related to:
Current year.............................. 1,975,694 2,413,980 3,370,671
Prior years............................... 1,922,990 5,063,282 5,907,717
----------- ----------- -----------
Total paid.................................. 3,898,684 7,477,262 9,278,388
----------- ----------- -----------
Net balance at December 31.................. 7,664,199 9,937,350 13,407,133
Plus reinsurance recoverables............. 4,349,118 4,007,047 6,184,927
----------- ----------- -----------
Balance at December 31................. $12,013,317 $13,944,397 $19,592,060
=========== =========== ===========
</TABLE>
During 1996 and 1997, the provision for losses and loss adjustment expenses
increased due to unfavorable reserve development primarily in the liability
lines of business. The unfavorable development is attributed in part to the
changes in the legal interpretation of manifestation of loss. Currently,
approximately 40% of the
79
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
Company's business is related to artisan contractors. Accordingly, the law
relating to construction defect liability can substantially affect the Company's
business. In July of 1995, the California Supreme Court rendered its opinion on
Admiral Insurance Company vs. Montrose Chemical Corporation (the "Montrose
Decision"). In that decision, the Supreme Court ruled that in the case of a
continuous and progressively deteriorating loss, such as pollution liability (or
construction defect liability), an insurance company has a definitive duty to
defend the policyholder until all uncertainty related to the severity and cause
of the loss is extinguished. As a result of the Montrose Decision, the Company
experienced a significant increase in construction defect liability cases, to
which it would not have been subject under the old law.
The liability for unpaid losses and loss adjustment expenses is stated net
of anticipated salvage and subrogation recoverable of $746,000 and $913,000 at
December 31, 1996 and 1997, respectively.
NOTE 6 NOTES PAYABLE, NET
At December 31, 1996 and 1997, and March 31, 1998, the Group owed
$5,000,000 under unsecured Senior Notes payable to certain stockholders of the
Company. The Notes accrue 12% interest compounded annually. Interest payments
are due semi-annually and the Notes are due on January 1, 2001. The Notes were
issued with Common Stock Purchase Warrants which entitle the holders to purchase
up to 593,691 shares of the Group's Common Stock. The Common Stock Warrants are
discussed further at Note 8. The Group is subject to certain restrictions
described in the note agreement.
The Group had outstanding borrowings of $500,000, $0, and $0, under a
$530,000 bank line of credit at December 31, 1996 and 1997, and March 31, 1998,
respectively. The line is unsecured, matures July 1, 1998, and bears interest
(payable monthly) at an annual rate of 1 percent over the bank's base rate. The
effective annual interest rate was 9.25% and 8.5% during the years ended
December 31, 1996 and 1997, respectively.
The notes payable are presented net of deferred debt issue costs. Deferred
debt issue costs are amortized over the term of the note. Unamortized debt issue
costs totaled $20,586, $15,439, and $14,152, at December 31, 1996 and 1997, and
March 31, 1998, respectively.
NOTE 7 SERIES A CONVERTIBLE PREFERRED STOCK
The Group issued Series A convertible preferred stock ("Series A Stock")
pursuant to a Convertible Preferred Stock Purchase Agreement, dated September 7,
1993 (the "Series A Stock Agreement").
Each share of Series A Stock is convertible, at the option of the holder
thereof, into 394.375 shares of Common Stock, subject to certain adjustments
described in the Series A Stock Agreement. The holders of Series A Stock have
voting rights and powers equal to the voting rights and powers of such Common
Stock.
Each share of Series A Stock is automatically converted into shares of Common
Stock immediately upon the effective date of a registration statement filed by
the Company pursuant to the Securities Act of 1933, as amended, in connection
with a firm commitment, underwritten public offering with an offering price of
not less than $5.00 per share and with gross proceeds equal to or exceeding $10
million.
In the event of any liquidation, dissolution or winding up of the Group,
the holders of the Series A Stock are entitled to receive, prior and in
preference to any distribution of any assets of the Group to the holders of
Common Stock, the amount of $1.00 per share plus any declared but unpaid
dividends. At any time after September 7, 2000, the Group is entitled to redeem
all or any portion of the outstanding shares of Series A Stock for $1.00 per
share plus any declared but unpaid dividends.
80
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 COMMON STOCK WARRANTS
On September 7, 1993, the Group issued Common Stock Purchase Warrants ("the
Warrants"). The Warrants entitle the holders to purchase 153,525 shares of the
Group's Common Stock, at any time prior to September 7, 2003, at the price of
$2.54 per share, subject to certain adjustments described in the Warrants.
On December 28, 1995, the Group issued Common Stock Purchase Warrants (the
"Senior Note Warrants") in conjunction with the issuance of the Senior Notes
payable as discussed at Note 6. The Senior Note Warrants entitle the holders to
purchase 593,691 shares of the Group's Common Stock, at any time prior to
January 1, 2004, at the price of $5.61 per share, subject to certain
restrictions described in the Senior Note Warrants.
The Company believes the Warrants and the Senior Note Warrants were issued
at fair market value.
NOTE 9 SALE OF DIRECT BOOK OF BUSINESS
Prior to August 1994, approximately 10% of FPIC policies were sold directly
to policyholders. On August 1, 1994, FPIC sold its direct book of business to an
existing agent, resulting in a gain of $205,000. FPIC received a twenty percent
down payment during August 1994, with the remainder payable monthly over sixty
months. The monthly payments are based on the agent's retention of the book of
business. During 1996 and 1997, respectively, the Company charged-off to other
income $80,000 and $33,252 of the note receivable due to the agent's declining
book of business. The unsecured note receivable balance is $47,859 and $6,691 at
December 31, 1996 and 1997, respectively.
NOTE 10 STOCK INCENTIVE PLAN
During 1993, the Group adopted a Stock Incentive Plan, pursuant to which up
to 109,420 shares of Common Stock of the Group may be issued at the discretion
of the Board of Directors or a committee thereof. Awards may include, without
limitation, stock bonuses, restricted stock, stock options, reload options,
stock purchase warrants, other rights to acquire stock, securities convertible
or redeemable for stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares. Officers, employees,
consultants, and advisors to the Company or any of its subsidiaries are eligible
for awards under the plan. To date, all awards have been in the form of stock
options issued with exercise prices at the estimated fair market value as of the
issue date.
The Company applies APB Opinion 25 and related Interpretations in
accounting for the stock incentive plan. Accordingly, no compensation cost has
been recognized in the accompanying consolidated financial statements. Had
compensation costs been determined consistent with FAS 123, the Company's net
income would have been adjusted to the pro forma amounts as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
As reported............................ $2,149,504 $2,003,286 $2,342,003
Pro forma.............................. $2,143,485 $1,983,453 $2,327,768
Pro forma Basic Earnings per share..... $ 4.41 $ 4.08 $ 4.79
Pro forma Diluted Earnings per share... $ 0.94 $ 0.68 $ 0.79
</TABLE>
81
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 STOCK INCENTIVE PLAN (CONTINUED)
The following is a summary of the transactions under the stock incentive
plan for the years ended December 31, 1995, 1996 and 1997, respectively:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... 27,608 $2.81 25,636 $3.02 69,016 $3.02
Granted............................. 7,888 $3.15 43,380 $4.25 9,860 $4.82
Forfeited........................... (9,860) $2.54 -- -- (9,860) $3.30
------- ------- --------
Outstanding at end of year............ 25,636 $3.02 69,016 $3.80 69,016 $4.01
======= ======= ========
Options exercisable at year end....... 9,860 19,719 31,550
======= ======= ========
Weighted average fair value of options
granted during the year............. $ 3.15 $ 4.25 $ 4.82
======= ======= ========
</TABLE>
All of the stock options have a ten year term. Options issued and not yet
exercisable at December 31, 1997 vest over periods ranging from one to five
years. At December 31, 1997, 40,226 shares were available for future grants.
The following is a summary of options outstanding at December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED NUMBER WEIGHTED
NUMBER CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
OUTSTANDING AT LIFE EXERCISE AT EXERCISE
RANGE OF EXERCISE PRICES 12/31/97 (IN YEARS) PRICE 12/31/97 PRICE
- ------------------------ -------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.54 to 3.15..................... 15,776 6.5 $2.84 15,775 $2.84
$4.20 to 4.33..................... 43,380 8.3 4.25 15,775 4.28
$4.82............................. 9,860 9.1 4.82 -- --
------ --- ----- ------ -----
$2.54 to 4.82..................... 69,016 8.0 $4.01 31,550 $3.56
====== === ===== ====== =====
</TABLE>
The fair value of each option grant was estimated using the Minimum Value
Method. Minimum value is determined by calculating the difference between the
current stock price and the present value of the exercise price with the
following assumptions for 1995, 1996 and 1997, respectively: risk free interest
rates of 5.4%, 6.2% and 5.7%, expected lives of 5 years and no expected
dividends.
NOTE 11 401(k) PLAN
The Company sponsors a contributory 401(k) plan. All employees of the
Company who have completed one year of service are eligible for participation in
the plan. The Company matches 100% of the employee's pre-tax contribution up to
$1,000, $1,500 and $2,000 in 1995, 1996 and 1997, respectively. In 1995, 1996
and 1997, the Company contributed $20,565, $61,435 and $87,980, respectively, to
the plan.
NOTE 12 STATUTORY REGULATIONS AND ACCOUNTING
All dividends from FPIC require prior notice to the California Department
of Insurance ("DOI"). All "extraordinary" dividends must be approved in advance
by the DOI. A dividend is deemed "extraordinary" if, when aggregated with all
other dividends paid within the preceding 12 months, the dividend exceeds the
greater of (i) FPIC's statutory net income (excluding unrealized capital gains)
for the preceding calendar year or (ii) 10% of surplus as regards policyholders
as of the preceding December 31st. Additionally, unless approved in advance by
the DOI, no dividend may be paid by FPIC except from unassigned funds or earned
82
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 STATUTORY REGULATIONS AND ACCOUNTING (CONTINUED)
surplus. The DOI may disallow the payment of any dividend if, in the DOI's
opinion, the payment would in any way violate the Code or be hazardous to
policyholders, creditors or the public.
During 1998, the maximum dividend that may be paid by FPIC without approval
of the DOI is $1,426,180. During the years ended December 31, 1995, 1996 and
1997, FPIC paid dividends of $402,000, $630,000 and $900,000, respectively, with
the approval of the DOI.
Statutory accounting principles vary in some respects from generally
accepted accounting principles, the more significant of these differences being:
(a) the cost related to policy acquisition and commission costs are expensed
when incurred, rather than capitalized and amortized over the coverage period;
(b) federal income taxes are recorded when payable and deferred income taxes are
not provided; (c) assets must be included in the statutory statements of
admitted assets, liabilities and changes in capital and surplus at "admitted
asset value" and "non-admitted assets" are excluded through a charge against
surplus. The minimum statutory capital and surplus required by the California
Insurance Code is $2,600,000. As of December 31, 1996 and 1997, respectively,
FPIC had statutory capital and surplus of $13,788,332 and $14,261,802. FPIC's
statutory net income for the years ended December 31, 1995, 1996 and 1997 was
$2,095,205, $2,123,815 and $1,213,293, respectively.
In December 1993, the National Association of Insurance Commissioners
("NAIC") adopted a model law which establishes certain minimum Risk Based
Capital ("RBC") requirements for property/casualty insurance companies. The RBC
calculation serves as a benchmark for the regulation of insurance companies by
state insurance regulatory authorities. The calculation specifies various
formulas and rating factors that are applied to financial balances or various
levels of activity based on the perceived degree of risk, and are set forth in
the RBC requirements. The Company's capital as of December 31, 1996 and 1997
meets the minimum RBC requirements, and management expects capital to continue
to meet the amount required.
The NAIC recently approved newly codified accounting practices that will
change the definition of what constitutes prescribed statutory accounting
practices and may result in changes to the accounting policies that insurance
enterprises use to prepare their statutory financial statements commencing in
1999. The Company has not determined how the newly codified statutory accounting
practices will affect its insurance subsidiary's statutory financial statements
or how insurance rating agencies will interpret or react to any such changes. No
assurance can be given that future legislative or regulatory changes resulting
from such activities will not adversely affect the Company.
83
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("FAS 107"), requires disclosures of fair
value information about financial instruments, whether or not recognized in the
consolidated balance sheet, for which it is practicable to estimate that value.
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments as of December 31, 1996 and 1997. FAS 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1996 1997
-------------------------- --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents............ $ 497,388 $ 497,000 $ 632,495 $ 632,000
Premiums receivable.................. 13,016,982 13,017,000 14,631,026 14,631,000
Investment securities................ 24,045,597 24,046,000 29,976,813 29,977,000
Accrued interest receivable.......... 304,605 305,000 426,013 426,000
Financial liabilities
Notes payable........................ 5,479,414 5,500,000 4,984,561 5,000,000
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash, premiums receivable and accrued interest receivable: The
carrying amounts approximate fair value because of the short maturity of
those instruments.
Investment securities: The fair values of debt securities and equity
investments are based on quoted market prices at the reporting date for
those or similar investments.
Notes payable: The fair value of the Group's notes payable is
estimated based upon discounting expected cash flows at rates currently
offered to the Group for debt of the same remaining maturities and
security.
NOTE 14 COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company occupied office space and leased
equipment and vehicles under various operating leases that have remaining
noncancellable lease terms in excess of one year. A summary of minimum future
non-cancelable lease commitments at December 31, 1997 follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -----------------------
<S> <C>
1998............................................. $ 511,697
1999............................................. 454,615
2000............................................. 360,016
2001............................................. 313,594
2002............................................. 313,594
Thereafter....................................... 1,124,375
----------
Total minimum payments................. $3,077,891
==========
</TABLE>
Rental expense of approximately $382,796, $494,587 and $541,736 for the
years ended December 31, 1995, 1996 and 1997, respectively, has been charged to
operations in the accompanying consolidated statements of operations.
The Company is also the subject of certain claims arising in the ordinary
course of its operations. The Company believes that the ultimate resolution of
such matters will not materially impact its financial condition.
84
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 EARNINGS PER SHARE
Reconciliations of the outstanding shares used in the basic and fully
diluted earnings per share calculations, are presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (Numerator):
Income available to Common
Stockholders for Basic and Diluted
earnings per share.................. $2,149,504 $2,003,286 $2,342,003 $ 517,516 $ 653,162
---------- ---------- ---------- ---------- ----------
Weighted Average Shares (Denominator):
Basic Shares.......................... 485,983 485,983 485,983 485,983 486,376
Effect of dilutive securities
Stock Options....................... 7,380 13,158 37,115 42,186 42,528
Warrants............................ 63,612 666,454 703,273 708,288 708,288
Convertible Preferred stock......... 1,735,250 1,735,250 1,735,250 1,735,250 1,735,250
---------- ---------- ---------- ---------- ----------
Diluted Shares........................ 2,292,225 2,900,845 2,961,621 2,971,707 2,972,442
========== ========== ========== ========== ==========
Per Share Amounts:
Basic Earnings per Share.............. $ 4.42 $ 4.12 $ 4.82 $ 1.06 $ 1.34
Diluted Earnings per Share............ $ 0.94 $ 0.69 $ 0.79 $ 0.17 $ 0.22
</TABLE>
For the years ended December 31, 1995 and 1996, the Company had 593,691
warrants which could potentially dilute Basic EPS in the future but were not
included in Diluted EPS because their effect was antidilutive.
NOTE 16 SUBSEQUENT EVENT
On April 14, 1998, the Company declared a 394.375-to-1 stock split effected
in the form of a dividend to stockholders of record on April 14, 1998.
All data with respect to equity classification, earnings per share and
share information, including price per share, where applicable, in the
consolidated financial statements and notes thereto have been retroactively
adjusted to reflect the split.
85
<PAGE> 87
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATES SUBSEQUENT TO THE DATE HEREOF.
------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 7
Use of Proceeds............................ 13
Dividend Policy............................ 13
Dilution................................... 14
Capitalization............................. 15
Selected Consolidated Financial Data....... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 18
Business................................... 27
Management................................. 46
Principal and Selling Stockholders......... 52
Certain Transactions....................... 53
Description of Capital Stock............... 54
Shares Eligible for Future Sale............ 57
Underwriting............................... 59
Legal Matters.............................. 60
Experts.................................... 60
Additional Information..................... 61
Glossary of Selected Insurance Terms....... 62
Index to Consolidated Financial
Statements........................... 65
</TABLE>
- ------------------------------------------------------
PROSPECTUS
- ------------------------------------------------------
2,500,000 SHARES
(FINANCIAL PACIFIC LOGO)
Common Stock
------------------------
EVEREN SECURITIES, INC.
- ------------------------------------------------------
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fees and the Nasdaq Stock Market
listing fee.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 9,330
NASD fee.................................................... $ 3,670
Nasdaq National Market listing fee.......................... $ 60,000
Printing and engraving expenses............................. $130,000
Legal fees and expenses..................................... $210,000
Accounting fees and expenses................................ $120,000
Blue sky fees and expenses.................................. $ 25,000
Transfer agent fees......................................... $ 15,000
Miscellaneous fees and expenses............................. $127,000
--------
Total............................................. $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VI, Section 1, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Amended and
Restated Certificate of Incorporation provides that, pursuant to Delaware law,
its directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty as directors to the Company and its stockholders. This
provision in the Amended and Restated Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Company for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or state or federal
environmental laws. The Registrant has entered or will enter into
Indemnification Agreements with its officers and directors that provide the
Registrant's officers and directors with further indemnification to the maximum
extent permitted by the Delaware General Corporation Law. Reference is made to
Section of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since April 1995, the Company has issued and sold the following
unregistered securities.
1. On December 28, 1995, Registrant issued Warrants to purchase up to
593,691 shares of its Common Stock and $5,000,000 aggregate principal amount of
12% Senior Notes due January 1, 2001 to a Group of four investors for an
aggregate purchase price of $5,000,000.
II-1
<PAGE> 89
2. Within the past three years, from time to time, the Registrant has
granted to employees, directors and consultants options to purchase an aggregate
of approximately 80,847 shares of Common Stock pursuant to stock option
agreements and the Registrant's stock option plans.
3. The Company has agreed to issue to the representative of the
Underwriters ("Representative") warrants (the "Representative's Warrants") to
purchase up to 143,750 shares of Common Stock, at an exercise price per share
equal to 110% of the initial public offering price per share. The
Representative's Warrants are exercisable for a period of four years, commencing
one year from the effective date (the "Effective Date") of the Registration
Statement and expire five years from the Effective Date. The Representative's
Warrants are not transferable prior to the expiration of one year from the
Effective Date other than to officers or partners of the Underwriters and
members of the selling group and their officers and partners. The holders of the
Representative's Warrants will have no voting, dividend or other shareholders'
rights until the Warrants are exercised. The Company has granted the
Representative certain demand and piggy-back registration rights related to the
Representative's Warrants, which are applicable during the period that the
Representative's Warrants are exercisable and expire five years from the
Effective Date.
The sales and issuances described above were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof, as
transactions by an issuer not involving any public offering, or in reliance upon
the exemption from registration provide by Rule 701 promulgated under the
Securities Act. In addition, the recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------------------------------------------
<C> <S>
1.1 Underwriting Agreement between EVEREN Securities, Inc. and
the Registrant.
3.1* Restated Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Specimen Common Stock certificate.
4.2+* Stockholders Agreement, dated September 7, 1993, between the
Registrant and the investors named therein.
4.3* Amendment Number One to the Stockholders Agreement, dated
December 28, 1995, between the Registrant and the investors
named therein.
5.1 Opinion of Riordan & McKinzie, a Professional Law
Corporation.
10.1* 1993 Stock Incentive Plan.
10.2* Form of Stock Option Agreement.
10.3*++ Employment Agreement between the Registrant and Robert C.
Goodell dated February 6, 1996, as amended.
10.4*++ Employment Agreement between the Registrant and Robert T.
Kingsley dated February 13, 1997.
10.5*++ Employment Agreement between the Registrant and Edward J.
Paoletti dated November 14, 1997.
10.6*++ Employment Agreement between the Registrant and Wallace G.
Rascher dated February 14, 1997.
10.7*++ Employment Agreement between the Registrant and Timothy N.
Blaede dated February 14, 1997.
10.8*++ Employment Agreement between the Registrant and John R.
Hollingshead dated November 14, 1997.
</TABLE>
II-2
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------------------------------------------
<C> <S>
10.9*++ Employment Agreement between the Registrant and Artur A.
Terner dated February 14, 1997.
10.10*++ Employment Agreement between the Registrant and Charles E.
Wardlaw dated January 1, 1998.
10.11+ ++ Restricted Stock Agreement between the Registrant and Robert
C. Goodell dated September 7, 1993, as amended.
10.12* Note and Warrant Purchase Agreement dated December 28, 1995
among the Registrant and the purchasers listed therein.
10.13* Form of 12% Senior Note due 2001.
10.14* Form of Warrant issued by the Registrant dated December 28,
1995.
10.15* Form of Warrant issued by the Registrant dated September 7,
1993.
10.16* Financial Pacific Insurance Company Property Quota Share
Reinsurance Contract originally effective July 1, 1993.
10.17* Financial Pacific Insurance Company Contingent Excess of
Loss Reinsurance Contract originally effective July 1, 1996.
10.18* Financial Pacific Insurance Company Contingent Excess of
Loss Reinsurance Contract originally effective January 1,
1997.
10.19* Financial Pacific Insurance Company Semi-Automatic Casualty
Facultative Reinsurance Contract originally effective July
1, 1996.
10.20* Financial Pacific Insurance Company (M.L. Oates Insurance
Company) Property Quota Share Reinsurance Contract
originally effective July 1, 1993.
10.21* Financial Pacific Insurance Company First Excess Casualty
Reinsurance Contract originally effective January 1, 1997.
