<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- ----------------
Commission file number 1-9627
ZENITH NATIONAL INSURANCE CORP.
[Exact name of registrant as specified in its charter]
DELAWARE 95-2702776
[State or other jurisdiction of I.R.S. Employer
incorporation or organization] identification No.]
21255 Califa Street, Woodland Hills, California 91367-5021
[Address of principal executive offices] [Zip Code]
[818] 713-1000
[Registrant's telephone number, including area code]
Not Applicable
[Former name, former address and former fiscal year, if changed
since last report.]
Indicate by check mark whether the registrant [1] has filed all reports required
to be filed by Section 13 or 15[d] of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and [2] has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. At July 31, 1996, 17,535,000
shares of common stock were outstanding, net of 6,835,000 shares of treasury
stock.
PAGE 1
<PAGE>
PART I FINANCIAL INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
ITEM 1:
Dollars and Shares in Thousands
ASSETS JUN. 30, 1996 DEC. 31, 1995
<S> <C> <C>
Investments
Fixed maturities:
At amortized cost (fair value $54,854 & $57,816) $ 56,076 $ 56,674
At fair value (cost $513,397 & $555,922) 503,357 566,826
Non redeemable preferred stocks, at fair value (cost $14,864 & $14,864) 14,283 13,869
Common stocks, at fair value (cost $14,366 & $18,937) 17,210 22,656
Short-term investments (at cost, which approximates fair value) 153,880 137,083
Other investments 38,873 38,106
----------- -----------
TOTAL INVESTMENTS 783,679 835,214
Cash 8,091 6,919
Accrued investment income 9,259 8,810
Premiums receivable 82,833 70,155
Receivable from reinsurers and prepaid reinsurance premiums 66,545 64,781
Federal income tax 22,821 14,609
Deferred policy acquisition costs 21,313 20,339
Properties and equipment, less accumulated depreciation 48,609 48,702
Excess of cost over net assets acquired and purchased intangibles and other assets 7,777 7,983
Other assets 50,025 37,921
----------- -----------
TOTAL ASSETS $ 1,100,952 $ 1,115,433
----------- -----------
----------- -----------
LIABILITIES
Policy liabilities and accruals
Unpaid losses and loss expenses $ 504,149 $ 517,552
Unearned premiums 129,926 119,591
Policyholders' dividends accrued and accumulated 10,125 12,100
Other policyholder funds 13,060 15,491
Reserves on loss portfolio transfers 8,581 9,073
Senior notes payable, less unamortized issue costs of $707 & $768 74,293 74,232
Payable to banks 7,382 8,903
Other liabilities 28,817 28,059
----------- -----------
TOTAL LIABILITIES 776,333 785,001
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par - shares authorized 1,000; issued and outstanding,
none in 1995 and 1994
Common stock, $1 par - shares authorized 50,000; issued 24,365,
outstanding 17,530, 1996; issued 24,310, outstanding 17,784, 1995 24,365 24,310
Additional paid-in capital 257,135 256,083
Retained earnings 169,986 155,634
Net unrealized appreciation (depreciation) on investments, net of deferred
tax expense (benefit) of $(2,715) & $4,752 (5,043) 8,825
----------- -----------
446,443 444,852
Less treasury stock at cost (6,835 shares 1996 & 6,526 shares 1995) (121,824) (114,420)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 324,619 330,432
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,100,952 $ 1,115,433
----------- -----------
----------- -----------
The accompanying notes are an integral part of this statement.
</TABLE>
PAGE 2
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
Dollars in thousands, except per share data 1996 1995 1996 1995
<S> <C> <C> <C> <C>
CONSOLIDATED REVENUES:
Premium earned $ 108,255 $ 106,439 $ 220,492 $ 213,498
Net investment income 12,836 11,949 24,890 23,240
Realized gains on investments 3,778 1,013 8,050 1,179
Real estate sales 8,810 11,273 14,795 20,093
-------- -------- -------- -------
Total revenues 133,679 130,674 268,227 258,010
EXPENSES:
Property and casualty losses and loss expenses incurred 74,429 