10.22* Producer Agreement between American Underwriting Managers
Agency, Inc. and Financial Pacific Insurance Agency, Inc.
("FPIA") effective October 1, 1995.
10.23* Claims Management Agreement between FPIA and American
Underwriting Managers dated November 28, 1995
10.24* Agreement between Financial Pacific Insurance Company
("FPIC") and General Reinsurance Corporation (No. 118).
10.25* Agreement between FPIC and General Reinsurance Corporation
(No. AFF-6243440)
10.26* Agreement between FPIC and General Reinsurance Corporation
(No. 8090).
10.27* Quota Share Reinsurance Agreement between FPIC and American
Re-insurance dated October 23, 1997.
10.28* Net Lease Agreement between FPIC and Stanford Ranch I, LLC
dated June 11, 1996.
10.29* Promissory Note dated September 15, 1997 issued by the
Registrant to U.S. Bank
10.30* Stock Purchase Agreement dated February 24, 1997 between
Robert C. Goodell and the purchasers listed therein.
10.31* Form of Indemnification Agreement between the Registrant and
each director of the Registrant.
10.32 Representatives Warrant Agreement between the Registrant and
EVEREN Securities, Inc. dated June , 1998.
11.1* Computation of Net Income Per Share.
21.1* Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Accountants.
23.2 Consent of Riordan & McKinzie (contained in Exhibit 5.1).
23.3 Consent of LeBoeuf, Lamb, Greene & Macrae.
24.1* Power of Attorney (see page II-5).
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-50511) on April 20, 1998.
++ Confidential treatment requested.
II-3
<PAGE> 91
+ The Schedules to this Exhibit have not been filed with the Commission
because the Registrant believes that such Schedules do not contain
information that is material to an investment decision. The Registrant
hereby agrees to furnish supplementally a copy of the omitted schedules to
the Commission upon request.
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
maybe permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final jurisdiction
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this Registrant
Statement in reliance upon Rule 430A and contained in a form of Prospectus filed
by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registrant Statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, thereto duly authorized, in
the City of Rocklin, State of California, on this 29th day of May, 1998.
FINANCIAL PACIFIC INSURANCE GROUP, INC.
By /s/ ROBERT C. GOODELL
-------------------------------------
Robert C. Goodell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 Registration Statement has been signed below by the following person in
the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ ROBERT C. GOODELL President and Chief Executive May 29, 1998
- --------------------------------------------------- Officer and Director
Robert C. Goodell (Principal Executive Officer)
* Chief Financial Officer May 29, 1998
- --------------------------------------------------- (Principal Financial and
Artur A. Terner Accounting Officer)
* Director May 29, 1998
- ---------------------------------------------------
Richard G. Pfeiffer
* Director May 29, 1998
- ---------------------------------------------------
Patrick C. Haden
* Director May 29, 1998
- ---------------------------------------------------
Michael J. Morrissey
* Director May 29, 1998
- ---------------------------------------------------
Stephen E. Adamson
By: /s/ ROBERT C. GOODELL
- ---------------------------------------------------
Robert C. Goodell
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 93
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders
Financial Pacific Insurance Group, Inc.
The audits referred to in our report dated January 30, 1998, except as to
Note 16, which is as of April 14, 1998, included the related financial statement
schedules as of December 31, 1997, and for each of the years in the three-year
period ended December 31, 1997, included in the registration statement. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the Prospectus.
KPMG Peat Marwick LLP
Los Angeles, California
April 17, 1998
S-1
<PAGE> 94
SCHEDULE I
FINANCIAL PACIFIC INSURANCE GROUP, INC.
SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- --------------------------------------------------- -------- ------------ ----------------
AMOUNT AS
SHOWN ON BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- --------------------------------------------------- -------- ------------ ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and Government
Agencies and Authorities.................... $15,619 $ 15,628 $15,628
States, municipalities and political
subdivisions................................ 66 71 71
Foreign governments........................... -- -- --
Public utilities.............................. -- -- --
Convertibles and bonds with warrants
attached.................................... -- -- --
All other corporate bonds..................... 14,130 14,065 14,065
------- ------------ -------
Total bonds.............................. 29,815 29,764 29,764
Certificates of deposit....................... 213 213 213
Redeemable preferred stock.................... -- -- --
------- ------------ -------
Total fixed maturities................... 30,028 29,977 29,977
------- ------------ -------
Equity Securities:
Common stock:
Public utilities.............................. -- -- --
Banks, trust and insurance companies.......... -- -- --
Industrial, miscellaneous and all other....... -- -- --
Non-redeemable preferred stock................... -- -- --
------- ------------ -------
Total equity securities.................. -- -- --
------- ------------ -------
Mortgage loans on real estate...................... -- xxxxxxxxxxxx --
Real estate........................................ -- xxxxxxxxxxxx --
Policy loans....................................... -- xxxxxxxxxxxx --
Other long-term investments........................ -- xxxxxxxxxxxx --
Short-term money-market investments................ -- xxxxxxxxxxxx --
------- ------------ -------
Total investments........................ $30,028 xxxxxxxxxxxx $29,977
======= ============ =======
</TABLE>
S-2
<PAGE> 95
SCHEDULE II.1
FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
BALANCE SHEETS
($'S IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
-------- --------
<S> <C> <C>
Investment in subsidiaries.................................. $16,309 $18,655
Cash and cash equivalents................................... 3 5
Other assets................................................ 277 487
------- -------
Total assets...................................... $16,589 $19,147
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable, net........................................ $ 5,479 $ 4,985
Interest payable.......................................... 304 300
Due to affiliates......................................... 190 464
------- -------
Total liabilities................................. 5,973 5,749
======= =======
Stockholders' Equity
Series A convertible preferred stock, $.001 par value;
5,000 shares authorized; 4,400 shares issued and
outstanding at 1996 and 1997, respectively............. -- --
Common stock, $.001 par value; 3,000,000 shares
authorized; 485,983 issued and outstanding at 1996 and
1997, respectively..................................... -- --
Additional paid-in capital................................ 4,950 4,950
Retained earnings......................................... 6,140 8,482
Net unrealized loss on available for sale securities, net
of deferred income tax benefit of $244,337 in 1996 and
$17,269 in 1997........................................ (474) (34)
------- -------
Total stockholders' equity........................ 10,616 13,398
------- -------
Total liabilities and stockholders' equity........ $16,589 $19,147
======= =======
</TABLE>
See accompanying notes to financial statements.
S-3
<PAGE> 96
SCHEDULE II.2
FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
STATEMENT OF OPERATIONS
($'S IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenues:
Equity in income of subsidiaries.......................... $2,204 $2,462 $2,804
Net investment income..................................... 4 2 2
------ ------ ------
Total revenues.................................... 2,208 2,464 2,806
Expenses:
General and administrative................................ 5 5 4
Interest espense.......................................... 128 692 617
Due diligence expense..................................... -- -- 81
------ ------ ------
133 697 702
Income before federal indome tax benefit.......... 2,075 1,767 2,104
Provision for federal income tax benefit.................... 75 236 238
------ ------ ------
$2,150 $2,003 $2,342
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
S-4
<PAGE> 97
SCHEDULE II.3
FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS
($'S IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,150 $ 2,003 $ 2,342
Less equity in income of subsidiaries..................... (1,804) (1,832) (1,904)
------- ------- -------
Net loss from operations............................... 346 171 438
Amortization........................................... 15 32 8
Adjustments:
Increase in other assets (164) (104) (214)
Increase (decrease) in federal income taxes payable (3) 3
Increase (decrease) in interest payable.............. 15 289 (4)
Increase in intercompany payable..................... 118 43 274
------- ------- -------
Net cash provided (used).......................... 327 434 502
Cash flows from investing activities:
Proceeds from sale of fixed maturities available for
sale................................................... 5
Purchase of fixed maturities available for sale........... (55)
------- ------- -------
Net cash provided by investing activities..............
Cash flows from financing activities:
Proceeds form issuance of note payable.................... 5,000 500
Capital contribution...................................... (5,000)
Principal repayment on note payable....................... (315) (945) (500)
------- ------- -------
Net cash provided (used) by financing activities....... (315) (445) (500)
Net increase (decrease) in cash and cash equivalents... 12 (11) 2
Cash and cash equivalents, beginning of year........... 1 14 3
------- ------- -------
Cash and cash equivalents, end of year................. $ 13 $ 3 $ 5
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
S-5
<PAGE> 98
SCHEDULE II.4
FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Financial Pacific Insurance Group, Inc. (the "Parent Company"). The Parent
Company's wholly-owned subsidiaries, Financial Pacific Insurance Company
("Insurance Company") and Financial Pacific Insurance Agency and Financial
Pacific Technologies, Inc. are not presented as consolidated entities on these
condensed financial statements.
2. MATERIAL CONTINGENCIES
The Parent Company is the subject of certain claims arising in the ordinary
course of its operations. The Parent Company believes that the ultimate
resolution of such matters will not materially affect its financial condition.
3. NOTES PAYABLE, NET
At December 31, 1995 and 1996, the Parent Company owed $5,000,000 under an
unsecured senior note payable to certain stockholders and directors of the
Parent Company. The note payable accrues 12% interest compounded annually and is
payable semi-annually. The note is due on January 1, 2001. The note was issued
with a Common Stock Warrant Purchase agreement which entitles the holders the
option to purchase up to 1,505.4 shares of the Group's common stock. The Group
is subject to certain restrictions described in the note agreement.
At December 31, 1995, the Parent Company owed $945,000 under a secured
promissory note issued in conjunction with the Acquisition of the Insurance
Company and Agency. Effective February 1, 1995, the note was amended to extend
the maturity to November 12, 1998 with interest to accrue at 10% compounded
annually and payable quarterly. Principal payments of $315,000 are due annually
on the anniversary date of the promissory note, November 12, 1993. The
promissory note is secured by the common stock of the Insurance Company. The
note was issued with a stock option agreement which grants the holder an option
to purchase from the Parent Company common stock equal to 5% of the Insurance
Company's outstanding common stock each year during the term of promissory note,
on the anniversary of the promissory note, in exchange for the cancellation by
the holder of the principal payment then due under the promissory note.
Effective May 1, 1996, the Parent Company paid off the balance due under this
note and obtained a general release from the former owner.
At December 31, 1996, the Parent Company owed $500,000 under a $530,000
bank line of credit. The line of credit is unsecured, matures April 1, 1997, and
bears interest (payable monthly) at an annual rate of 1 percent over the bank's
base rate. The effective annual interest through December 31, 1996 was 9.25%.
The bank also granted a $30,000 irrevocable letter of credit covered by this
line of credit.
The notes payable are presented net of deferred debt issue costs. Deferred
debt issue costs are amortized over the term of the note. Unamortized debt issue
costs totaled $20.586 and $44,340 at December 31, 1996 and 1995, respectively.
NOTE 4. DIVIDENDS FROM SUBSIDIARIES
Financial Pacific Insurance Company, a consolidated subsidiary of the
Parent Company paid dividends to its parent of $402,000, $630,000, and $900,000
in 1995, 1996, and 1997 respectively.
S-6
<PAGE> 99
SCHEDULE III
FINANCIAL PACIFIC INSURANCE GROUP, INC.
SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
- ------------------------------------------ ----------- -------------- -------- ---------- -------- ----------
FUTURE POLICY OTHER
DEFERRED BENEFITS, POLICY
POLICY LOSSES, CLAIMS CLAIMS AND NET NET
ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COST EXPENSES PREMIUM PAYABLE REVENUE INCOME
- ------------------------------------------ ----------- -------------- -------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1997 -- Property & Casualty Insurance..... $5,357 $19,592 21,968 -- $22,854 $ 1,720
====== ======= ======= == ======= =======
1996 -- Property & Casualty Insurance..... $3,778 $13,944 $18,980 -- $14,987 $ 1,449
====== ======= ======= == ======= =======
1995 -- Property & Casualty Insurance..... $2,495 $12,225 $13,659 -- $12,060 $ 1,029
====== ======= ======= == ======= =======
<CAPTION>
COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K
- ------------------------------------------ -------------- ------------ --------- --------
BENEFITS, AMORTIZATION
CLAIMS, LOSSES OF DEFERRED
AND POLICY OTHER NET
SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT EXPENSES COSTS EXPENSES WRITTEN
- ------------------------------------------ -------------- ------------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1997 -- Property & Casualty Insurance..... $12,748 $ 7,440 $ 1,655 $26,936
======= ======= ======= =======
1996 -- Property & Casualty Insurance..... $ 9,750 $ 4,785 $ 1,443 $18,253
======= ======= ======= =======
1995 -- Property & Casualty Insurance..... $ 6,325 $ 3,684 $ 1,447 $14,042
======= ======= ======= =======
</TABLE>
S-7
<PAGE> 100
SCHEDULE IV
FINANCIAL PACIFIC INSURANCE GROUP, INC.
REINSURANCE
YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------- -------- --------- ---------- -------- ----------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
-------- --------- ---------- -------- ----------
($'s in thousands)
<S> <C> <C> <C> <C> <C>
Life insurance in force.............. $ -- $ -- $ -- $ -- --%
------- ------- ------- ------- ---
Premiums:
Life insurance..................... -- -- -- -- --
Accident and health insurance...... -- -- -- -- --
Property and liability insurance... 39,512 12,576 -- 26,936 0.0
Title insurance.................... -- -- -- -- --
------- ------- ------- ------- ---
Total Premiums............. $39,512 $12,576 -- $26,936 0.0%
======= ======= ======= ======= ===
</TABLE>
S-8
<PAGE> 101
SCHEDULE IV
FINANCIAL PACIFIC INSURANCE GROUP, INC.
REINSURANCE
YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------- -------- --------- ---------- -------- ----------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
-------- --------- ---------- -------- ----------
($'s in thousands)
<S> <C> <C> <C> <C> <C>
Life insurance in force.............. $ -- $ -- $ -- $ -- --%
------- ------- ------- ------- ---
Premiums:
Life insurance..................... -- -- -- -- --
Accident and health insurance...... -- -- -- -- --
Property and liability insurance... 31,927 13,674 -- 18,253 0.0
Title insurance.................... -- -- -- -- --
------- ------- ------- ------- ---
Total Premiums............. $31,927 $13,674 $ -- $18,253 0.0%
======= ======= ======= ======= ===
</TABLE>
S-9
<PAGE> 102
SCHEDULE IV
FINANCIAL PACIFIC INSURANCE GROUP, INC.
REINSURANCE
YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------- -------- --------- ---------- -------- ----------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
-------- --------- ---------- -------- ----------
($'s in thousands)
<S> <C> <C> <C> <C> <C>
Life insurance in force.............. $ -- $ -- $ -- $ -- --%
------- ------- ------- ------- ---
Premiums:
Life insurance..................... -- -- -- -- --
Accident and health insurance...... -- -- -- -- --
Property and liability insurance... 24,695 10,653 -- 14,042 0.0
Title insurance.................... -- -- -- -- --
------- ------- ------- ------- ---
Total Premiums............. $24,695 $10,653 $ -- $14,042 0.0%
======= ======= ======= ======= ===
</TABLE>
S-10
<PAGE> 103
SCHEDULE V
FINANCIAL PACIFIC INSURANCE GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------- ------------ ------------ ------------- ----------
DEDUCTIONS --
ADDITIONS -- FROM PREMIUM
BALANCE AT CHARGED TO BALANCE TO BALANCE AT
BEGINNING OF COSTS AND ALLOWANCE END OF
PERIOD EXPENSES ACCOUNT PERIOD
------------ ------------ ------------- ----------
($'s in thousands)
<S> <C> <C> <C> <C>
1997:
Allowance for doubtful accounts............. $40 $30 $30 $40
=== === === ===
1996:
Allowance for doubtful accounts............. $40 $31 $31 $40
=== === === ===
1995:
Allowance for doubtful accounts............. $20 $56 $36 $40
=== === === ===
</TABLE>
S-11
<PAGE> 104
SCHEDULE VI
FINANCIAL PACIFIC INSURANCE GROUP, INC.
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- ------------------------- ------------ ------------ --------- -------- -------- ---------- ------------------
NET CLAIMS AND
CLAIMS ADJUSTMENT
RESERVES FOR EXPENSES INCURRED
UNPAID DISCOUNT, RELATED TO
DEFERRED CLAIMS & IF ANY, ------------------
POLICY CLAIM DEDUCTED NET NET (1) (2)
AFFILIATION WITH ACQUISITIONS ADJUSTMENT IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUM INCOME YEAR YEAR
- ------------------------- ------------ ------------ --------- -------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997:
Financial Pacific
Insurance Company...... $5,357 $19,592 $-- $21,968 $22,854 $1,720 $10,991 $1,757
====== ======= == ======= ======= ====== ======= ======
1996:
Financial Pacific
Insurance Company...... $3,778 $13,944 $-- $18,980 $14,987 $1,449 $ 7,183 $2,356
====== ======= == ======= ======= ====== ======= ======
1995:
Financial Pacific
Insurance Company...... $2,495 $12,225 $-- $13,659 $12,060 $1,029 $ 6,702 $ (166)
====== ======= == ======= ======= ====== ======= ======
<CAPTION>
COLUMN A COLUMN I COLUMN J COLUMN K
- ------------------------- ------------ ---------- --------
AMORTIZATION PAID NET
OF DEFERRED CLAIMS AND
POLICY CLAIM NET
AFFILIATION WITH ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COST EXPENSES WRITTEN
- ------------------------- ------------ ---------- --------
<S> <C> <C> <C>
1997:
Financial Pacific
Insurance Company...... $7,440 $9,278 $26,936
====== ====== =======
1996:
Financial Pacific
Insurance Company...... $4,785 $7,477 $18,253
====== ====== =======
1995:
Financial Pacific
Insurance Company...... $3,684 $3,899 $14,042
====== ====== =======
</TABLE>
S-12
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S> <C>
1.1 Underwriting Agreement between EVEREN Securities, Inc. and
the Registrant. ............................................
3.1* Restated Certificate of Incorporation of the Registrant. ...
3.2* Bylaws of the Registrant. ..................................
4.1* Specimen Common Stock certificate. .........................
4.2+* Stockholders Agreement, dated September 7, 1993, between the
Registrant and the investors named therein. ................
4.3* Amendment Number One to the Stockholders Agreement, dated
December 28, 1995, between the Registrant and the investors
named therein. .............................................
5.1 Opinion of Riordan & McKinzie, a Professional Law
Corporation. ...............................................
10.1* 1993 Stock Incentive Plan. .................................
10.2* Form of Stock Option Agreement. ............................
10.3*++ Employment Agreement between the Registrant and Robert C.
Goodell dated February 6, 1996, as amended. ................
10.4*++ Employment Agreement between the Registrant and Robert T.
Kingsley dated February 13, 1997. ..........................
10.5*++ Employment Agreement between the Registrant and Edward J.
Paoletti dated November 14, 1997. ..........................
10.6*++ Employment Agreement between the Registrant and Wallace G.
Rascher dated February 14, 1997. ...........................
10.7*++ Employment Agreement between the Registrant and Timothy N.
Blaede dated February 14, 1997. ............................
10.8*++ Employment Agreement between the Registrant and John R.
Hollingshead dated November 14, 1997. ......................
10.9*++ Employment Agreement between the Registrant and Artur A.
Terner dated February 14, 1997. ............................
10.10*++ Employment Agreement between the Registrant and Charles E.
Wardlaw dated January 1, 1998. .............................
10.11+++ Restricted Stock Agreement between the Registrant and Robert
C. Goodell dated September 7, 1993, as amended. ............
10.12* Note and Warrant Purchase Agreement dated December 28, 1995
among the Registrant and the purchasers listed therein. ....
10.13* Form of 12% Senior Note due 2001. ..........................
10.14* Form of Warrant issued by the Registrant dated December 28,
1995. ......................................................
10.15* Form of Warrant issued by the Registrant dated September 7,
1993. ......................................................
10.16* Financial Pacific Insurance Company Property Quota Share
Reinsurance Contract originally effective July 1, 1993. ....
10.17* Financial Pacific Insurance Company Contingent Excess of
Loss Reinsurance Contract originally effective July 1,
1996. ......................................................
10.18* Financial Pacific Insurance Company Contingent Excess of
Loss Reinsurance Contract originally effective January 1,
1997. ......................................................
10.19* Financial Pacific Insurance Company Semi-Automatic Casualty
Facultative Reinsurance Contract originally effective July
1, 1996. ...................................................
10.20* Financial Pacific Insurance Company (M.L. Oates Insurance
Company) Property Quota Share Reinsurance Contract
originally effective July 1, 1993. .........................
10.21* Financial Pacific Insurance Company First Excess Casualty
Reinsurance Contract originally effective January 1,
1997. ......................................................
10.22* Producer Agreement between American Underwriting Managers
Agency, Inc. and Financial Pacific Insurance Agency, Inc.
("FPIA") effective October 1, 1995. ........................
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S> <C>
10.23* Claims Management Agreement between FPIA and American
Underwriting Managers dated November 28, 1995. .............
10.24* Agreement between Financial Pacific Insurance Company
("FPIC") and General Reinsurance Corporation (No. 118). ....
10.25* Agreement between FPIC and General Reinsurance Corporation
(No. AFF-6243440). .........................................
10.26* Agreement between FPIC and General Reinsurance Corporation
(No. 8090). ................................................
10.27* Quota Share Reinsurance Agreement between FPIC and American
Re-insurance dated October 23, 1997. .......................
10.28* Net Lease Agreement between FPIC and Stanford Ranch I, LLC
dated June 11, 1996. .......................................
10.29* Promissory Note dated September 15, 1997 issued by the
Registrant to U.S. Bank. ...................................
10.30* Stock Purchase Agreement dated February 24, 1997 between
Robert C. Goodell and the purchasers listed therein. .......
10.31* Form of Indemnification Agreement between the Registrant and
each director of the Registrant. ...........................
10.32 Warrant Agreement between the Registrant and EVEREN
Securities, Inc. dated June , 1998. ......................
11.1* Computation of Net Income Per Share. .......................
21.1* Subsidiaries of the Registrant. ............................
23.1 Consent of KPMG Peat Marwick LLP, Independent
Accountants. ...............................................
23.2 Consent of Riordan & McKinzie (contained in Exhibit 5.1)....
23.3 Consent of LeBoeuf, Lamb, Greene & Macrae. .................
24.1* Power of Attorney (see page II-5). .........................
27.1* Financial Data Schedule. ...................................
</TABLE>
- ---------------
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-50511) on April 20, 1998.
++ Confidential treatment requested.
<PAGE> 1
EXHIBIT 1.1
2,500,000 Shares
FINANCIAL PACIFIC INSURANCE GROUP, INC.
Common Stock, Par Value $.001
June __, 1998
UNDERWRITING AGREEMENT
EVEREN Securities, Inc.
<PAGE> 2
2,500,000 Shares
FINANCIAL PACIFIC INSURANCE GROUP, INC.
Common Stock
Par Value $.001
UNDERWRITING AGREEMENT
June __, 1998
EVEREN Securities, Inc.
As Representative of the Several Underwriters
77 West Wacker Drive
Chicago, Illinois 60601-1994
Ladies and Gentlemen:
Financial Pacific Insurance Group, Inc., a Delaware corporation (the
"Company"), and Riordan, Lewis & Haden, Firemark Advisors, Inc., St. Paul Fire &
Marine Insurance Company, Celerity Partners, L.P., Robert S. Goodell and David
Rogers (collectively, the "Selling Stockholders") confirm their agreements with
each other and the several underwriters listed in Schedule I hereto (the
"Underwriters"), for whom EVEREN Securities, Inc. (the "Representative") has
been duly authorized to act as representative, as follows:
1. The Shares. Subject to the terms and conditions set forth in this
agreement (the "Agreement"), the Company proposes to issue and sell 2,000,000
shares of its authorized but unissued Common Stock, $.001 par value (the "Common
Stock"), to the several Underwriters and the Selling Stockholders propose to
sell an aggregate of 500,000 shares of the Company's authorized and outstanding
Common Stock to the several Underwriters, with each of the Selling Stockholders
to sell the number of shares listed beside such Selling Stockholder's name on
Schedule II hereto. The 2,000,000 shares of Common Stock of the Company to be
sold by the Company are hereinafter called the "Company Shares" and the 500,000
shares of Common Stock to be sold by the Selling Stockholders are hereinafter
called the "Selling Stockholder Shares." The Company Shares and the Selling
Stockholder Shares are hereinafter collectively referred to as the "Firm
Shares." The Company also proposes to grant to the Underwriters an option to
purchase up to 375,000 additional shares of Common Stock (the "Option Shares")
if requested by the Underwriters as provided in Section 3 hereof. The Firm
Shares and the Option Shares are herein collectively called the "Shares."
The Company and the Selling Stockholders hereby confirm their respective
agreements with the Underwriters as follows:
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<PAGE> 3
2. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 (File No. 333-50511) including a
prospectus, relating to the Shares, which may have been amended; each such
amendment was so prepared and filed. The registration statement, as amended at
the time when it became or becomes effective, including all financial schedules
and exhibits thereto and all of the information (if any) deemed to be part of
the registration statement at the time of its effectiveness pursuant to Rule
430A under the Act ("Rule 430A"), is hereinafter referred to as the
"Registration Statement"; any registration statement filed pursuant to Rule
462(b) under the Act is herein called the "462(b) Registration Statement," and
after such filing the term "Registration Statement" shall include the Rule
462(b) Registration Statement; the prospectus in the form first provided to the
Underwriters by the Company in connection with the offering and sale of the
Shares (whether or not required to be filed pursuant to Rule 424(b) under the
Act ("Rule 424(b)")) is hereinafter referred to as the "Prospectus," except that
if any revised prospectus shall be provided to the Underwriters by the Company
for use in connection with the offering of the Shares that differs from the
Prospectus (whether or not any such revised prospectus is required to be filed
by the Company pursuant to Rule 424(b) under the Act), the term "Prospectus"
shall refer to the revised prospectus from and after the time it is first
provided to the Underwriters for such use; and each preliminary prospectus
included in the Registration Statement prior to the time it became or becomes
effective is herein referred to as a "Preliminary Prospectus."
3. Agreements to Sell and Purchase. On the basis of the representations
and warranties contained in this Agreement, and subject to the terms and
conditions hereof, (i) the Company and the Selling Stockholders agree, severally
and not jointly, to sell to the Underwriters, at a price of $ ________ per Share
(the "Purchase Price"), the Company Shares and the Selling Stockholder Shares,
respectively; and (ii) each Underwriter agrees, severally and not jointly, to
purchase from the Company and the Selling Stockholders, at the Purchase Price,
the aggregate number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to the terms and conditions hereof, (i) the Company
agrees to sell to the Underwriters, at the Purchase Price, up to 375,000 Option
Shares; and (ii) the Underwriters shall have the right to purchase, severally
and not jointly, from time to time, up to an aggregate of 375,000 Option Shares
at the Purchase Price. Option Shares may be purchased as provided in Section 4
hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Option Shares are to be purchased,
each Underwriter, severally and not jointly, agrees to purchase the number of
Option Shares (subject to such adjustments to eliminate fractional shares as the
Representative may determine) that bears the same proportion to the total number
of Option Shares to be purchased as the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule I bears to the total number of Firm
Shares.
For a period of 180 days from the date this Agreement becomes effective,
the Company will not, without the prior written consent of EVEREN Securities,
Inc. on behalf of the Underwriters (1) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or (2) enter
into any swap or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction
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<PAGE> 4
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise; provided, however, that
this clause shall not apply to the transactions expressly contemplated hereby,
the issuance of the Warrants pursuant to the Warrant Agreement dated June __,
1998 between the Company and the purchasers party thereto and the granting of
options for shares of Common Stock and involving the Shares the sales of shares
of Common Stock to the Company's employees pursuant to the exercise of options
under those employee benefit plans described in the Prospectus and provided
further, however, that the Company may issue shares of Common Stock
("Acquisition Shares") during such period in connection with acquisitions of
business so long as the purchaser of such Acquisition Shares agrees to be bound
by a lock-up letter in form and substance satisfactory to you pursuant to which
such purchaser agrees with the Company not to sell, offer to sell, solicit an
offer to buy, contract to sell, grant any option to purchase, or otherwise
transfer or dispose of, any such Acquisition Shares at any time before the
expiration of such 180 day period and the certificates evidencing such
Acquisition Shares bear a legend to such effect.
For a period of 180 days from the date this Agreement becomes effective,
the Company will not, without the prior written consent of EVEREN Securities,
Inc. on behalf of the Underwriters, file a registration statement relating to
shares of capital stock (including the Common Stock) or securities convertible
into or exercisable or exchangeable for, capital stock or warrants, options or
rights to purchase or acquire, capital stock, with the exception of the filing
of Registration Statements on Form S-8 with respect to the Company's employee
benefit plans described in the Prospectus and provided further, however, that
the Company may issue shares of Common Stock ("Acquisition Shares") during such
period in connection with acquisitions of business so long as the purchaser of
such Acquisition Shares agrees to be bound by a lock-up letter in form and
substance satisfactory to you pursuant to which such purchaser agrees with the
Company not to sell, offer to sell, solicit an offer to buy, contract to sell,
grant any option to purchase, or otherwise transfer or dispose of, any such
Acquisition Shares at any time before the expiration of such 180 day period and
the certificates evidencing such Acquisition Shares bear a legend to such
effect.
4. Agreements of the Company as to Delivery and Payment. The Company
agrees with each Underwriter that:
(a) Delivery to the Underwriters of and payment for the Firm
Shares shall be made at 9:00 A.M., Los Angeles time, on the third full
business day (such time and date being referred to as the "Closing
Date") following the date of the initial public offering of the Firm
Shares as advised to you by the Company, at such place as you shall
designate. Payment for the Firm Shares shall be made to the Company or
its order upon delivery of the Company Shares, and shall be made to the
Custodian for the account of the Selling Stockholders upon delivery of
the Selling Stockholder Shares, in each case in Federal or other funds
immediately available in Los Angeles.
(b) Delivery to the Underwriters of and payment for any Option
Shares to be purchased by the Underwriters shall be made at such place
as the Representative shall designate, at 9:00 A.M., Los Angeles time,
on such date or dates (individually, an "Option Closing Date" and
collectively, the "Option Closing Dates"), which may be the same as the
Closing Date but shall in no event be earlier than the Closing Date, as
shall be specified in a written notice from the Representative to the
Company of the Underwriters' determination to purchase a number,
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<PAGE> 5
specified in said notice, of Option Shares. Any such notice may be given
at any time within 45 days after the date of this Agreement. Payment for
any Option Shares shall be made to the Company or its order upon
delivery of the Option Shares, in Federal or other funds immediately
available in Los Angeles.
(c) Certificates for the Shares shall be registered in such
names and issued in such denominations as you shall request in writing
not later than two business days prior to the Closing Date or the
applicable Option Closing Date, as the case may be, and shall be made
available for inspection not later than 9:00 A.M., Los Angeles time, on
the business day next preceding the Closing Date or the applicable
Option Closing Date, as the case may be, with any transfer taxes payable
upon initial issuance or the transfer thereof duly paid by the Company
for the respective accounts of the Underwriters against payment of the
Purchase Price therefor.
5. Further Agreements of the Company. The Company also agrees with each
Underwriter that:
(a) it will, if the Registration Statement has not heretofore
become effective under the Act, file an amendment to the Registration
Statement or, if necessary pursuant to Rule 430A under the Act, a
post-effective amendment to the Registration Statement, as soon as
practicable after the execution and delivery of this Agreement, and will
use its best efforts to cause the Registration Statement or such
post-effective amendment to become effective at the earliest possible
time; and the Company will comply fully and in a timely manner with the
applicable provisions of Rule 424(b) and Rule 430A under the Act;
(b) it will advise you promptly and, if requested by you,
confirm such advice in writing, (i) when the Registration Statement has
become effective, if and when the Prospectus is sent for filing pursuant
to Rule 424 under the Act and when any post-effective amendment to the
Registration Statement becomes effective, (ii) of the receipt of any
comments from the Commission that relate to the Registration Statement
or requests by the Commission for amendments to the Registration
Statement or amendments or supplements to the Prospectus or for
additional information, (iii) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement,
or of the suspension of qualification of the Shares for offering or sale
in any jurisdiction, or the initiation or, to the best knowledge of the
Company, threat of any proceedings for such purpose by the Commission or
any state securities commission or other regulatory authority, and (iv)
of the happening of any event or information becoming known during the
period referred to in paragraph (e) below that makes any statement of a
material fact made in the Registration Statement untrue or that requires
the making of any additions to or changes in the Registration Statement
(as amended or supplemented from time to time) in order to make the
statements therein not misleading or that makes any statement of a
material fact made in the Prospectus (as amended or supplemented from
time to time) untrue or that requires the making of any additions to or
changes in the Prospectus (as amended or supplemented from time to time)
in order to make the statements therein not misleading except statements
in or omissions from the Registration Statement and the Prospectus made
or omitted in reliance upon, and in conformity with, information
relating to the Underwriters furnished in writing to the Company by or
on behalf of the Underwriters with your consent expressly for use
therein; if at any time the Commission shall issue or institute
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<PAGE> 6
proceedings (or threaten to institute any such proceedings) to issue any
stop order suspending the effectiveness of the Registration Statement,
or any state securities commission or other regulatory authority shall
issue or institute proceedings (or threaten to institute proceedings) to
issue an order suspending the qualification or exemption of the Shares
under any state securities or Blue Sky laws, the Company shall use its
best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time;
(c) it will furnish to the Representative without charge one
signed copy of the Registration Statement as first filed with the
Commission and of each amendment to it, including all exhibits filed
therewith, and, from time to time, will furnish to you and each
Underwriter designated by you a reasonable number of conformed copies of
the Registration Statement as so filed and of each amendment to it,
without exhibits;
(d) it will not file any amendment or supplement to the
Registration Statement, whether before or after the time when it becomes
effective, make any filing under Rule 462(b) of the Act or make any
amendment or supplement to the Prospectus of which you shall not
previously have been advised and provided a copy a reasonable period of
time prior to the filing thereof or to which you or your counsel shall
reasonably object; and it will prepare and file with the Commission,
promptly upon your reasonable request, any amendment to the Registration
Statement or supplement to the Prospectus that may be necessary or
advisable in connection with the distribution of the Shares by you in
your or your counsel's opinion, and will use its reasonable commercial
efforts to cause the same to become effective as promptly as possible;
(e) promptly after the Registration Statement becomes effective,
and from time to time thereafter for such period as a prospectus is
required by the Act to be delivered in connection with the sales by an
underwriter or a dealer (in the opinion of your counsel), it will
furnish to each Underwriter and dealer without charge as many copies of
the Prospectus (and any amendment or supplement of the Prospectus) as
such Underwriter or dealer may reasonably request for the purposes
contemplated by the Act; the Company consents to the use of the
Prospectus and any amendment or supplement thereto by any Underwriter or
any dealer, both in connection with the offering or sale of the Shares
and for such period of time thereafter as the Prospectus is required by
the Act to be delivered in connection therewith;
(f) if during the period specified in paragraph (e) any event
shall occur or information become known as a result of which in the
opinion of your counsel or in the judgment of the Company it becomes
necessary to amend or supplement the Prospectus in order to make the
statements therein, in light of the circumstances existing as of the
date the Prospectus is delivered to a purchaser, not misleading, or it
is necessary to amend or supplement the Prospectus to comply with any
law, forthwith to prepare and, subject to paragraph 5(d) above, it will
file with the Commission at the sole expense of the Company an
appropriate amendment or supplement to the Prospectus so that the
statements of any material facts in the Prospectus, as so amended and
supplemented, will not in light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with
law, and it will furnish to the Underwriters and to such dealers as the
Underwriters shall specify, at the sole expense of the Company, such
number of copies thereof as such Underwriters or dealers may reasonably
request;
(g) prior to any public offering of the Shares, it will
cooperate with you and counsel for the Underwriters in connection with
the registration or qualification of the Shares for offer and sale by
the several Underwriters and by dealers under the state securities or
Blue Sky laws of such jurisdictions as you may reasonably request
(provided, that the Company shall not be obligated to qualify as a
foreign corporation in any jurisdiction in which it is not so qualified
or
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<PAGE> 7
to take any action which would subject it to general consent to service
of process in any jurisdiction in which it is not now so subject); the
Company will continue such qualification in effect so long as required
by law for the distribution of the Shares and will file such consents to
service of process or other documents as may be necessary in order to
effect such registration or qualification (provided, that the Company
shall not be obligated to take any action that would subject it to
general consent to service of process in any jurisdiction in which it is
not now so subject);
(h) it will not, prior to the exercise in full or termination or
expiration of the option to purchase the Option Shares, incur any
liability or obligation, direct or contingent, or enter into any
material transaction, other than in the ordinary course of business,
except as contemplated by the Prospectus;
(i) it will not acquire any capital stock of the Company prior
to the exercise in full or termination or expiration of the option to
purchase the Option Shares nor will the Company declare or pay any
dividend or make any other distribution upon the Common Stock payable to
Stockholders of record on a date prior to the exercise in full or
termination or expiration of the option to purchase the Option Shares,
except in either case as contemplated by the Prospectus;
(j) it will make generally available to its security holders as
soon as reasonably practicable a consolidated earnings statement
covering a period of at least 12 months beginning after the "effective
date" (as defined in Rule 158 under the Act) of the Registration
Statement (but in any event not later than the forty-fifth (45th) day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement) that
will satisfy the provisions of Section 11(a) of the Act and Rule 158
thereunder and to advise you in writing when such statement has been
made so available;
(k) during the period of five years after the date of this
Agreement, it will furnish to you a copy (i) as soon as practicable
after the filing thereof, of each report filed by the Company with the
Commission, any securities exchange or the National Association of
Securities Dealers, Inc. ("NASD"); (ii) as soon as practicable after the
release thereof, of each material press release in respect of the
Company; (iii) as soon as available, of each report of the Company
mailed to Stockholders; and (iv) as soon as available, such other
publicly available information concerning the Company as you may
reasonably request;
(l) subject to Section 5(m), whether or not the transactions
contemplated hereby are consummated or this Agreement becomes effective
as to all of its provisions or is terminated, it will pay all costs,
fees, expenses and taxes incident to the performance by the Company of
its obligations hereunder, including (i) the preparation, printing,
filing and distribution under the Act of the Registration Statement
(including financial statements and exhibits), each Preliminary
Prospectus and all amendments and supplements to any of them prior to or
during the period specified in paragraph (e) above of this Section 5,
(ii) the word processing, reproduction and distribution of this
Agreement, the Blue Sky Survey and any other agreements, memoranda,
correspondence and other documents prepared and delivered by the
Underwriters or their counsel in connection with the offering of the
Shares (including in each case any disbursements of counsel for the
Underwriters relating to such preparation and delivery), (iii) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states, including in each
case the fees and disbursements of counsel for the Underwriters,
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<PAGE> 8
relating to such registration or qualification and memoranda relating
thereto, provided that the Company shall not be required to pay more
than $25,000 for legal fees of the counsel for the Underwriters relating
to Blue Sky matters, (iv) the listing of the Shares on The Nasdaq
National Market System ("NMS"); (v) furnishing such copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus and
all amendments and supplements thereto as may be requested for use in
connection with the offering or sale of the Shares by the Underwriters
or by dealers to whom the Shares may be sold, (vi) obtaining the
opinions to be provided pursuant to Section 8 of this Agreement and
(vii) the performance by the Company of all of its other obligations
under this Agreement;
(m) in addition to the expenses set forth in Section 5(l), the
Company shall, as applicable: (A) on the Closing Date, and on each of
the Option Closing Dates, pay to EVEREN Securities, Inc., individually
and not in its capacity as Representative, a non-accountable expense
allowance equal to one percent (1%) of the initial public offering price
of the Shares and Option Shares sold pursuant to this Agreement, or (B)
(i) if the sale of the Shares provided for herein is not consummated
because the Underwriters exercise their right to terminate this
Agreement pursuant to Section 9 hereof and any of the following have
occurred during the term of this Agreement: (1) there has been any
material adverse change in the condition (financial or otherwise),
earnings, affairs, business or prospects of the Company; (2) the
discovery of any defect in the authorization, validity of issuance or
fully paid status of any of the Company's outstanding securities; (3)
the discovery that any of the Company's business plans, prospects,
condition (financial or otherwise) or projections are materially
different from information with respect thereto previously provided to
you; (4) the failure or inability to qualify or register the offer and
sale of the Common Stock on the NASDAQ-NMS or other appropriate
exchange; or (5) the Company or the Selling Stockholders shall refuse or
be unable to comply with any provision hereof (except as the result of
any breach of this Agreement by the Underwriters), the Company will
promptly reimburse the Underwriters upon demand for all reasonable
out-of-pocket expenses (including the fees and disbursements of counsel
for the Underwriters) that shall have been incurred by the Underwriters
in connection with the proposed purchase and sale of Shares, or (ii)
notwithstanding any provision of this Agreement to the contrary, if the
sale of the Shares provided for herein is not consummated or this
Agreement is terminated for any reason other than the reasons set forth
set in clause (B) (i) of this Section 5(m), the Company shall not pay
any out-of-pocket expenses (including the fees and disbursements of
counsel for the Underwriters) that shall have been incurred by the
Underwriters in connection with the proposed purchase and sale of
Shares. For purposes of this Section 5(m), the reimbursable amount for
fees and disbursements of counsel for the Underwriters will be limited
to $100,000.00.
(n) it intends to use the net proceeds received by it from the
sale of the Shares being sold by it in the manner specified under the
caption "Use of Proceeds" in the Prospectus, and it will file such
reports with the Commission with respect to the application of the
proceeds therefrom as may be required in accordance with Rule 463 under
the Act;
(o) if, at the time of effectiveness of the Registration
Statement, any information shall have been omitted therefrom in reliance
upon Rule 430A, then immediately following the execution and delivery of
this Agreement, it will prepare, and file or transmit for filing with
the Commission in accordance with such Rule 430A and Rule 424(b), copies
of an amended prospectus, or, if required by such Rule 430A, a
post-effective amendment to the Registration
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<PAGE> 9
Statement (including an amended prospectus), containing all information
so omitted;
(p) it will cause the Shares to be listed, subject to notice of
issuance or sale, on the NMS; it will comply with all registration,
filing and reporting requirements of the Securities Exchange Act of
1934, as amended, (the "Exchange Act") and the NMS applicable to the
Company;
(q) the Company shall obtain and deliver to you prior to the
Closing Date an agreement from each current officer and director of the
Company, and each beneficial owner of Common Stock (other than John Aye)
prior to the date hereof a written agreement (the "Lock-up Agreements")
that for a period of 180 days from the date this Agreement becomes
effective, he or she will not, without the prior written consent of the
Representative on behalf of the Underwriters (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or (2) enter into any swap
or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise;
provided, however, that this clause shall not apply to the transactions
expressly contemplated hereby involving the Shares or the warrants to be
provided under the Warrant Agreement (the "Warrants") or to transfers of
Common Stock to partnerships, limited liability companies, trusts or
similar entities organized for the exclusive benefit of family members
of the transferor for financial and estate planning purposes so long as
any transferee that receives Common Stock as a result of such transfer
shall agree upon such transfer to be bound by the terms of this
paragraph and shall be capable of being so bound; and
(r) it will use its reasonable commercial efforts to do and
perform all things required to be done and performed under this
Agreement by it prior to or after the Closing Date or any Option Closing
Date, as the case may be, and to satisfy all conditions precedent to the
delivery of the Shares.
6. Representations and Warranties.
(a) the Company represents and warrants to each Underwriter as
of the date hereof, the Closing Date and each Option Closing Date that:
(i) the Company has not received from the Commission any
order preventing or suspending the use of any Preliminary
Prospectus relating to the proposed offering of the Shares nor
instituted or threatened any proceedings for that purpose. The
Registration Statement, on the date it became or becomes
effective, any 462(b) Registration Statement, on the date it
became or becomes effective, each Preliminary Prospectus, on the
date of the filing thereof with the Commission, and the
Prospectus and any amendment or supplement thereto, on the date
of filing thereof with the Commission (or if not filed, on the
date provided by the Company to the Underwriters in connection
with the offering and sale of the Shares) and at the Closing
Date and each Option Closing Date conformed or will conform in
all material respects with the requirements of the Act and the
rules and regulations promulgated thereunder ("Rules
8
<PAGE> 10
and Regulations"); the Registration Statement, on the date it
became or becomes effective, and any 462(b) Registration
Statement, on the date it became or becomes effective, did not
or will not contain an untrue statement of material fact or omit
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; each
Preliminary Prospectus, on the date of the filing thereof with
the Commission, and the Prospectus and any amendment or
supplement thereto, on the date of filing thereof with the
Commission (or if not filed, on the date provided by the Company
to the Underwriters in connection with the offering and sale of
the Shares) and at the Closing Date and each Option Closing Date
did not and will not include an untrue statement of material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading;
the foregoing shall not apply to statements in or omissions from
the Registration Statement and the Prospectus made or omitted in
reliance upon, and in conformity with, information relating to
the Underwriters furnished in writing to the Company by or on
behalf of the Underwriters with your consent expressly for use
therein; the Company and the Selling Stockholders hereby
acknowledge for all purposes under this Agreement that (A) the
statements set forth under the caption "Underwriting" in the
Prospectus and (B) the stabilization legend on the inside cover
of the Prospectus constitute the only written information
furnished to the Company by or on behalf of the Underwriters for
use in the preparation of the Registration Statement or the
Prospectus or any amendment or supplement thereto;
(ii) the Company has been duly incorporated and is a validly
existing corporation in good standing under the laws of
Delaware, with full corporate power and authority to own or
lease its properties and assets and to conduct its business as
described in the Registration Statement and the Prospectus, is
duly registered as an insurance holding company under the laws
of California, and is duly qualified to do business in each
jurisdiction in which it owns or leases real property or in
which the conduct of its business or the ownership or leasing of
property requires such qualification, except where the failure
to be so qualified, either individually or in the aggregate,
would not have a material adverse effect on the condition
(financial or otherwise), business, assets, prospects, net worth
or results of operations of the Company taken as a whole (a
"Material Adverse Effect");
(iii) the Company has no subsidiaries other than Financial
Pacific Insurance Agency ("FPIA"), Financial Pacific Insurance
Company ("FPIC")and Financial Pacific Technology, Inc., each a
corporation organized and operating under the laws of
California; all issued and outstanding shares of capital stock
or other equity interest of each subsidiary of the Company have
been duly authorized and validly issued and are fully paid and
nonassessable, and were not issued in violation of or subject to
any preemptive right, or other rights to subscribe for or
purchase shares or other equity interest and are owned by the
Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest.
(iv) the capitalization of the Company is, and upon
consummation of the transactions contemplated hereby and by the
Prospectus will be, as set forth in the Registration Statement
and the Prospectus under the caption "Capitalization"; all of
the outstanding shares of capital stock of the Company
(including the shares to be sold by
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<PAGE> 11
the Selling Stockholders hereunder) have been duly authorized
and are validly issued, are fully paid and non-assessable and
conform to the description thereof in the Registration Statement
and the Prospectus and were not issued in violation of any
preemptive rights or other rights to subscribe for or purchase
securities; and, except as set forth in the Registration
Statement and the Prospectus with respect to 4,400 shares of
Series A Preferred Stock and the warrants to purchase an
aggregate of 747,216 shares of the Common Stock described under
the Caption "Description of Capital Stock" and the options to
purchase 82,819 shares of the Common Stock under the Company's
1993 Stock Incentive Plan, and except for the Warrants, no
options, warrants or other rights to purchase from the Company,
agreements or other obligations of the Company to issue or other
rights to convert any obligation into, or exchange any
securities for, shares of capital stock of or ownership
interests in the Company are outstanding; the description of the
Company's 1993 Stock Incentive Plan and the options or other
rights granted and exercised thereunder, as set forth in the
Registration Statement and the Prospectus, accurately and fairly
presents the information required to be shown under the Act with
respect to such options and rights;
(v) subsequent to the respective dates as of which
information is given in the Registration Statement and
Prospectus, and except as described therein, (A) the Company has
not incurred any material liabilities or obligations, direct or
contingent, or entered into any material transactions not in the
ordinary course of business, (B) the Company has not purchased
any of its outstanding capital stock or declared, paid or
otherwise made any dividend or distribution of any kind on its
capital stock or otherwise and (C) there has not been any
material adverse change in the Company's condition (financial or
otherwise), business, affairs, prospects or results of
operations or any material change in the Company's capital
stock, short-term debt or long-term debt;
(vi) the Company Shares have been duly and validly
authorized and, when issued, delivered and paid for pursuant to
this Agreement, will be validly issued, fully paid and
nonassessable, and will conform to the description thereof
contained in the Prospectus;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company and is a legal, valid and binding
agreement of the Company enforceable in accordance with its
terms, except as enforceability of the same may be limited by
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally and by
general equity principles;
(viii) the Company is not in violation of its Restated
Certificate of Incorporation or By-laws; the Company is not in
violation of or in breach of or in default in (nor has any event
occurred that with notice or lapse of time, or both, would be a
breach of or a default in) the performance of any obligation,
agreement or condition contained in any agreement, lease,
contract, permit, license, franchise agreement, mortgage, loan
agreement, debenture, note, deed of trust, bond, indenture or
other evidence of indebtedness or any other instrument or
obligation (collectively, "Obligations or Instruments") to which
the Company is a party or by which the Company or any of its
properties or assets is bound or affected (except for such
breach or default as would not have a Material Adverse Effect);
the Company is not in violation
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<PAGE> 12
of any statute, judgment, decree, order, rule or regulation
(collectively, "Laws") applicable to the Company or any of its
properties or assets that, alone, or together with other
violations of Laws would result in a Material Adverse Effect;
and to the best knowledge of the Company, no other party under
any contract or other agreement to which the Company is a party
is in material default thereunder except for such defaults as
would not individually or in the aggregate result in a Material
Adverse Effect;
(ix) the execution, delivery and performance of this
Agreement, the delivery of the Shares by the Company and the
Selling Stockholders pursuant to this Agreement, and the
consummation of the transactions contemplated hereby and thereby
will not, alone or upon notice or the passage of time or both,
(A) require any consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other
governmental body or third party, except such consents or
approvals as have been obtained or waived or which would not
result in a Material Adverse Effect (and except in the case of
the Shares such as may be required under the Act and the
securities or Blue Sky laws of the various states or by the
NASD), and except those relating to the acquisition of 10% or
more of the aggregate number of shares of the Common Stock to be
outstanding upon the consummation of the transactions
contemplated by this Agreement by any person or affiliated
persons (other than the purchase and sale of the Shares by the
Underwriters pursuant to this Agreement), (B) except as
described in the Prospectus, result in the creation or
imposition of any lien, charge or encumbrance upon any of the
properties or assets of the Company pursuant to the terms and
provisions of any Obligation or Instrument, (C) conflict with or
constitute a breach or default under any Obligation or
Instrument to which the Company is a party or by which the
Company or any of its properties or assets is bound, (except for
such creation, conflict, breach or default as would not have a
Material Adverse Effect or would not interfere with the
consummation of the transactions contemplated by this
Agreement), or (D) assuming compliance with the Act and all
applicable state securities or Blue Sky laws, violate or
conflict with any Laws applicable to the Company or its
subsidiary or any of their respective properties or assets taken
as a whole (except for such violation or conflict as could not
have a Material Adverse Effect or would not interfere with the
consummation of the transactions contemplated by this
Agreement); no action, suit or proceeding before any court or
arbitrator or any governmental body, agency or official
(domestic or foreign) is pending against or, to the knowledge of
the Company, threatened against the Company, that, if adversely
determined, could reasonably be expected to in any manner
invalidate this Agreement or the Warrant Agreement;
(x) except as set forth in the Prospectus, there is no
action, suit, proceeding, inquiry or investigation, governmental
or otherwise before any court, arbitrator or governmental agency
or body (collectively, "Proceedings") pending to which the
Company or its subsidiary is a party or to which any of their
respective properties or assets are subject, that, if determined
adversely to the Company or its subsidiary, as the case may be,
would result in a Material Adverse Effect, or that would
materially and adversely affect the properties or assets
thereof, or that seeks to restrain, enjoin, prevent the
consummation of or otherwise challenge the issuance or sale of
any of the Shares to be sold hereunder or the consummation of
the transactions contemplated hereunder, or under the Warrant
Agreement and, to the best knowledge of the Company, no such
Proceedings are threatened or contemplated; and (except for such
contracts, documents
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<PAGE> 13
or agreements for which confidential treatment has been granted
by the Commission in accordance with Rule 406 of the Rules and
Regulations) there is no contract, document, agreement or
transaction to which the Company or its subsidiary is a party,
or that involved or involves the Company, its subsidiary or any
of their properties or assets that are required to be described
in or filed as exhibits to the Registration Statement or the
Prospectus by the Act or the Rules and Regulations that have not
been so described or filed; no action has been taken with
respect to the Company, and, to the best knowledge of the
Company, no statute, Rule or regulation or order has been
enacted, adopted or issued by any governmental agency that
suspends the effectiveness of the Registration Statement,
prevents or suspends the use of any Preliminary Prospectus or
the Prospectus, or suspends the sale of the Shares in any
jurisdiction referred to in Section 5(g) hereof; no injunction,
restraining order or order of any nature by a federal or state
court of competent jurisdiction or any insurance regulatory
agency has been issued with respect to the Company that might
prevent the issuance of the Shares, suspend the effectiveness of
the Registration Statement, prevent or suspend the use of any
Preliminary Prospectus or the Prospectus or suspend the sale of
the Shares in any jurisdiction referred to in Section 5(g)
hereof; and every request of the Commission, or any securities
authority or agency of any jurisdiction, for additional
information (to be included in the Registration Statement or the
Prospectus or otherwise) has been complied with in all material
respects;
(xi) the Company and each of its subsidiaries is duly
licensed or authorized as an insurer or insurance agency or
third-party administrator in each jurisdiction where it is
required to be so licensed or authorized to conduct its business
as described in the Prospectus, or is subject to no material
liability or disability by reason of the failure to be so
licensed or authorized in any such jurisdiction; the Company has
made all required filings under applicable insurance holding
company statutes; each subsidiary of the Company is in
compliance with the requirements of the insurance laws and
regulations of California and the insurance laws and regulations
of other jurisdictions which are applicable to such subsidiary,
and has filed all notices, reports, documents or other
information required to be filed thereunder, except where the
failure to so comply or file would not have a Material Adverse
Effect; the Company and each of its subsidiaries have all other
necessary authorizations, approvals, orders, consents,
certificates, permits, registrations or qualifications of and
from all insurance regulatory authorities to conduct its
businesses as described in the Prospectus, or are subject to no
material liability or disability by reason of the failure to
have such authorizations, approvals, orders, consents, licenses,
certificates, permits, registrations or qualifications; and none
of the Company or any of its subsidiaries has received any
notification from any insurance regulatory authority to the
effect that any additional authorization, approval, order,
consent, license, certificate, permit, registration or
qualification from such insurance regulatory authority is needed
to be obtained by any of the Company or its subsidiaries in any
case where it could be reasonably expected that (x) the Company
or its subsidiaries would in fact be required either to obtain
any such additional authorization, approval, order, consent,
license, certificate, permit, registration or qualification, or
cease or otherwise limit writing certain business and (y) the
failure to obtain such authorization, approval, order, consent,
license, certificate, permit, registration or qualification or
the limiting of such business would have a Material Adverse
Effect on the business, financial position or results of
operations of the Company and its subsidiaries;
(xii) the Company is not aware that any of its pending
applications for licenses or permits to act as an insurer or
insurance agent or third-party administrator, or any such
pending application of a subsidiary, is not being processed in
due course;
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<PAGE> 14
(xiii) except as disclosed in the Prospectus, to the best
knowledge of the Company, no change in any insurance laws, rules
or regulations in California has been introduced that would
reasonably be expected to be adopted and if adopted, would
reasonably be expected to have, individually or in the aggregate
with all such changes, a Material Adverse Effect;
(xiv) in addition to the above, the Company and its
subsidiaries believe they have such permits, licenses,
franchises and authorizations of governmental or regulatory
authorities or third parties ("Permits"), including, without
limitation, under any applicable Environmental Laws, as are
necessary to own, lease and operate its properties and assets
and to conduct its businesses, except where the failure to have
any such Permit would not have a Material Adverse Effect; the
Company has fulfilled and performed all of its material
conditions or obligations with respect to such Permits, and no
event has occurred that allows, or after notice or lapse of
time, or both would allow, revocation or termination thereof or
result in any other material impairment of the rights of the
holder of any such Permit;
(xv) all reinsurance treaties and arrangements to which the
Company or any of its subsidiaries is a party are in full force
and effect and none of the Company or its subsidiaries is in
violation of or in default in the performance, observance or
fulfillment of, any material obligation, agreement, covenant or
condition contained therein; neither the Company nor any of its
subsidiaries has received notice from any of the other parties
to such treaties, contracts or agreements that such other party
intends not to perform such treaty, and the Company and its
subsidiaries, to their best knowledge, have no reason to believe
that any of the other parties to such treaties or arrangements
will be unable to perform any such treaties or arrangements
except to the extent adequately and properly reserved for in the
consolidated financial statements of the Company and its
subsidiaries included in the Prospectus.
(xvi) the Company has not violated any foreign, federal, state
or local law or regulation relating to the protection of human
health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental
Laws"), nor any foreign, Federal, state or local law relating to
discrimination in the hiring, promotion or pay of employees nor
any applicable foreign, Federal or state wages and hours laws,
nor any provisions of the Employee Retirement Income Security
Act of 1974, as amended or the rules and regulations promulgated
thereunder or similar foreign laws, that, in each case or in the
aggregate, would have in a Material Adverse Effect; none of the
property leased by the Company is contaminated with any waste or
hazardous substances, and, to the extent that the Company
disposes in the ordinary course of its business products that
may be classified as or contain "hazardous substances," the
disposal of such products (A) is in material compliance with all
applicable laws as of the date hereof and (B) has not and will
not result in a Material
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<PAGE> 15
Adverse Effect;
(xvii) the Company is not, and does not intend to conduct
its business in a manner in which it would become, an
"investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of
1940, as amended (the "Investment Company Act");
(xviii) except as otherwise set forth in the Prospectus, the
Company has good and marketable title, free and clear of all
liens, claims, encumbrances and restrictions (except liens for
taxes not yet due and payable) to all property and assets
described in the Registration Statement as being owned by it;
all leases to which the Company is a party are subsisting, valid
and binding and no default of the Company or, to the best
knowledge of the Company any other person has occurred or is
continuing thereunder that might result in a Material Adverse
Effect; and the Company enjoys peaceful and undisturbed
possession under all such leases to which the Company is a party
as lessee with such exceptions as do not materially interfere
with the use made thereof by the Company;
(xix) the Company believes it maintains adequate insurance
for the conduct of its business with reputable third-party
insurers in accordance with prudent practices in its industry,
and the Company has no reason to believe that it will not be
able to renew its existing coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a comparable cost;
(xx) to the best of the Company's knowledge, KPMG Peat
Marwick LLP, the accounting firm that has certified or reviewed,
or shall certify or review, the financial statements and
supporting schedules filed or to be filed with the Commission as
part of the Registration Statement and the Prospectus, is an
independent public accounting firm with respect to the Company
as required by the Act;
(xxi) the consolidated financial statements of the Company,
together with related notes and schedules of the Company
included in the Registration Statement and the Prospectus, are
accurate and present fairly, in all material respects, the
financial position, results of operations and cash flows of the
Company at the indicated dates and for the indicated periods;
such financial statements of have been prepared in accordance
with generally accepted accounting principles ("GAAP")
consistently applied throughout the periods involved, except
where such summary and selected financial and operating data
have been prepared or include data prepared in accordance with
statutory accounting principles and the Registration Statement
specifically indicates that this is the case, and all
adjustments necessary for a fair presentation of results for
such periods have been made, and any unaudited financial
statements have been prepared on a basis substantially
consistent with that of the audited operating financial
statements included in the Registration Statement and the
Prospectus; and the summary and selected financial and operating
data included in the Registration Statement and the Prospectus
present fairly, in all material respects, the information shown
therein and have been compiled on a basis consistent with the
audited and any unaudited financial statements, as the case may
be, included therein;
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<PAGE> 16
(xxii) the statutory financial statements of the Company and
its subsidiaries from which certain ratios and other statistical
data filed as part of the Registration Statement or included or
incorporated in the Prospectus have been derived: (i) have for
each relevant period been prepared in conformity with statutory
accounting practices required or permitted by the National
Association of Insurance Commissioners and by the California
Department of Insurance, and such statutory accounting practices
have been applied on a consistent basis throughout the periods
involved, except as may otherwise be indicated therein or in the
notes thereto; and (ii) present fairly the statutory financial
position of the Company and its subsidiaries as at the dates
thereof, and the statutory basis results of operations of the
Company for the periods covered thereby;
(xxiii) FPIC is currently rated A- (excellent) by A.M. Best;
the Company is not aware of any action by A.M. Best that could
lead to a downward change in the rating of FPIC, nor is it aware
of any circumstance that could be the basis for such downward
change;
(xxiv) except for the registration rights of the Selling
Stockholders which have been exercised, all rights of security
holders of the Company to require registration of shares of
Common Stock (a "Registration Right") or any other security of
the Company because of the filing of the Registration Statement
or consummation of the transactions contemplated by this
Agreement or to receive notification of such filing or
consummation have been duly waived with respect to the public
offering contemplated hereby. There are no preemptive rights
with respect to the offering being made by the Prospectus;
(xxv) except as disclosed in the Registration Statement and
the Prospectus, no labor dispute with the employees of the
Company exists, or to the best knowledge of the Company, is
imminent, and the Company has not received notice of any
existing or imminent labor disturbance by the employees of any
of its principle suppliers, customers, manufacturers or
contractors that could result in any Material Adverse Effect;
(xxvi) to the best of the Company's knowledge, the Company
has filed or caused to be filed, or has properly filed
extensions for, all foreign, federal, state and local income,
value added and franchise tax returns and has paid all taxes and
assessments shown thereon as due, except for such taxes and
assessments as are disclosed or adequately reserved against and
that are being contested in good faith by appropriate
proceedings, promptly instituted and diligently conducted;
(xxvii) the Company does not own or require any patents in
connection with the business it now operates and the Company
owns or possesses the licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names
(collectively, "Proprietary Rights") currently employed by it in
connection with the business it now operates except where the
failure to so own such Proprietary Rights would not have a
Material Adverse Effect; and the Company has not received any
notice and is not otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any
Proprietary Rights that, if the subject of any unfavorable
decision, ruling or finding, in the aggregate, would result in a
Material Adverse Effect;
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<PAGE> 17
(xxviii) the Company is conducting and intends to conduct
its business so as to comply in all material respects with
applicable federal, state, local and foreign government Laws,
except where the failure to comply would not have a Material
Adverse Effect; and except as set forth in the Registration
Statement and the Prospectus, the Company is not charged with
or, to the best knowledge of the Company, under investigation
with respect to, any material violation of any such Laws;
(xxix) the Company has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably
be expected to cause or result, under the Exchange Act or
otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Shares;
(xxx) neither the Company nor, to the best knowledge of the
Company, any employee or agent of the Company has made any
payment of funds of the Company or received or retained any
funds in violation of any law, rule or regulation (including,
without limitation, the Foreign Corrupt Practices Act) or of a
character required to be disclosed in the Prospectus; the
Company has not, at any time during the past five years, (1)
made any unlawful contributions to any candidate for any
political office, or failed fully to disclose any contribution
in violation of law, or (2) made any unlawful payment to state,
federal or foreign government officer or officers, or other
person charged with similar public or quasi-public duty;
(xxxi) the Company maintains a system of internal accounting
controls which it believes is sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain
asset accountability, (iii) access to assets is permitted only
in accordance with management's general or specific
authorization, and (iv) the recorded accountability for
inventory is compared with the existing inventory at reasonable
intervals and appropriate action is taken with respect to any
differences;
(b) In addition, the Selling Stockholders, severally and not
jointly, represent and warrant to and agree with each Underwriter and
the Company that:
(i) each such Selling Stockholder now has and on the Closing
Date will have valid marketable title to the Selling Stockholder
Shares to be sold by him or her, free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable
interest other than pursuant to this Agreement; and upon
delivery of such Shares hereunder and payment of the Purchase
Price as herein contemplated, each of the Underwriters will
obtain valid marketable title to the Shares purchased by it from
such Selling Stockholder, free and clear of any pledge, lien,
security interest pertaining to such Selling Stockholder or such
Selling Stockholder's property, encumbrance, claim or equitable
interest, including any liability for estate or inheritance
taxes, or any liability to or claims of any creditor, devisee,
legatee or beneficiary of such Selling Stockholders;
(ii) each such Selling Stockholder has duly executed and
delivered, in the form heretofore furnished to the
Representative, an irrevocable Power of Attorney and Custody
Agreement appointing Robert C. Goodell, Patrick C. Haden and
Stephen E.
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<PAGE> 18
Adamson, or any of them, as attorney-in-fact (the "Attorney")
with Robert C. Goodell as custodian (the "Custodian"); the Power
of Attorney and Custody Agreement constitutes a valid and
binding agreement on the part of each Selling Stockholder,
enforceable in accordance with its terms, except as the
enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by
general equitable principles; and the Attorney, acting alone, is
authorized to execute and deliver this Agreement and the
certificate referred to in Section 8(l) hereof on behalf of such
Selling Stockholder, to determine the Purchase Price to be paid
by the several Underwriters to such Selling Stockholder as
provided in Section 3 hereof, and to duly endorse (in blank or
otherwise) the certificate or certificates representing such
Shares or a stock power or powers with respect thereto, to
accept payment therefor, and otherwise to act on behalf of such
Selling Stockholder in connection with this Agreement;
(iii) all consents, approvals, authorizations and orders
required for the execution and delivery by each Selling
Stockholder of the Power of Attorney and Custody Agreement, the
execution and delivery by or on behalf of such Selling
Stockholder of this Agreement and the sale and delivery of the
Selling Stockholder Shares to be sold by such Selling
Stockholder under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been
declared effective by the Commission), the issuance of the order
of the Commission declaring the Registration Statement effective
and such consents, approvals, authorizations or orders as may be
necessary under state or other securities or Blue Sky laws) have
been obtained and are in full force and effect; and such Selling
Stockholder has full legal right, power and authority to enter
into and perform its obligations under this Agreement and such
Power of Attorney and Custody Agreement, and to sell, assign,
transfer and deliver the Shares to be sold by such Selling
Stockholder under this Agreement;
(iv) for a period of 180 days from the date this Agreement
becomes effective, no Selling Stockholder will, without the
prior written consent of EVEREN Securities, Inc. on behalf of
the Underwriters (1) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock
(except for such transactions contemplated in the Registration
Statement), or (2) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by
delivery of Common Stock or such other securities, in cash or
otherwise; provided, however, that this clause shall not apply
to the transactions expressly contemplated hereby involving the
Shares or to transfers of Common Stock to partnerships, limited
liability companies, trusts or similar entities organized for
the exclusive benefit of family members of a Selling Stockholder
for financial and estate planning purposes so long as any
transferee that receives Common Stock as a result of such
transfer shall agree upon such transfer to be bound by the terms
of this paragraph and shall be capable of being so bound;
(v) the performance of this Agreement and the consummation
of the
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<PAGE> 19
transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of or constitute a
default under any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement
or instrument to which any Selling Stockholder is a party or by
which any Selling Stockholder, may be bound or, to the best of
each Selling Stockholder's knowledge, result in any violation of
any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over such Selling
Stockholder;
(vi) no Selling Stockholder has taken or will take, directly
or indirectly, any action designed to or that might reasonably
be expected to cause or result in stabilization or manipulation
of the price of the Common Stock to facilitate the sale or
resale of the Shares;
(vii) other than as permitted by the Act, no Selling
Stockholder has distributed or will distribute any prospectus or
other offering material in connection with the offering and sale
of the Shares;
(viii) each such Selling Stockholder has reviewed the
Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and the Registration Statement,
and the information regarding such Selling Stockholder set forth
therein under the caption "Principal and Selling Stockholders"
is complete and accurate;
(ix) each Selling Stockholder will review the Prospectus and
will comply with all agreements and satisfy all conditions to be
complied with or satisfied by the Selling Stockholders pursuant
to this Agreement on or prior to the Closing Date, and will
advise the Representative prior to the Closing Date if any
statement to be made on behalf of such Selling Stockholder in
the certificate contemplated by Section 8(l) would be inaccurate
if made as of the Closing Date;
(x) no Selling Stockholder has, unless waived prior to the
date hereof, any preemptive right, co-sale right or right of
first refusal or other similar right to purchase any of the
Company Shares; such Selling Stockholder does not have, or has
waived prior to the date hereof, any registration right or other
similar right to participate in the offering made by the
Prospectus, other than such rights of participation as have been
satisfied by the participation of such Selling Stockholder in
the transactions to which this Agreement relates in accordance
with the terms of this Agreement; and such Selling Stockholder
does not own any warrants, options or similar rights to acquire,
and does not have any right or arrangement to acquire, any
capital stock, rights, warrants, options or other securities
from the Company, other than those described in the Registration
Statement and the Prospectus.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each of
the Underwriters and each person, if any, who controls each of the
Underwriters within the meaning of Section 15 of the Act or Section 20
of the Exchange Act (the "indemnified parties") from and against any
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<PAGE> 20
and all losses, claims, damages, liabilities and judgments caused by, arising
out of, related to or based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (as amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto), including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule 430A, if
applicable, or the Prospectus or any Preliminary Prospectus or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company shall not be liable in any such case to the
extent that such losses, claims, damages, liabilities or judgments are caused by
an untrue statement or omission made or omitted in reliance upon written
information furnished to the Company by or on behalf of the Underwriters for use
in the preparation of the Registration Statement or the Prospectus or any
amendment or supplement thereto. In addition to its other obligations under this
Section 7(a), the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding arising out of
or based upon any statement or omission, or any alleged statement or omission,
described in this Section 7(a), or any inaccuracy in the representations and
warranties of the Company herein or the failure to perform its obligations
hereunder, the Company will pay each Underwriter on a quarterly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to indemnify hereunder or to pay each
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim payment is so held to have been improper, the
Underwriters shall promptly return such payment to the Company. Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the prime rate (or
other commercial lending rate for borrowers of the highest credit standing)
listed from time to time in The Wall Street Journal which represents the base
rate on corporate loans posted by a substantial majority of the nation's thirty
(30) largest banks (the "Prime Rate"), from the date of such request.
(b) The Selling Stockholders agree, severally and not jointly, to
indemnify and hold harmless each of the Underwriters and each person, if any,
who controls each of the Underwriters within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act (the "indemnified parties") from and
against any and all losses, claims, damages, liabilities and judgments caused
by, arising out of, related to or based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto), including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule 430A, if
applicable, or the Prospectus or any Preliminary Prospectus or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to such Underwriter by a Selling
Stockholder, directly or through such Selling Stockholder's representatives,
specifically for use in the preparation thereof; provided, however, that the
Selling Stockholders shall not be liable in any such case to the extent that
such losses, claims, damages, liabilities or judgments are caused by an untrue
statement or omission made or omitted in reliance
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<PAGE> 21
upon written information furnished to the Underwriters for use in the
preparation of the Registration Statement or the Prospectus or any amendment or
supplement thereto. In addition to any other obligations of the Selling
Stockholders under this Section 7(b), the Selling Stockholders agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 7(b), or any
inaccuracy in the representations and warranties of the Selling Stockholders
herein or the failure to perform any of their obligations hereunder, the Selling
Stockholders will, severally and not jointly, pay each Underwriter on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Selling
Stockholders' obligation to indemnify hereunder or to pay each Underwriter for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Selling Stockholders. Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(c) In case any action shall be brought against any of the indemnified
parties, based upon any Preliminary Prospectus, the Registration Statement or
the Prospectus or any amendment or supplement thereto and with respect to which
indemnity may be sought against the Company and the Selling Stockholders, such
indemnified parties shall promptly notify the Company (and the Selling
Stockholders, care of the Company) in writing (but the failure so to notify
shall not relieve the Company or the Selling Stockholders of any liability that
they may otherwise have to such indemnified parties under this Section 7
(although the Company's and the Selling Stockholder's liability to an
indemnified party may be reduced on a monetary basis to the extent, but only to
the extent, they have been prejudiced by such failure on the part of such
indemnified party), and the Company and the Selling Stockholders shall promptly
assume the defense thereof, including the employment of counsel satisfactory to
such indemnified party and payment of all fees and expenses. The indemnified
parties shall each have the right to employ separate counsel in any such action
and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such indemnified parties unless (i) the
employment of such counsel shall have been specifically authorized by the
Company, (ii) the Company or the Selling Stockholder, as the case may be, shall
have failed to assume promptly the defense or to employ counsel reasonably
satisfactory to such indemnified party or (iii) the named parties to any such
action (including any impleaded parties) include both the indemnified parties
and the Company or the Selling Stockholders, and an indemnified party shall have
been advised by counsel that there may be one or more legal defenses available
to one or more of the indemnified parties that are different from or additional
to those available to the Company or the Selling Stockholders (in which case the
Company and the Selling Stockholders shall not have the right to assume the
defense of such action on behalf of such indemnified party, it being understood,
however, that the Company and the Selling Stockholders shall not, in connection
with any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for the indemnified
parties, which firm shall be designated in writing by the Representative, and
that all
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such fees and expenses shall be reimbursed promptly as they are incurred). The
Company and the Selling Stockholders shall not be liable for any settlement of
any such action effected without their written consent, which consent shall not
be unreasonably withheld, but if settled with the written consent of the Company
and the Selling Stockholders, the Company and the Selling Stockholders agree to
indemnify and hold harmless the indemnified parties from and against any and all
loss or liability by reason of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional and complete release in writing of such indemnified party from any
and all liability on claims that are the subject matter of such proceeding,
which such settlement shall be in form and substance satisfactory to the
indemnified party. The indemnification provided in this Section 7 will be in
addition to any liability which the Company and the Selling Stockholders may
otherwise have.
(d) The Underwriters agree, severally and not jointly, to indemnify and
hold harmless each Selling Stockholder, the Company, its directors, its officers
who sign the Registration Statement and any person controlling the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
(the "indemnified parties"), to the same extent as the foregoing indemnity from
the Company and the Selling Stockholder to the Underwriters but only with
reference to information stated in or omitted from the Registration Statement,
the Prospectus or any Preliminary Prospectus in reliance upon, and in conformity
with, information relating to the Underwriters furnished in writing to the
Company by or on behalf of the Underwriters with your consent expressly for use
therein. In case any action shall be brought against the Company, the Selling
Stockholders, any of the Company's directors, any such officers or any person
controlling the Company based on the Registration Statement, the Prospectus or
any Preliminary Prospectus and in respect of which indemnity may be sought
against the Underwriters, the Underwriters shall have the rights and duties
given to the Company and the Selling Stockholders by Section 7(c) hereof (except
that if the Company and the Selling Stockholders shall have assumed the defense
thereof, such Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of such Underwriter), and each
Selling Stockholder, the Company, its directors, any such officers and any
person controlling the Company shall have the rights and duties given to the
"indemnified parties" by Section 7(c) hereof. In addition to their other
obligations under this Section 7(d), the Underwriters severally and not jointly
agree that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding described in Section 7(d) hereof,
they will reimburse the Company and the Selling Stockholders on a quarterly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to reimburse
the Company and the Selling Stockholders for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Company and the Selling
Stockholders shall promptly return such payment to the Underwriters together
with interest, compounded daily, determined on the basis of the Prime Rate. Any
such interim reimbursement payments which are not made to the Company or the
Selling Stockholders
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<PAGE> 23
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(e) If the indemnification provided for in this Section 7 is for any
reason unavailable to an indemnified party or insufficient to hold such
indemnified party harmless in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other from the offering
of the Securities or (ii) if the allocation provided in clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions or
alleged statements or omissions that resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering and
sale of the Shares (before deducting expenses) received by the Company and the
Selling Stockholders on the one hand, and the total underwriting discounts and
commissions received by the Underwriters on the other, bears to the total price
to the public of the Shares, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault of the Company, the Selling
Stockholders and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or the alleged omission to state a material fact relates to
information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 7(e)
were determined by pro rata allocation (even if the Underwriters, the Company or
the Selling Stockholders were treated as one entity for such purpose) or by any
other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities or judgments referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise paid or been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission, and no Selling Stockholder
shall be required to contribute, more in the aggregate than the total selling
price of his or her shares (net of all amounts reimbursed, for any reason, by
the Company or insurance policies paid for or held by the Company). No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this Section
7(e) to contribute are several in proportion to the respective amount of Shares
purchased hereunder by
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<PAGE> 24
each Underwriter and not joint.
(f) It is agreed that any controversy arising out of the
operation of the interim payment arrangements set forth in Sections
7(a), 7(b) or 7(d) hereof, including the amounts of any requested
payments and method of determining such amounts, shall be settled by
arbitration conducted under the provisions of the Constitution and Rules
of the Board of Governors of the New York Stock Exchange, Inc. or
pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. Any such arbitration shall be
commenced by service of a written demand for arbitration or written
notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make
such designation of an arbitration tribunal in such demand or notice,
then the party responding to said demand or notice is authorized to do
so. Such an arbitration shall be limited to the operation of the interim
payment provisions contained in Sections 7(a), 7(b) and 7(d) hereof and
shall not resolve the ultimate propriety or enforceability of the
obligation to indemnify or pay expenses which is created by the
provisions of such Sections 7(a), 7(b) and 7(d) hereof.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel
during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully
informed regarding said provisions. They further acknowledge that the
provisions of this Section 7 fairly allocate the risks in light of the
ability of the parties to investigate the Company and its business in
order to assure that adequate disclosure is made in the Registration
Statement and Prospectus as required by the Act and the Exchange Act.
The parties are advised that federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be contrary to
certain of the provisions of this Section 7, and the parties hereto
hereby expressly waive and relinquish any right or ability to assert
such public policy as a defense to a claim under this Section 7 and
further agree not to attempt to assert any such defense.
(h) Notwithstanding any other provision herein to the contrary,
the liability of each Selling Stockholder under this Agreement,
including under the representations, warranties and agreements contained
herein and under the indemnity and contribution agreements contained in
the provisions of this Section 7, shall be limited to an amount equal to
the initial public offering price of the Shares sold by such Selling
Stockholder to the Underwriters minus the amount of the underwriting
discount paid thereon to the Underwriters by such Selling Stockholder.
8. Conditions to the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Shares on the Closing
Date and the Option Shares on any Option Closing Date are subject to the
fulfillment of each of the following conditions on or prior to the Closing Date
and each Option Closing Date:
(a) All the representations and warranties of the Company and
the Selling Stockholders contained in this Agreement and in any
certificate delivered hereunder shall be true and correct on the Closing
Date and each Option Closing Date with the same force and effect as if
made on and as of the Closing Date or Option Closing Date, as
applicable. The Company and the Selling Stockholders shall not have
failed at or prior to the Closing Date or Option Closing Date, as
applicable, to perform or comply in all respects with any of the
agreements herein contained and required to be performed or complied
with by the Company at or prior to the Closing Date.
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<PAGE> 25
(b) If the Registration Statement is not effective at the time
of the execution and delivery of this Agreement, the Registration
Statement shall have become effective (or, if a post-effective amendment
is required to be filed pursuant to Rule 430A under the Act, such
post-effective amendment shall have become effective) not later than
8:00 A.M., Los Angeles time, on the date of this Agreement or such later
time as you may approve in writing or, if the Registration Statement has
been declared effective prior to the execution and delivery hereof in
reliance on Rule 430A, the Prospectus shall have been filed as required
hereby, if necessary; and at the Closing Date and each applicable Option
Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued, and no proceedings for
that purpose shall have been commenced or shall be pending before or, to
the best knowledge of the Underwriters, the Company or the Selling
Stockholder, threatened by the Commission; every request for additional
information on the part of the Commission shall have been complied with
to the Underwriters' reasonable satisfaction; no stop order suspending
the sale of the Shares in any jurisdiction referred to in Section 5(g)
shall have been issued, and no proceeding for that purpose shall have
been commenced or shall be pending or threatened.
(c) The Shares shall have been qualified for sale under the Blue
Sky laws of such states as shall have been specified by the
Representative.
(d) The legality and sufficiency of the authorization, issuance
and sale or transfer and sale of the Shares hereunder, the validity and
form of the certificates representing the Shares, the execution and
delivery of this Agreement and all corporate proceedings and other legal
matters incident thereto, and the form of the Registration Statement and
the Prospectus (except financial statements) shall have been approved by
counsel for the Underwriters exercising reasonable judgment, and no
Underwriter shall have advised the Company that the Registration
Statement or the Prospectus, or any amendment or supplement thereto,
contains an untrue statement of material fact, or omits to state a fact
that in your opinion is material and is required to be stated therein or
is necessary to make the statements therein not misleading.
(e) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred any material change, or any material
development involving a prospective change, in or affecting particularly
the business or properties of the Company, whether or not arising in the
ordinary course of business, that, in the judgment of the
Representative, makes it impractical or inadvisable to proceed with the
public offering or purchase of the Shares as contemplated hereby.
(f) You shall have received the Lock-up Agreements specified in
Section 5(q) of this Agreement.
(g) You shall have received an opinion (satisfactory to you and
your counsel) dated the Closing Date or the Option Closing Date, as the
case may be, of Riordan & McKinzie, counsel for the Company and the
Selling Stockholders, to the effect set forth on Exhibit A hereto and
incorporated herein.
(h) You shall have received an opinion (satisfactory to you and
your counsel) dated the Closing Date or the Option Closing Date, as the
case may be, of LeBoeuf, Lamb, Greene, MacRae, LLP, special counsel to
the Company with respect to matters involving insurance regulation to
the effect set forth on Exhibit B hereto and incorporated herein.
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<PAGE> 26
(i) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
letter from KPMG Peat Marwick, LLP addressed to the Company and the
Underwriters, dated the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, confirming that they are
independent certified public accountants with respect to the Company
within the meaning of the Act and the applicable published Rules and
Regulations and based upon the procedures described in such letter
delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not
more than five (5) business days prior to the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, (i)
confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such
later date on which Option Shares are to be purchased, as the case may
be, and (ii) setting forth any revisions and additions to the statements
and conclusions set forth in the Original Letter which are necessary to
reflect any changes in the facts described in the Original Letter since
the date of such letter, or to reflect the availability of more recent
financial statements, data or information. The letter shall not disclose
any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the
Shares as contemplated by the Prospectus. The Original Letter from KPMG
Peat Marwick, LLP shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and
shall (i) represent, to the extent true, that they are independent
certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations,
(ii) set forth their opinion with respect to their examination of the
balance sheets of the Company as of December 31, 1997, and related
statements of operations, shareholders' equity and cash flows for the
years then ended December 31, 1997, (iii) state that KPMG Peat Marwick,
LLP has performed the procedure set out in Statement on Auditing
Standards No. 71 ("SAS 71") for a review of financial information at
March 31, 1998, and (iv) address other matters agreed upon by KPMG Peat
Marwick, LLP and you. In addition, you shall have received confirmation
from KPMG Peat Marwick, LLP that a letter addressed to the Company has
been delivered to the Company stating that, in performing their audit of
the Company's consolidated financial statements as of March 31, 1998, to
the extent they deemed necessary in determining their auditing
procedures, they considered the Company's system of internal accounting
controls and noted no matters that they considered to be material
weaknesses.
(j) You shall have received from the Company a certificate,
signed by Robert C. Goodell and Arthur A. Terner, in their capacities as
Chief Executive Officer and Chief Financial Officer of the Company,
respectively, addressed to the Underwriters and dated the Closing Date
or Option Closing Date, as applicable, to the effect that:
(i) such officer does not know of any Proceedings
instituted, threatened or contemplated against the Company of a
character required to be disclosed in the Prospectus that are
not so disclosed; such officer does not know of any material
contract required to be filed as an exhibit to the Registration
Statement which is not so filed;
(ii) such officer has carefully examined the Registration
Statement and the Prospectus and all amendments or supplements
thereto and, in such officer's opinion, such Registration
Statement or such amendment as of its effective date and as of
the Closing Date, and the Prospectus or such supplement as of
its date and as of the Closing Date, did not contain an untrue
statement of material fact or omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading and, in such officer's
opinion, since the effective date of the Registration
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<PAGE> 27
Statement, no event has occurred or information become known
that should have been set forth in an amendment to the
Registration Statement or a supplement to the Prospectus which
has not been so set forth in such amendment or supplement;
(iii) the representations and warranties of the Company set
forth in Section 6(a) of this Agreement are true and correct as
of the date of this Agreement and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior
to such Closing Date; and
(iv) the Commission has not issued an order preventing or
suspending the use of the Prospectus or any preliminary
prospectus filed as a part of the Registration Statement or any
amendment thereto; no stop order suspending the effectiveness of
the Registration Statement has been issued; and, to the best
knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated
under the Act. The delivery of the certificate provided for in
this subparagraph shall be and constitute a representation and
warranty of the Company as to the facts required in the
immediately foregoing clauses (iii) and (iv) of this
subparagraph to be set forth in said certificate.
(k) You shall have received a certificate, dated the Closing
Date, from each Selling Stockholder to the effect that, as of the
Closing Date, such Selling Stockholder has not been informed that:
(i) The representations and warranties made by any Selling
Stockholder herein are not true or correct in any material
respect on the Closing Date or on any later date on which Option
Shares are to be purchased, as the case may be; or that
(ii) Any Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be
performed or satisfied on the part of such Selling Stockholder
at or prior to the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be.
(l) You and Morrison & Foerster LLP, counsel for the
Underwriters, shall have received on or before the Closing Date or the
Option Closing Date, as the case may be, such further documents,
opinions, certificates and schedules or instruments relating to the
business, corporate, legal and financial affairs of the Company as you
and they shall have reasonably requested from the Company.
(m) The Company shall have executed and delivered to the
Representative the Warrant Agreement, together with certificates for the
Warrants in the form and under the terms specified therein, registered
in such names and amounts as the Representative shall direct.
9. Effective Date of Agreement, Termination and Defaults. This Agreement
shall become effective upon, and shall not be deemed delivered until, the later
of (i) execution of this Agreement and (ii) when notification of the
effectiveness of the Registration Statement has been released by the Commission.
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<PAGE> 28
This Agreement may be terminated at any time prior to the Closing Date
and any exercise of the option to purchase Option Shares may be canceled at any
time prior to any Option Closing Date by the Underwriters by written notice to
the Company if any of the following has occurred: (i) since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, any material adverse change or development involving a prospective
material adverse change in the condition, financial or otherwise, of the Company
or the earnings, affairs, management, or business of the Company, whether or not
arising in the ordinary course of business, that would, in the Representative's
reasonable judgment, make it impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus, (ii) any outbreak or escalation of
hostilities or other national or international calamity or crisis or change in
economic conditions or in the financial markets of the United States that, in
the Representative's reasonable judgment, is material and adverse and would, in
the Representative's judgment, make it impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus, (iii) the suspension or
material limitation of trading in securities on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq Stock Market or limitation on prices for
securities on either such exchange or the Nasdaq Stock Market, (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, Rule or order of any court or other governmental authority
that in the Representative's opinion materially and adversely affects, or will
materially and adversely affect, the business or operations of the Company, (v)
the declaration of a banking moratorium by either federal or New York or
California state authorities, (vi) the taking of any action by any Federal,
state or local government or agency in respect of its monetary or fiscal affairs
that in the Representative's reasonable opinion has a material adverse effect on
the financial markets in the United States or (vii) there shall be any change in
financial markets or in political, economic or financial conditions which, in
the reasonable opinion of the Representative, either renders it impracticable or
inadvisable to proceed with the offering and sale of the Shares on the terms set
forth in the Prospectus or materially adversely affects the market for the
Shares.
If on the Closing Date or on any Option Closing Date, as the case may
be, any of the Underwriters shall fail or refuse to purchase the Firm Shares or
Option Shares, as the case may be, which it has agreed to purchase hereunder on
such date, and the aggregate number of Firm Shares or Option Shares, as the case
may be, that such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase does not exceed, in the aggregate, 10% of the total number
of Shares that all Underwriters are obligated to purchase on such date, each
non-defaulting Underwriter shall be obligated, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I hereto bears to
the total number of Firm Shares or Option Shares, as the case may be, which all
the non-defaulting Underwriters have agreed to purchase, or in such other
proportion as you may specify, to purchase the Firm Shares or Option Shares, as
the case may be, that such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date. If, on the Closing Date or on the
Option Closing Date, as the case may be, any of the Underwriters shall fail or
refuse to purchase the Firm Shares or Option Shares, as the case may be, in an
amount that exceeds, in the aggregate, 10% of the total number of the Shares,
and arrangements satisfactory to you and the Company for the purchase of such
Shares are not made within 48 hours after such default, this Agreement shall
terminate without liability on the part of the non-defaulting Underwriters, the
Company or the Selling Stockholder, except as otherwise provided in this Section
9. In any such case that does not result in termination of this Agreement,
either you or the Company may postpone the Closing Date or the Option Closing
Date, as the case may be, for not longer than seven (7) days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve a defaulting Underwriter from liability in respect
of any
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<PAGE> 29
default of any such Underwriter under this Agreement.
The indemnity and contribution provisions and other agreements,
representations and warranties of the Company, the Selling Stockholders and the
Company's officers and directors set forth in or made pursuant to this Agreement
shall remain operative and in full force and effect, and will survive delivery
of and payment for the Shares, regardless of (i) any investigation, or statement
as to the results thereof, made by or on behalf of any of the Underwriters or by
or on behalf of the Company or the Selling Stockholders or the officers or
directors of the Company or any controlling person of the Company, (ii)
acceptance of the Shares and payment therefor hereunder or (iii) termination of
this Agreement. Notwithstanding any termination of this Agreement, the Company
shall be liable for and shall pay all expenses it has agreed to pay pursuant to
Section 5(l).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of, and shall be binding upon, the Company, the Selling
Stockholders, the Underwriters, any indemnified person referred to herein and
their respective successors and assigns, all as and to the extent provided in
this Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The terms "successors and assigns" shall not include a
purchaser of any of the Shares from any of the several Underwriters merely
because of such purchase.
10. Effectiveness of Registration Statement. You, the Company and the
Selling Stockholders will use your, its and their best efforts to cause the
Registration Statement to become effective, if it has not yet become effective,
and to prevent the issuance of any stop order suspending the effectiveness of
the Registration Statement and, if such stop order be issued, to obtain as soon
as possible the lifting thereof.
11. Miscellaneous. All communications hereunder will be in writing and,
if sent to the Underwriters will be mailed, delivered or telegraphed and
confirmed to you at 77 West Wacker Drive, Chicago, Illinois 60601-1994,
Attention: Syndicate Department, with a copy to EVEREN Securities, Inc., 1901
Avenue of the Stars, Suite 1460, Los Angeles, California 90067, Attention: Basil
E. Horner, Senior Managing Director; if sent to the Company will be mailed,
delivered or telegraphed and confirmed to the Company at 3850 Atherton Road,
Rocklin, California 95765 Attention: Robert C. Goodell, President and Chief
Executive Officer with a copy to Riordan & McKinzie, 300 South Grand Avenue,
29th Floor, Los Angeles, California 90071, Attention: Janis B. Salin; and if
sent to the Selling Stockholders will be mailed, delivered or telegraphed to
them care of the Company, with a copy to, or in any case to such other address
as the person to be notified may have requested in writing.
The Underwriters confirm that they will acquire the Shares only for
resale to the public and do not intend to hold the Shares for investment. They
further confirm that they do not intend to exercise control over the Company or
FPIC.
Until the initial public offering of the shares to the public has been
completed (as evidenced by termination of the underwriting syndicate), the
Underwriters will not knowingly sell to a single person or an affiliated group a
number of shares which equals or exceeds 10% or more of the Company's
outstanding voting securities, unless the purchaser or purchasers provide the
Underwriters with evidence satisfactory to the Underwriters that it or they have
obtained all required approvals form the California Department of Insurance or
that such approvals are not required. Absent actual knowledge, the knowledge of
one member of the underwriting syndicate shall not be attributed to other
members of the underwriting syndicate. Until the initial public offering of the
shares to the public has been completed, no Underwriter shall exercise any
voting right associated with shares held for such Underwriter's account.
The Company shall not in any event be liable to any of the Underwriters
for loss of anticipated profits from the transactions covered by this Agreement.
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THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF
LAW THEREOF.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholder and the several Underwriters,
including you.
Very truly yours,
FINANCIAL PACIFIC INSURANCE
GROUP, INC., a California corporation
By: ___________________________________
Its ___________________________________
Selling Stockholders:
RIORDAN, LEWIS & HADEN
By: ___________________________________
Attorney-in-Fact
FIREMARK ADVISORS, INC.
By: ___________________________________
Attorney-in-Fact
ST. PAUL FIRE & MARINE INSURANCE COMPANY
By: ___________________________________
Attorney-in-Fact
29
<PAGE> 31
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first
above written.
EVEREN Securities, Inc.
Acting as Representative of the
several Underwriters named in Schedule I.
By: ___________________________________
[Title]
30
<PAGE> 32
SCHEDULE I
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Everen Securities, Inc............................. $
$
$
$
$
$
$
$
$
$
TOTAL................................... $
</TABLE>
31
<PAGE> 33
SCHEDULE II
<TABLE>
<CAPTION>
STOCKHOLDER NAME NUMBER OF SHARES
---------------- ----------------
<S> <C>
Riordan, Lewis & Haden 136,971
Firemark Advisors, Inc. 136,971
St. Paul Fire & Marine Insurance Co. 136,972
Celerity Partners, L.P. 59,367
Robert S. Goodell 10,000
David Rogers 19,719
TOTAL................................... 500,000
</TABLE>
32
<PAGE> 1
EXHIBIT 5.1
May 28, 1998
06-158-007
Financial Pacific Insurance Group, Inc.
3850 Atherton Road
Rocklin, California 95765
Ladies and Gentlemen:
We have acted as counsel to Financial Pacific Insurance Group, Inc., a
Delaware corporation (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended (the "1933 Act"), of the sale in an
underwritten public offering of up to 2,375,000 authorized but unissued shares
of the Common Stock, $.01 par value (the "Common Stock"), of the Company (the
"Company Shares") and 500,000 authorized, issued and outstanding shares of the
Company currently held by existing stockholders. This opinion is delivered to
you in connection with the Registration Statement on Form S-1, Registration No.
333-50511, as amended to date (the "Registration Statement"), for the
aforementioned sale, filed with the Securities and Exchange Commission (the
"Commission") under the 1933 Act.
In rendering the opinion set forth herein, we have made such
investigations of fact and law, and examined such documents and instruments, or
copies thereof established to our satisfaction to be true and correct copies
thereof, as we have deemed necessary under the circumstances.
Based upon the foregoing and such other examination of law and fact as
we have deemed necessary, and in reliance thereon, we are of the opinion that,
subject to such proceedings as are now contemplated being duly taken and
completed by you prior to the issuance of the Company Shares, the issuance of an
appropriate order by the Commission declaring the Registration Statement, as
amended, effective, and the compliance with applicable state securities and
"blue sky" laws, the Company Shares have been duly authorized and will, upon
sale and
<PAGE> 2
Financial Pacific Insurance Group, Inc.
May 28, 1998
Page 2
delivery thereof and receipt by the Company of full payment therefor as set
forth in the Registration Statement, be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration Statement.
Very truly yours,
/s/ RIORDAN & MCKINZIE
<PAGE> 1
Exhibit 10.11
ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE BEEN
REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION BY
THE REGISTRANT AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT.
[Execution Copy]
RESTRICTED STOCK AGREEMENT
This Restricted Stock Agreement is made as of September 7,
1993 by and among Financial Pacific Insurance Group, Inc., a Delaware
corporation (the "Corporation"), Robert C. Goodell ("RCG") and Suzanne M.
Goodell ("SMG"). RCG and SMG are collectively referred to herein as ("Goodell").
RECITALS
A. On the date hereof, immediately prior to the transactions
referred to below, RCG owns 100% of the outstanding shares of the common stock,
$.001 par value (the "Common Stock"), of the Corporation, consisting of 682,284
shares (the "Initial Shares").
B. The parties listed on Schedule 1 attached hereto (the
"Purchasers") propose to purchase from the Corporation, and the Corporation
proposes to sell to the Purchasers, an aggregate of 3,650,001 shares of the
Corporation's Series A Convertible Preferred Stock , $.001 par value (the
"Series A Stock"), pursuant to a Series A Convertible Preferred Stock Purchase
Agreement of even date herewith by and among the Corporation and the Purchasers
(the "Purchase Agreement").
C. RCG, SMG and the trustees of their respective Individual
Retirement Accounts propose to purchase from the Corporation, and the
Corporation proposes to sell to such persons, an aggregate of 500,000 additional
shares of Common Stock (the "New Shares") on the terms and conditions set forth
in this Agreement. The New Shares consist of the following (and any shares
issued in exchange for or in connection with the following):
Number of
Record Holder Shares
------------- ------
79,000
California Central Trust Bank Corporation,
as Trustee #1060000539 FBO Robert C.
Goodell ("RCG Trustee")
California Central Trust Bank Corporation, 20,500
as Trustee #1060000539 FBO Suzanne M.
Goodell ("SMG Trustee")
Robert C. Goodell 200,000
Robert C. Goodell and Suzanne M. Goodell 200,300
<PAGE> 2
As used hereafter in this Agreement, the term "Restricted Shares" shall mean
the Initial Shares and the New Shares.
D. The Purchasers, the holders of the Common Stock and the
Corporation are entering into a Stockholders Agreement of even date herewith
(the "Stockholders Agreement"). The term "Stockholders" as used herein has the
meaning as provided from time to time in the Stockholders Agreement.
E. Goodell believes that the consummation of the transactions
contemplated by the Purchase Agreement will be of financial benefit to the
Corporation and accordingly assumes certain duties toward and confers certain
benefits upon the Purchasers under this Agreement in satisfaction of one of the
Purchasers' closing conditions under the Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and mutual
covenants and conditions contained herein, the parties agree as follows:
1. Repurchase Option Upon Failure to Satisfy Performance Standards.
(a) Performance Standards. The parties hereby agree upon
the performance standard for the annual consolidated net income of the
Corporation and its subsidiaries, excluding any extraordinary or nonrecurring
gains or losses (net of taxes) (the "Target Annual Net Income"), to be
determined in accordance with generally accepted accounting principles ("GAAP")
consistently applied, as set forth below:
<TABLE>
<CAPTION>
Target Annual Cumulative
Year Net Income Net Income
---- ------------- -----------
<S> <C> <C>
January 1, 1994 to December 31, 1994 $ 1,119,000 $1,119,000
January 1, 1995 to December 31, 1995 1,460,000 2,579,000
January 1, 1996 to December 31, 1996 2,124,000 4,703,000
January 1, 1997 to December 31, 1997 2,744,000 7,447,000
January 1, 1998 to December 31, 1998 3,698,000 11,145,000
</TABLE>
However, in the event the Board of Directors of the Corporation (the
"Board") elects to determine a more conservative investment policy for the
Corporation and its insurance subsidiary than is in effect on the date hereof,
then the Target Annual Net Income, as set forth above, shall be adjusted as the
Board and RCG shall reasonably agree in good faith to account for the resulting
change in investment income. In addition, if the Corporation conducts a public
offering of its Common Stock that would require the automatic conversion of the
outstanding shares of Series A Stock into Common Stock pursuant to the
Certificate of Designations of Series A Convertible Preferred Stock of the
Corporation, then
2.
<PAGE> 3
the Target Annual Net Income shall be adjusted as the Board and RCG shall
reasonably agree in good faith to account for the resulting change in investment
income.
(b) Annual Designation of Exempt Shares. The parties hereby agree that
up to 20% of the original Initial Shares shall be eligible to be converted into
shares exempt from the repurchase option described in subparagraph (c) below
("Exempt Shares") each calendar year; provided, however, that all of the Initial
Shares shall be converted into Exempt Shares upon the consolidation or merger of
the Corporation with or into another corporation, the sale or conveyance of all
or substantially all of the assets of the Corporation or a sale of all or
substantially all of the capital stock of the Corporation (a "Sale
Transaction"). After each calendar year end, upon the receipt of the
Corporation's audited consolidated financial statements, the Board shall
determine the percentage of the Target Annual Net Income achieved by the
Corporation for such calendar year. For each calendar year, if the Corporation
achieves:
(i) 100% or more of the Target Annual Net Income for such calendar
year, then the entire eligible percentage of the Initial Shares shall
become Exempt Shares;
(ii) less than 80% of the Target Annual Net Income for such
calendar year, then no Initial Shares shall become Exempt Shares;
(iii) 80% of the Target Annual Net Income for such calendar year,
then 80% of the Initial Shares shall become Exempt Shares; and
(iv) greater than 80%, but less than 100%, of the Target Annual
Net Income for such calendar year, then a pro rata portion of the
eligible percentage of Initial Shares shall become Exempt Shares;
provided, however, that if the Corporation's cumulative net income on a
consolidated basis, excluding any extraordinary or nonrecurring gains or losses
(net of taxes), determined in accordance with GAAP consistently applied, from
January 1, 1994 to the end of such calendar year is equal to or greater than the
amount of Cumulative Net Income set forth above, then the portion of any
eligible Initial Shares which were not converted into Exempt Shares in any prior
calendar year shall be converted into Exempt Shares. Those Initial Shares that
have become Exempt Shares pursuant to this subparagraph (b) shall remain Exempt
Shares regardless of the future performance of the Corporation. Notwithstanding
the foregoing, if RCG is employed by the Corporation on December 31, 2001, then
all of the Initial Shares on such date shall be converted into Exempt Shares.
Upon any Date of Determination, as hereinafter defined, the performance
standards set forth in this subparagraph (b) shall be applied to the most
recently completed calendar quarter and in such a manner as to give RCG the
benefit of any partial year's
3.
<PAGE> 4
performance by the Corporation, and such performance standards shall be prorated
accordingly. For purposes of this Section 2, the term "Determination Date" shall
mean the first date as of which any of the following occurs; (a) the termination
of RCG's employment with the Corporation for any reason, (b) a Sale Transaction
or (c) December 31, 1998.
(c) Repurchase Upon Determination Date. As of the Determination Date,
the Corporation shall have the right to repurchase for cancellation all Initial
Shares that have not been converted into Exempt Shares, as follows:
(i) Corporation's Repurchase Option. The Corporation shall have
the option (the "Corporation's Repurchase Option") to purchase for a
period of 60 days after the Determination Date any or all of the
Initial Shares at the Repurchase Price (as hereinafter defined). Should
the Corporation fail to purchase any or all of the Initial Shares which
it is entitled to purchase pursuant to the Corporation's Repurchase
Option, the balance of the Initial Shares shall become Exempt Shares.
The Corporation's Repurchase Option may not be assigned by the
Corporation, and all Initial Shares repurchased shall be cancelled.
(ii) Purchase Price. The purchase price ("Repurchase Price") for
any Initial Shares to be purchased pursuant to the Corporation's
Repurchase Option shall be $.01 per Incentive Share (as adjusted for
Recapitalizations, as hereinafter defined).
(iii) Exercise of Repurchase Option. The Corporation's Repurchase
Option shall be exercised by the Corporation by delivery (a) within the
60 day period specified in clause (i) to Goodell of a written notice
specifying the number of Initial Shares to be purchased and (b) within
the same 60 day period, a check in the amount of the Repurchase Price,
calculated as provided in clause (iii), for all Initial Shares to be
purchased by the Corporation.
(iv) Payment by Goodell for Exempt Shares. Goodell shall, on the
Determination Date, either (i) pay the Corporation $1.00 times the
number of Exempt Shares (as adjusted for Recapitalizations) on such
date (the "Cash Amount") or (ii) sell to the Corporation for
cancellation at a price of $.01 per share (as adjusted for
Recapitalizations) the number of Exempt Shares equal in value to the
Cash Amount.
2. Repurchase Option Upon Termination.
(a) Corporation's Repurchase Option. In the event that RCG's
employment by the Corporation terminates for any reason on or before December
31, 1998,
4.
<PAGE> 5
the Corporation shall have the option (the "Corporation's Repurchase Option") to
purchase for cancellation for a period of 60 days after the date of such
termination (the "Termination Date") any or all of the Restricted Shares
(including but not limited to any Exempt Shares) at the Restricted Share
Repurchase Price (as hereinafter defined). Should the Corporation fail to
purchase any or all of the Restricted Shares which it is entitled to purchase
pursuant to the Corporation's Repurchase Option, the Corporation shall promptly
give written notice (the "Repurchase Notice") to the other stockholders of the
Corporation (the "Other Stockholders") specifying the number of Restricted
Shares not purchased by the Corporation.
(b) Other Stockholders' Repurchase Option. Within 30 days after
delivery of the Repurchase Notice, the Other Stockholders may elect to purchase
(the "Other Stockholders' Repurchase Option") the Restricted Shares not
purchased by the Corporation pursuant to the Corporation's Repurchase Option
(the "Remaining Shares"). Should the aggregate number of shares that the Other
Stockholders elect to purchase exceed the number of Remaining Shares the Other
Stockholders are entitled to purchase, each Other Stockholder electing to
purchase shall be entitled to purchase such proportion of the Remaining Shares
as the number of shares of Common Stock held by such Other Stockholder
(determined on an as-converted as to the Purchasers) bears to the aggregate
number of shares of Common Stock (determined on an as-converted basis) held by
all Other Stockholders electing to purchase. The Secretary of the Corporation
shall promptly give notice to each Other Stockholder of the number of Remaining
Shares which such Other Stockholder may purchase.
(c) Purchase Price. The Corporation's Repurchase Option pursuant to
Section 1 shall first be applied for the repurchase of Restricted Shares. The
purchase price ("Restricted Share Repurchase Price") for any remaining
Restricted Shares to be purchased pursuant to the Corporation's Repurchase
Option or the Other Stockholders' Repurchase Option set forth in this Section 2
shall equal (i) for New Shares and Restricted Shares that have become Exempt
Shares (A) $1.00 per Restricted Share (as adjusted for Recapitalizations) if the
Termination Date is on or before September 7, 1994 and (B) the book value (as
hereinafter defined) per Restricted Share if the Termination Date is after
September 7, 1994 but on or before December 31, 1998; and (ii) for Restricted
Shares that are then Incentive Shares, $.01 per Restricted Share (as adjusted
for Recapitalizations). The book value of each Restricted Share shall equal the
price per share originally paid plus the net income or minus the net loss of the
Corporation and its subsidiaries on a consolidated basis, determined in
accordance with GAAP consistently applied, and calculated from the date hereof
to the end of the fiscal quarter immediately preceding the fiscal quarter in
which the Termination Date occurs. In computing net income or net loss for
purposes of the preceding sentence, there shall be excluded the amortization of
intangibles.
(d) Exercise of Repurchase Options. The Corporation's Repurchase Option
shall be exercised by the Corporation by delivery (a) within the 60 day period
specified in subparagraph (a) to Goodell of a written notice specifying the
number of Restricted Shares to be purchased and (b) within the same 60 day
period, a check in the
5.
<PAGE> 6
amount of the Restricted Share Repurchase Price, calculated as provided in
subparagraph (c) for all Restricted Shares to be purchased by the Corporation.
The Other Stockholders' Repurchase Option shall be exercised by the Other
Stockholders by delivery (a) within the 30 day period specified in subparagraph
(b) to Goodell of a written notice specifying the number of Remaining Shares to
be purchased and (b) within the same 30 day period, a check in the amount of the
Restricted Share Repurchase Price, calculated as provided in subparagraph (c),
for all Remaining Shares to be purchased by the Other Stockholders.
3. Put Option. In the event of death of RCG, his estate shall have the right,
at its option (the "Put Option"), to require the Corporation to purchase in the
manner and on the terms set forth in this Section 3 any Restricted Shares not
repurchased by the Corporation or the Other Stockholders pursuant to Section 2.
The Purchase Price for the Restricted Shares which the Corporation is required
to purchase upon the exercise of the Put Option ( the "Put Price") shall be the
same as the Restricted Share Repurchase Price pursuant to Section 2(c) hereof,
provided, however, that the Corporation shall not be obligated to repurchase
Restricted Shares in a number that would cause the payment to be made for such
Restricted Shares to exceed the proceeds of the key man life insurance required
under the terms of Section 5.2(k) of the Purchase Agreement, less any portion
thereof applied to repay Marvin L. Oates pursuant to the terms of the Note to be
issued by the Corporation to Mr. Oates. Notwithstanding the foregoing, the date
upon which the Corporation is required to make payment of the Put Price shall be
delayed to the extent that and for so long as the Corporation lacks sufficient
legally available funds to pay the Put Price or is otherwise prohibited under
Delaware or California law from making such payment.
4. Escrow. As security for the faithful performance of the terms of this
Agreement and to insure the availability for delivery of any Initial Shares upon
exercise of the repurchase options herein provided for, Goodell agrees to
deliver to and deposit with the Secretary of the Corporation, or such other
person designated by the Corporation ("Escrow Agent"), as Escrow Agent in this
transaction, two Stock Assignments duly endorsed (with date and number of shares
blank) in the form attached hereto as Exhibit A, together with the certificate
or certificates evidencing the Initial Shares. Said documents are to held by the
Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow
Instructions of the Corporation and Goodell set forth in Exhibit B attached
hereto and incorporated by this reference.
5. Restrictions on Transfer of Restricted Shares. The Restricted Shares shall
be subject to the restrictions on transfer set forth in that certain
Stockholders Agreement dated as of September 7, 1993 among the Corporation,
Goodell and the other stockholders named therein (the "Stockholders Agreement").
Each qualified transferee of Restricted Shares must, prior to the acknowledgment
and acceptance of such transfer by the Corporation, agree to take and hold such
Restricted Shares subject to the terms and conditions of the Stockholders
Agreement.
6.
<PAGE> 7
6. RIGHTS AS STOCKHOLDER. Subject to compliance with the provisions
of this Agreement, Goodell shall exercise all rights and privileges of the
registered holder of the Restricted Shares and shall be entitled to receive any
dividend or other distribution thereon.
7. NO CONTRACT OF EMPLOYMENT. Goodell acknowledges and agrees that
this Agreement shall not be construed to give RCG any right to be retained in
the employ of the Corporation or any subsidiary thereof, and that the right and
power of the Corporation or any subsidiary to dismiss or discharge RCG (with or
without cause) is strictly reserved.
8. RECLASSIFICATION, REORGANIZATION, ACQUISITION OF STOCK,ETC. In the
event of any reclassification, reorganization, recapitalization, stock split,
stock dividend, combination of shares, or any other change in the capital
structure of the Corporation (a "Recapitalization"), all shares of Common Stock
obtained as the result thereof by Goodell in addition to, in exchange for or in
respect of the Restricted Shares shall be deemed Restricted Shares and shall be
subject to this Agreement. Goodell's ownership interest shall be appropriately
adjusted in a manner consistent with the Certificate of Designations of Series A
Convertible Preferred Stock of the Corporation and the Warrants.
9. SHARES HELD BY IRA TRUSTEES. The Subscription Agreements pursuant
to which the shares of Common stock held by RCG Trustee and SMG Trustee were
issued provide that such shares shall be subject to the terms of this
Agreement. RCG shall cause RCG Trustee to comply with the provisions of this
Agreement, including the obligation to sell the shares of Common Stock held by
RCG Trustee as provided in this Agreement. SMG shall cause SMG Trustee to
comply with the provisions of this Agreement, including the obligation to sell
the shares of Common Stock held by SMG Trustee as provided in this Agreement.
10. THIRD PARTY BENEFICIARIES. The Other Stockholders shall be third
party beneficiaries of this Agreement.
11. MISCELLANEOUS.
(a) FURTHER ASSURANCES. Each party hereto agrees to perform any
further acts and execute and deliver any document which may be reasonably
necessary to carry out the intent if this Agreement.
(b) BINDING AGREEMENT. This Agreement shall bind and inure to
the benefit of the successors and assigns of the Corporation and the personal
representatives, heirs and legatees of Goodell.
(c) NOTICES. Any notice required or permitted to be given
pursuant to this Agreement shall be in writing and shall be deemed given upon
personal delivery or, if mailed, upon the expiration of 48 hours after mailing
by any form of United States mail
7.
<PAGE> 8
requiring a return receipt, addressed (i) to Goodell at the address set forth
on the signature page hereof, (ii) to Financial Pacific Insurance Group, Inc.,
8583 Elder Creek Road, Suite 100, Sacramento, California 95828, Attention:
President, and (iii) if to an Other Stockholder, at the address shown on
SCHEDULE 1 attached hereto. A party may change its address by giving written
notice to the other parties setting forth the new address for the giving of
notices pursuant to this Agreement.
(d) AMENDMENTS. This Agreement may be amended at any time by
the written agreement and consent of the parties hereto.
(e) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
(f) DISPUTES. In the event of any dispute among the parties
arising out of this Agreement, the prevailing party shall be entitled to
recover from the nonprevailing party the reasonable expenses of the prevailing
party, including, without limitation, reasonable attorneys' fees.
(g) ENTIRE AGREEMENT. This Agreement, including the agreements
referred to herein, constitute the entire agreement and understand among the
parties pertaining to the subject matter hereof and supersedes any and all
prior agreements, whether written or oral, relating thereto.
(h) HEADINGS. Introductory headings at the beginning of each
section of this Agreement are solely for the convenience of the parties and
shall not be deemed to be a limitation upon or description of the contents of
any such section.
8.
<PAGE> 9
(i) Counterparts. This Agreement may be executed in two or
more counterparts, all of which, when taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
FINANCIAL PACIFIC INSURANCE
GROUP, INC.
By: /s/ Karen Oldenkamp
---------------------------------
Karen Oldenkamp, Secretary
/s/ Robert C. Goodell
--------------------------------------
Robert C. Goodell
Address:
**
/s/ Suzanne M. Goodell
--------------------------------------
Suzanne M. Goodell
Address:
**
9.
<PAGE> 10
FIRST AMENDMENT TO RESTRICTED STOCK AGREEMENT
This Amendment to Restricted Stock Agreement is made as of May 7, 1998
by and among Financial Pacific Insurance Group, Inc., a Delaware corporation
(the "Corporation"), Robert C. Goodell ("RCG") and Suzanne M. Goodell ("SMG").
RCG and SMG are collectively referred to herein as "Goodell."
R E C I T A L S
A. The parties to this First Amendment entered into that certain
Restricted Stock Agreement dated as of September 7, 1993 (the "Original
Agreement").
B. The parties desire to amend the Original Agreement to make the
agreement consistent with the original intent of the parties with respect to
the consideration to be paid by RCG for certain shares of the Corporation.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants and conditions contained therein, the parties agree as follows:
1. Section 1(c)(iv) of the Original Agreement is hereby deleted.
2. Section 11 of the Original Agreement is hereby incorporated
into this First Amendment by reference.
IN WITNESS WHEREOF, the parties hereto have duly executed this First
Amendment as of the day and year first above written.
FINANCIAL PACIFIC INSURANCE GROUP, INC.
/s/ Robert T. Kingsley
-------------------------------------
By: Robert T. Kingsley
Its: Executive Vice President and
Chief Operating Officer
/s/ Robert C. Goodell
-------------------------------------
ROBERT C. GOODELL
1800 Shelborne Dr.
Granite Bay, CA 96746
/s/ Suzanne M. Goodell
-------------------------------------
SUZANNE M. GOODELL
1800 Shelborne Dr.
Granite Bay, CA 96746
<PAGE> 1
EXHIBIT 10.32
FINANCIAL PACIFIC INSURANCE GROUP, INC.
and
EVEREN SECURITIES, INC.
WARRANT AGREEMENT
Dated as of June , 1998
THIS WARRANT AGREEMENT (the "Agreement"), dated as of June __, 1998, is
made and entered into by and between FINANCIAL PACIFIC INSURANCE GROUP, INC., a
Delaware corporation (the "Company"), EVEREN SECURITIES, INC. ("Everen") and the
persons listed on Exhibit A attached hereto (the "Warrantholders").
The Company agrees to issue and sell to the Warrantholders and the
Warrantholders severally agree to purchase, for the price of $0.01 per warrant,
warrants, as hereinafter described (the "Warrants") to purchase up to an
aggregate of 125,000 shares (the "Shares") of the Company's Common Stock, $.001
par value (the "Common Stock") in the amounts set forth on Exhibit A hereto, in
connection with a public offering (the "Public Offering") by the Company of
2,500,000 shares of Common Stock pursuant to an underwriting agreement (the
"Underwriting Agreement"), dated as of June __, 1998, by and among the Company,
certain stockholders of the Company, and Everen, as the representative of the
underwriters that are party to the Underwriting Agreement (the "Underwriters").
The number of Shares purchasable upon exercise of these Warrants by the
Warrantholders shall be increased by an amount equal to 5% of the number of
Shares issued upon exercise of the Underwriters' over-allotment option pursuant
to the second paragraph of section 3 and section 4(b) of the Underwriting
Agreement, (and then rounding down to the nearest whole number) at a price of
$0.01 per share of Common Stock. The purchase and sale of Warrants to purchase
125,000 shares of the Common Stock shall occur on the Closing Date, as defined
in the Underwriting Agreement, and be subject to the conditions to the
Underwriters' obligations to purchase Common Stock thereunder (except for
delivery of this Agreement) and the performance of such obligations by the
Underwriters. On the Option Closing Date or Dates (if any), the Warrantholders
shall purchase, and the Company shall sell, Warrants to purchase a number of
shares equal to 5% of the number of Option Shares purchased on that date, at a
price of $0.01 per share of Common Stock, subject to the conditions to the
Underwriters' obligations to purchase Common Stock on that Option Closing Date.
Everen acknowledges that receipt of the Warrants by the Warrantholders
constitutes full satisfaction of the Company's obligation under Paragraph 8 of
the Engagement Agreement dated March 26, 1998 between the Company and Everen.
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder, the parties hereto, for value received, hereby agree as follows:
1
<PAGE> 2
SECTION 1. Transferability and Form of Warrants.
1.1 Registration. The Warrants shall be numbered and shall be registered
on the books of the Company when issued.
1.2 Transfer. The Warrants shall be transferable only on the books of
the Company maintained at its principal office in Rocklin, California, or
wherever its principal office may then be located, upon delivery thereof duly
endorsed by the transferring Warrantholder or by its duly authorized attorney or
representative, accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration of transfer, the Company shall
execute and deliver new Warrants to the person entitled thereto.
1.3 Limitations on Transfer of the Warrants. Subject to the provisions
of Section 11 hereof, the Warrants shall not be sold, transferred, assigned or
hypothecated (a "Transfer") by any Warrantholder until _________, 1999, except
to (i) an officer or partner of the transferring Warrantholder, another
Underwriter or member of the selling group or officer, partner or employee of
any of them; (ii) a successor to the transferring Warrantholder which is not an
individual (a "Warrantholder Entity") in merger or consolidation; (iii) a
purchaser of all or substantially all of the transferring Warrantholder Entity's
assets; (iv) any person receiving the Warrants from one or more of the persons
listed in this subsection 1.3 at such person's or persons' death pursuant to
will, trust or the laws of intestate succession; or (v) an inter vivos trust for
the benefit of the transferor, his spouse, family and designated heirs,
successors and assigns. The Warrants may be divided or combined, upon request to
the Company by any Warrantholder, into a certificate or certificates
representing the right to purchase the same aggregate number of Shares.
Notwithstanding the foregoing, no Warrant may be Transferred unless the
transferee agrees to be bound by the terms and conditions of this Agreement.
Unless the context indicates otherwise, the terms "Warrantholder" shall include
any transferee or transferees of the Warrants pursuant to this subsection 1.3,
and the term "Warrants" shall include any and all warrants outstanding pursuant
to this Agreement, including those evidenced by a certificate or certificates
issued upon division, exchange, substitution or transfer pursuant to this
Agreement.
1.4 Form of Warrants. The text of the Warrants and of the form of
election to purchase Shares shall be substantially as set forth in Exhibit B
attached hereto. The number of Shares issuable upon exercise of the Warrants is
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided. The Warrants shall be executed on behalf of the Company by its
President or by a Vice President, attested to by its Secretary or an Assistant
Secretary. A Warrant bearing the signature of an individual who was at any time
the proper officer of the Company shall bind the Company, notwithstanding that
such individual shall have ceased to hold such office prior to the delivery of
such Warrant or did not hold such office on the date of this Agreement.
The Warrants shall be dated as of the date of signature thereof by the
Company either upon initial issuance or upon division, exchange, substitution or
transfer.
1.5 Legend on Shares. Each certificate for Shares initially issued upon
exercise of the Warrants shall bear the following legend, unless, at the time of
exercise, such Shares are subject
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to a currently effective Registration Statement under the Securities Act of
1933, as amended (the "Act"):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY
NOT BE SOLD, OFFERED FOR SALE, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN
ANY MANNER IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH
RESPECT TO THE SECURITIES UNDER THE SECURITIES ACT AND IN COMPLIANCE
WITH APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF THE
SECURITIES ACT."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the Act, of
the securities represented thereby) shall also bear the above legend unless, in
the opinion of the Company's counsel, the securities represented thereby need no
longer be subject to such restrictions.
SECTION 2. Exchange of Warrant Certificate. Any Warrant certificate may
be exchanged for another certificate or certificates entitling a Warrantholder
to purchase a like aggregate number of Shares as the certificate or certificates
surrendered then entitled such Warrantholder to purchase. Any Warrantholder
desiring to exchange a Warrant certificate shall make such request in writing
delivered to the Company, and shall surrender, properly endorsed, with
signatures guaranteed, the certificate evidencing the Warrant to be so
exchanged. Thereupon, the Company shall execute and deliver to the person
entitled thereto a new Warrant certificate as so requested.
SECTION 3. Term of Warrants; Exercise of Warrants.
(a) Subject to the terms of this Agreement, any Warrantholder shall have
the right, at any time during the period commencing at 9:00 a.m., California
Time, on ___________, 1999 and ending at 5:00 p.m., California Time, on
___________, 2003 (the "Termination Date"), to purchase from the Company up to
the number of fully paid and non-assessable Shares to which such Warrantholder
may at the time be entitled to purchase pursuant to this Agreement, upon
surrender to the Company, at its principal office, of the certificate evidencing
the Warrants to be exercised, together with the purchase form on the reverse
thereof duly filled in and signed, with signatures guaranteed, and upon payment
to the Company of the Warrant Price (as defined in and determined in accordance
with the provisions of this section 3 and sections 7 and 8 hereof), for the
number of Shares in respect of which such Warrants are then exercised, but in no
event for less than 100 Shares (unless less than an aggregate of 100 Shares are
then purchasable under all outstanding Warrants held by a Warrantholder).
(b) Payment of the aggregate Warrant Price shall be made in cash, by
wire transfer, by certified or official bank check or through the use of
Appreciation Currency (as defined below), or any combination thereof. Upon such
surrender of the Warrants and payment of such Warrant Price as aforesaid, the
Company shall issue and cause to be delivered with all reasonable
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dispatch to or upon the written order of such Warrantholder and in the name or
names of such Warrantholder or, subject to compliance with the provisions of
Section 11(a) hereof, in such name or names as such Warrantholder may designate,
a certificate or certificates for the number of full Shares so purchased upon
the exercise of the Warrant, together with cash, as provided in Section 9
hereof, in respect of any fractional Shares otherwise issuable upon such
surrender. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of record of such securities as of the date of surrender of the
Warrants and payment of the Warrant Price, as aforesaid, notwithstanding that
the certificate or certificates representing such securities shall not actually
have been delivered or that the stock transfer books of the Company shall then
be closed. The Warrants shall be exercisable, at the election of such
Warrantholder, either in full or from time to time in part and, in the event
that a certificate evidencing the Warrants is exercised in respect of less than
all of the Shares specified therein at any time prior to the Termination Date, a
new certificate evidencing the remaining portion of the Warrants will be issued
by the Company.
(c) As used herein, "Appreciation Currency" shall mean the consideration
given by the surrender of Warrants in exchange for Shares. The number of Shares
to which the holder shall be entitled upon such surrender of Warrants ("X")
shall be determined by applying the following formula: X = N MULTIPLIED BY
(($S - $W) DIVIDED BY $S), where "N" is the number of Shares that would be
received if the Warrants surrendered were instead exercised for cash, "$S" is
the Current Market Price (as defined in section 9 hereof) per share of Common
Stock and "$W" is the Warrant Price defined in section 7 as adjusted and
readjusted as set forth in Section 8 hereof.
SECTION 4. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes, if any, attributable to the initial issuance of the Warrants or the
securities comprising the Shares; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or the securities comprising the Shares.
SECTION 5. MUTILATED OR MISSING WARRANTS. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of any Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of such Warrant and a bond of indemnity, if
requested, also satisfactory in form and amount at the Warrantholder's cost.
Applicants for such substitute Warrants certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
SECTION 6. RESERVATION OF SHARES. There has been reserved, and the
Company shall at all times keep reserved so long as the Warrants remain
outstanding, out of its authorized Common Stock, such number of shares of Common
Stock as shall be subject to purchase under the Warrants. The Company will
supply every transfer agent for the Common Stock and other securities of the
Company issuable upon the exercise of the Warrants with duly executed stock
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and other certificates, as appropriate, for such purpose and will provide or
otherwise make available any cash which may be payable as provided in Section 9
hereof.
SECTION 7. WARRANT PRICE. The price per Share at which Shares shall be
purchasable upon the exercise of the Warrants (the "Warrant Price") shall be
$______ [insert 110% of initial public offering price per Share] subject to
further adjustment pursuant to Section 8 hereof.
SECTION 8. ADJUSTMENT OF NUMBER OF SHARES. The number and kind of
securities purchasable upon the exercise of the Warrants and the Warrant Price
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
8.1 ADJUSTMENTS. The number of Shares purchasable upon the exercise of
the Warrants shall be subject to adjustment as follows: In case the Company
shall (i) pay a dividend in Common Stock or make a distribution in Common Stock,
(ii) subdivide its outstanding Common Stock, (iii) combine its outstanding
Common Stock into a smaller number of shares of Common Stock, or (iv) issue by
reclassification of its Common Stock other securities of the Company, the
Warrant Price and the number of Shares purchasable upon exercise of the Warrants
immediately prior thereto shall be proportionately adjusted so that the
Warrantholder shall be entitled to receive the kind and number of Shares or
other securities of the Company which it would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrants been exercised at the Warrant Price
immediately prior to the happening of such event or any record date with respect
thereto. Any adjustment made pursuant to this subsection 8.1 shall become
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event.
For the purpose of this subsection 8.1, the term "Common Stock" shall
mean (i) the class of stock designated as the Common Stock of the Company at the
date of this Agreement, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value.
8.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in subsection 8.1,
no adjustment in respect of any dividends or distributions out of earnings shall
be made during the term of the Warrants or upon the exercise of the Warrants.
8.3 CERTIFICATE OF ADJUSTMENT. Whenever the number of Shares purchasable
upon the exercise of the Warrants is adjusted as herein provided, the Company
shall cause to be promptly mailed to the Warrantholder by first class mail,
postage prepaid, notice of such adjustment and a certificate of the chief
financial officer or other executive officer of the Company setting forth the
number of Shares purchasable upon the exercise of the Warrants after such
adjustment, a brief statement of the facts requiring such adjustment and the
computation by which such adjustment was made.
8.4 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of
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the property, assets or business of the Company as an entirety or substantially
as an entirety, the Company or such successor or purchasing corporation, as the
case may be, shall execute with each Warrantholder an agreement that the
Warrantholder shall have the right thereafter upon payment of the Warrant Price
in effect immediately prior to such action to purchase, upon exercise of the
Warrants, the kind and amount of consideration which it would have owned or have
been entitled to receive after the happening of such consolidation, merger, sale
or conveyance had the Warrants been exercised immediately prior to such action.
In the event of a merger described in Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, in which the Company is the surviving corporation, the
right to purchase Shares under the Warrants shall terminate on the date of such
merger and thereupon the Warrants shall become null and void, but only if the
controlling corporation shall agree to substitute for the Warrants its warrant
which entitles the holder thereof to purchase upon its exercise the kind and
amount of consideration which it would have owned or been entitled to receive
had the Warrants been exercised immediately prior to such merger. Any such
agreements referred to in this subsection 8.4 shall provide for adjustments,
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in Section 8 hereof. The provisions of this subsection 8.4 shall
similarly apply to successive consolidations, mergers, sales or conveyances.
8.5 PAR VALUE OF SHARES OF COMMON STOCK. Before taking any action which
would cause an adjustment effectively reducing the portion of the Warrant Price
allocable to each Share below the then par value per share of the Common Stock
issuable upon exercise of the Warrants, the Company will take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and non-assessable Common Stock
upon exercise of the Warrants.
8.6 INDEPENDENT PUBLIC ACCOUNTANTS. The Company may retain a firm of
independent public accountants of recognized national standing (which may be any
such firm regularly employed by the Company) to make any computation required
under this Section 8, and a certificate signed by such firm shall be conclusive
evidence of the correctness of any computation made under this Section 8.
8.7 STATEMENT ON WARRANT CERTIFICATES. Irrespective of any adjustments
in the number of securities issuable upon exercise of Warrants, Warrant
certificates theretofore or thereafter issued may continue to express the same
number of securities as are stated in the similar Warrant certificates initially
issuable pursuant to this Agreement. However, the Company may, at any time in
its sole discretion (which shall be conclusive), make any change in the form of
Warrant certificate that it may deem appropriate and that does not affect the
substance thereof; and any Warrant certificate thereafter issued, whether upon
registration or transfer of, or in exchange or substitution for, an outstanding
Warrant certificate, may be in the form so changed.
SECTION 9. FRACTIONAL INTERESTS; CURRENT MARKET PRICE. The Company shall
not be required to issue fractional Shares on the exercise of the Warrants. If
any fraction of a Share would, except for the provisions of this Section 9, be
issuable on the exercise of the Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the then Current Market Price per
share of Common Stock multiplied by such fraction.
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For purposes of this Agreement, the term "Current Market Price" shall
mean (i) if the Common Stock is traded in the over-the-counter market and is
neither quoted in The Nasdaq National Market nor traded on any national
securities exchange, the average of the per share closing bid price on the 30
consecutive trading days immediately preceding the date in question, as reported
by The Nasdaq SmallCap Market (or an equivalent generally accepted reporting
service if quotations are not reported on The Nasdaq SmallCap Market), or (ii)
if the Common Stock is quoted in The Nasdaq National Market or traded on a
national securities exchange, the average for the 30 consecutive trading days
immediately preceding the date in question of the daily per share closing prices
in The Nasdaq National Market or on the principal stock exchange on which it is
listed, as the case may be. For purposes of clause (i) above, if trading in the
Common Stock is not reported by The Nasdaq SmallCap Market, the applicable bid
price referred to in that clause shall be the lowest bid price as reported in
The Nasdaq Electronic Bulletin Board or, if not reported thereon, as reported in
the "pink sheets" published by National Quotation Bureau, Incorporated, and, if
such securities are not so reported, shall be the price of a share of Common
Stock determined by the Company's Board of Directors in good faith. The closing
price referred to in clause (ii) above shall be the last reported sale price or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case in The Nasdaq National
Market or on the national securities exchange on which the Common Stock is then
listed.
SECTION 10. NO RIGHTS AS SHAREHOLDER; NOTICES TO WARRANTHOLDERS. Nothing
contained in this Agreement or in the Warrants shall be construed as conferring
upon any Warrantholder or its transferees any rights as a shareholder of the
Company, including the right to vote, receive dividends, consent or receive
notices as a shareholder in respect of any meeting of shareholders for the
election of directors of the Company or any other matter. If, however, at any
time prior to the expiration of the Warrants and prior to their exercise, any
one or more of the following events shall occur:
(a) any action which would require an adjustment pursuant to Section
8.1; or
(b) a dissolution, liquidation or winding up of the Company (other than
in connection with a consolidation, merger or sale of its property, assets and
business as an entirety or substantially as an entirety) shall be proposed;
then the Company shall give notice in writing of such event to each
Warrantholder, as provided in Section 14 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
shareholders entitled to vote on such proposed dissolution, liquidation or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to mail or receive such notice
or any defect therein shall not affect the validity of any action taken with
respect thereto.
SECTION 11. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
(a) Each Warrantholder agrees that prior to making any disposition of
the Warrants or the Shares, including without limitation, to persons or entities
identified in clauses (i) through
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(v), inclusive, of Section 1.3 hereof, other than pursuant to a registration
statement or other notification or post-effective amendment thereto (hereinafter
collectively a "Registration Statement") filed by the Company with, and declared
effective, by, the Securities and Exchange Commission (the "Commission"), each
Warrantholder shall give written notice to the Company describing briefly the
manner in which any such proposed disposition is to be made and shall provide
such other information as may reasonably be required by the Company and counsel
familiar with securities matters to conclude that no Registration Statement
under the Act is required with respect to such disposition. If requested by the
Company, and if the transfer will result in a public sale that is not in
compliance with Rule 144 of the Securities Act, the Warrantholder will provide
an opinion of counsel reasonably satisfactory to the Company that a Registration
Statement under the Act is not required with respect to such disposition.
(b) Whenever during the four-year period beginning on _________, 1999
and ending on_______, 2003, the Company proposes to file with the Commission a
Registration Statement (other than as to securities issued pursuant to an
employee benefit plan or as to a transaction subject to Rule 145 promulgated
under the Act (or any successor provision) or for which a Form S-4 Registration
Statement (or any successor form) could be used), it shall, at least 30 days
prior to each such filing, give written notice of such proposed filing to each
Warrantholder and each holder of Shares, at their respective addresses as they
appear on the records of the Company, and shall offer to include and shall
include in such filing any proposed disposition of the Warrants and Shares upon
receipt by the Company, not less than 10 days prior to the proposed filing date,
of a request therefor setting forth the facts with respect to such proposed
disposition and all other information with respect to such person reasonably
necessary to be included in such Registration Statement. If the managing
underwriter for the offering made pursuant to the Registration Statement advises
the Company in writing that the inclusion of such securities in the offering
would be detrimental to the offering, such securities may not be included in the
Registration Statement.
(c) The Company shall pay all fees, disbursements and out-of-pocket
expenses (other than brokerage fees and commissions of the Warrantholders and
holders of Shares, and legal fees of counsel to the Warrantholders and holders
of Shares, if any) in connection with the filing of any Registration Statement
under Section 11(b) hereof (or obtaining the opinion of counsel and any
no-action position of the Commission with respect to sales under Rule 144) and
in complying with applicable securities and Blue Sky laws. The Company at its
expense will supply any Warrantholder and any holder of Shares with copies of
such Registration Statement and the prospectus included therein and other
related documents, opinions and no-action letters in such quantities as may be
reasonably requested by a Warrantholder or holder of Shares.
(d) The provisions of this Section 11 and Section 12 hereof shall apply
to the extent as provided herein if the Company chooses to file an Offering
Statement under Regulation A promulgated under the Act.
(e) The Company agrees that until all Shares have been sold under a
Registration Statement or pursuant to Rule 144 under the Act, it will use
commercially reasonable efforts to keep current in filing all materials required
to be filed with the Commission in order to permit the holders of such
securities to sell the same under Rule 144.
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SECTION 12. Indemnification.
(a) In the event of the filing of any Registration Statement with
respect to the Shares pursuant to Section 11 hereof, the Company agrees to
indemnify and hold harmless any Warrantholder or any holder of such Shares and
each person, if any, who controls any Warrantholder or any holder of such Shares
within the meaning of the Act, against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
reasonable attorneys' fees), to which any Warrantholder or any holder of such
Shares or such controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any such Registration
Statement, or any related preliminary prospectus, final prospectus, or amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement, preliminary prospectus, final prospectus or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by the Warrantholder or the holder
of such Shares or any person who controls the Warrantholder or any holder of
such Shares within the meaning of the Act specifically for use in the
preparation thereof. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) Each Warrantholder and the holders of the Shares agree that they
will indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Act in respect of the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages or liabilities
(which shall, for all purposes of this Agreement, include but not be limited to,
all costs of defense and investigation and all attorneys' fees) to which the
Company or any such director, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
such Registration Statement, or any related preliminary prospectus, final
prospectus or amendment or supplement thereto, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in such Registration
Statement, preliminary prospectus, final prospectus or amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by such Warrantholder or such holder of Shares specifically for
use in the preparation thereof. This indemnity agreement will be in addition to
any liability which such Warrantholder or such holder of Shares may otherwise
have.
(c) Promptly after receipt by an indemnified party under this Section 12
of notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against any indemnifying party under this
Section 12, notify the indemnifying party in
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writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 12. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 12 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 12(a) or 12(b) hereof who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
SECTION 13. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) a Warrantholder or any
holder of the Shares or controlling person makes a claim for indemnification
pursuant to Section 12 hereof but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of Section 12 hereof provide for indemnification in such
case or (ii) contribution under the Act may be required on the part of any
Warrantholder or any holder of the Shares or controlling person, then the
Company and any Warrantholder or any such holder of the Shares or controlling
person shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), in either such case (after contribution from others) on the
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basis of relative fault as well as any other relevant equitable considerations.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or a Warrantholder or holder of Shares
or controlling person on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and such holders of such securities and such controlling
persons agree that it would not be just and equitable if contribution pursuant
to this Section 13 were determined by pro rata allocation or by any other method
which does not take account of the equitable considerations referred to in this
Section 13. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this Section 13 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
SECTION 14. Notices. Any notice pursuant to this Agreement by the
Company or by a Warrantholder or a holder of Shares shall be in writing and
shall be deemed to have been duly given if delivered or mailed by certified
mail, return receipt requested:
(a) If to a Warrantholder or a holder of Shares, addressed to EVEREN
Securities, Inc., 1901 Avenue of the Stars, Suite 1460, Los Angeles, California
90067, and 77 West Wacker Drive, Chicago, Illinois 60601, Attention: Corporate
Finance Department.
(b) If to the Company, addressed to it at 3850 Atherton Road, Rocklin,
California 95765, Attention: President and Chief Executive Officer.
Each party may from time to time change the address to which notices to
it are to be delivered or mailed hereunder by notice in accordance herewith to
the other party.
SECTION 15. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company, Everen, the Warrantholders, or
the holders of Shares shall bind and inure to the benefit of their respective
successors and permitted assigns hereunder.
SECTION 16. Merger or Consolidation of the Company. The Company will not
merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the provisions
of Section 8.4 are complied with.
SECTION 17. Survival of Representations and Warranties. All statements
contained in any schedule, exhibit, certificate or other instrument delivered by
or on behalf of the parties hereto, or in connection with the transactions
contemplated by this Agreement, shall be deemed to be representations and
warranties hereunder. Notwithstanding any investigations made by or on behalf of
the parties to this Agreement, all representations, warranties and agreements
made by the parties to this Agreement or pursuant hereto shall survive.
SECTION 18. Applicable Law. This Agreement shall be deemed to be a
contract made under the laws of the State of California and for all purposes
shall be construed in accordance with the laws of California.
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SECTION 19. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company,
Everen, the Warrantholders and the holders of Shares any legal or equitable
right, remedy or claim under this Agreement. This Agreement shall be for the
sole and exclusive benefit of the Company, Everen, the Warrantholders and the
holders of Shares.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
FINANCIAL PACIFIC INSURANCE GROUP, INC.
By:_______________________________________
Title:____________________________________
EVEREN SECURITIES, INC.
By:_______________________________________
Title:____________________________________
[WARRANTHOLDERS' SIGNATURES]
By:_______________________________________
By:_______________________________________
By:_______________________________________
12
<PAGE> 13
EXHIBIT B
Form of Warrant Certificate
A-1
<PAGE> 14
[FORM OF FACE OF WARRANT CERTIFICATE]
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
OFFERED FOR SALE, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS
OR AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD
PURSUANT TO RULE 144 OF THE SECURITIES ACT."
No. W-1 ________ __, 1998
FINANCIAL PACIFIC INSURANCE GROUP, INC.
WARRANT TO PURCHASE
125,000 SHARES OF COMMON STOCK
EXPIRING ________ __, 2003
This Warrant Certificate certifies that ___________________, or
registered assigns, is the registered holder of a warrant (the "Warrant") of
Financial Pacific Insurance Group, Inc., a Delaware corporation (the "Company"),
to purchase the number of shares (the "Shares") of Common Stock, $.001 par value
(the "Common Stock"), of the Company set forth above. This Warrant expires at
5:00 p.m. California Time (the "Close of Business") on ________ __, 2003 (the
"Expiration Date") and entitles the holder to purchase from the Company the
number of fully paid and nonassessable Shares set forth above at $[insert offer
price] per share (the "Exercise Price"), payable in lawful money of the United
States of America.
Subject to the terms and conditions set forth herein and in the Warrant
Agreement referred to on the reverse hereof, this Warrant may be exercised upon
surrender of this Warrant Certificate and payment in full of the aggregate
Exercise Price at the offices of the Company in Rocklin, California (the
"Company Offices").
The Exercise Price and the number of Shares purchasable upon exercise of
this Warrant are subject to adjustment upon the occurrence of certain events as
set forth in the Warrant Agreement.
No Warrant may be exercised after the Close of Business on the
Expiration Date. After the Close of Business on the Expiration Date, the
Warrants will become wholly void and of no value.
REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS
A-2
<PAGE> 15
WARRANT CERTIFICATE SET FORTH ON THE REVERSE HEREOF. SUCH FURTHER PROVISIONS
SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS
PLACE.
A-3
<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this Certificate to be
executed by its duly authorized officers, and the corporate seal hereunto
affixed.
Dated:_____________
FINANCIAL PACIFIC INSURANCE GROUP, INC.
By_______________________________________
ATTEST:
By____________________________
A-4
<PAGE> 17
[FORM OF REVERSE OF WARRANT CERTIFICATE]
FINANCIAL PACIFIC INSURANCE GROUP, INC.
The Warrant evidenced by this Warrant Certificate is a part of a duly
authorized issue of Warrants to purchase a maximum of one hundred forty-three
thousand seven hundred fifty (143,750) Shares of Common Stock (subject to
adjustment) issued pursuant to that certain Warrant Agreement, dated as of June
__, 1998 as the same may be amended from time to time (the "Warrant Agreement"),
duly executed by the Company and Everen Securities, Inc. The Warrant Agreement
is hereby incorporated by reference in and made a part of this instrument and is
hereby referred to for a description of the rights, limitation of rights,
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrant. A copy of the Warrant Agreement may be inspected at the
Company Offices and is available upon written request addressed to the Company.
All terms used herein that are defined in the Warrant Agreement have the
meanings assigned to them therein.
The Warrant may be exercised to purchase Shares from the Company before
the Close of Business on the Expiration Date, at the Exercise Price set forth on
the face hereof, subject to adjustment as described in the Warrant Agreement.
The Warrant may be exercised in whole or in part, provided that the Warrant may
not be exercised to purchase fewer than 100 Shares unless the registered holder
has, in aggregate, under all Warrants held, a right to receive fewer than 100
Shares. The holder of the rights to purchase Shares evidenced by this Warrant
Certificate may exercise any of such rights by surrendering the Warrant
Certificate, with the form of election to purchase set forth hereon properly
completed and executed, together with either (a) payment of the aggregate
Warrant Price for the Warrants exercised, in lawful money of the United States
of America, and any applicable transfer taxes, at the Company Offices, or (b) an
election to use Appreciation Currency, as defined in the Agreement, to pay the
Warrant Price. After the Close of Business on the Expiration Date, the Warrant
shall become wholly void and of no value.
If the exercise hereof is in part only, unless this Warrant has expired,
the Company shall issue a new Warrant or Warrants of like tenor calling, in the
aggregate on the face or faces thereof, for the number of Warrant Shares equal
(without giving effect to any adjustment herein) to the number of such shares
called for on the face of this Warrant minus (a) in an exercise for cash, the
number of Warrant Shares purchased, or (b) in an exercise using Appreciation
Currency, the number of Shares the Warrantholder would have had a right to
receive if the Warrants surrendered were exercised for cash.
The Company shall not be required to issue fractions of Shares or any
certificates that evidence fractional Shares. In lieu of such fractional Shares,
the Company shall pay to holders of the Warrant Certificates otherwise entitled
to receive such fractional Shares an amount in cash equal to the then Current
Market Price (as determined pursuant to the Warrant Agreement) per share of
Common Stock multiplied by such fraction.
Warrant Certificates, when surrendered at the Company Offices by the
registered holder thereof in person or by a legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but
A-5
<PAGE> 18
without payment of any service charge, for another Warrant Certificate of like
tenor evidencing Warrants to purchase in the aggregate a like number of Shares.
Upon due presentment for registration of transfer of this Warrant
Certificate at the Company Offices, a new Warrant Certificate of like tenor and
evidencing Warrants to purchase in the aggregate a like number of Shares shall
be issued to the transferee in exchange for this Warrant Certificate, subject to
the limitations provided in the Warrant Agreement, without charge, except for
any tax or other governmental charge imposed in connection therewith.
The Company may deem and treat the registered holder hereof as the
absolute owner of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone) for the purpose of any
exercise hereof and for all other purposes, and the Company shall not be
affected by any notice to the contrary.
A-6
<PAGE> 19
FORM OF SUBSCRIPTION
TO BE EXECUTED ONLY UPON EXERCISE OF WARRANT FOR CASH
To FINANCIAL PACIFIC INSURANCE GROUP, INC.
The undersigned registered holder of the within Warrant hereby
irrevocably exercises such Warrant for and purchases thereunder, *shares of
Common Stock of FINANCIAL PACIFIC INSURANCE GROUP, INC. and herewith makes
payment of $ therefor, and requests that the certificates for such shares be
issued as follows:
------------------------------------------
Name
------------------------------------------
Address
------------------------------------------
Delivery Address (if different)
- ------------------------------------- -------------------------------------
Social Security or Other Taxpayer Signature
Identification Number of Holder
Note: The above signature must
correspond with the name as written
upon the face of this Warrant
Certificate in every particular,
without alteration or enlargement or
any change whatsoever. If the
certificate representing the Shares
or any Warrant Certificate
representing Warrants not exercised
is to be registered in a name other
than that in which this Warrant
Certificate is registered the
signature of the holder hereof must
be guaranteed.
* Insert here the number of shares called for on the face of this Warrant
(or in the case of a partial exercise, the portion thereof as to which
this Warrant is being exercised), in either case without making any
adjustment for additional Common Stock or any other securities or
property or cash or combination thereof which, pursuant to the
adjustment provisions of the Warrant Agreement, may be delivered upon
exercise. In the case of a partial exercise, a new Warrant or Warrants
will be issued and delivered, representing the unexercised portion of
the Warrant, to the holder surrendering the Warrant.
A-7
<PAGE> 20
FORM OF SUBSCRIPTION AND ELECTION TO USE APPRECIATION CURRENCY
TO BE EXECUTED ONLY UPON EXERCISE OF WARRANT
FOR APPRECIATION CURRENCY (CASHLESS EXERCISE)
To FINANCIAL PACIFIC INSURANCE GROUP, INC.
The undersigned registered holder of the within Warrant hereby
irrevocably exercises such Warrant by surrendering the right to purchase *shares
of Common Stock of FINANCIAL PACIFIC INSURANCE GROUP, INC. as Appreciation
Currency for the number of Shares issuable therefor pursuant to Section 3 of the
Warrant Agreement, and requests that the certificates for such shares be issued
as follows:
------------------------------------------
Name
------------------------------------------
Address
------------------------------------------
Delivery Address (if different)
- ------------------------------------- -------------------------------------
Social Security or Other Taxpayer Signature
Identification Number of Holder
Note: The above signature must
correspond with the name as written
upon the face of this Warrant
Certificate in every particular,
without alteration or enlargement or
any change whatsoever. If the
certificate representing the Shares
or any Warrant Certificate
representing Warrants not exercised
is to be registered in a name other
than that in which this Warrant
Certificate is registered the
signature of the holder hereof must
be guaranteed.
* Insert here the number of shares called for on the face of this Warrant
(or in the case of a partial exercise, the portion thereof as to which
this Warrant is being exercised), in either case without making any
adjustment for additional Common Stock or any other securities or
property or cash or combination thereof which, pursuant to the
adjustment provisions of the Warrant Agreement, may be delivered upon
exercise. In the case of a partial exercise, a new Warrant or Warrants
will be issued and delivered, representing the unexercised portion of
the Warrant, to the holder surrendering the Warrant.
A-8
<PAGE> 21
FORM OF ASSIGNMENT
(TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH
HOLDER DESIRES TO TRANSFER THE WARRANT CERTIFICATE)
FOR VALUE RECEIVED, the undersigned registered holder hereby sells,
assigns and transfers unto
------------------------------------------
Name of Assignee
------------------------------------------
Address of Assignee
this Warrant Certificate, together with all right, title and interest therein,
and does irrevocably constitute and appoint __________________________ attorney,
to transfer the within Warrant Certificate on the books of the Company, with
full power of substitution.
- ------------------------------- --------------------------------------
Dated Signature
Note: The above signature must
correspond with the name as written
upon the face of this Warrant
Certificate in every particular,
without alteration or enlargement or
any change whatsoever.
- -------------------------------------
Social Security or Other Taxpayer
Identification Number of Assignee
SIGNATURE GUARANTEED:
A-9
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT AND CONSENT
The Board of Directors
Financial Pacific Insurance Group, Inc:
The audits referred to in our report dated January 30, 1998, except as to
note 16 which is as of April 14, 1998, included the related financial statement
schedules as of December 31, 1996 and 1997 and for each of the years in the
three-year period ended December 31, 1997 included in the registration
statement. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements, taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
Los Angeles, California
May 29, 1998
KPMG Peat Marwick LLP
<PAGE> 1
EXHIBIT 23.3
[LeBOEUF, LAMB, GREENE & MacRAE L.L.P. LETTERHEAD]
May 28, 1998
Financial Pacific Insurance Group, Inc.
3850 Atherton Road
Rocklin, California 95765
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
In connection with the Registration Statement on Form S-1, Registration
No. 333-50511, as amended to date (the "Registration Statement"), regarding the
registration under the Securities Act of 1933, as amended, of the sale in an
underwritten public offering of up to 2,375,000 authorized but unissued shares
of the common stock ("Common Stock") of Financial Pacific Insurance Group, Inc.
(the "Company") and 500,000 shares of the Common Stock currently held by
existing stockholders of the Company, we hereby consent to the reference to
LeBoeuf, Lamb, Greene & MacRae, L.L.P. under the caption "Legal Matters" in the
Prospectus which is a part of the Registration Statement.
Very truly yours,
/s/ KENNETH B. SCHNOLL
---------------------------
Kenneth B. Schnoll
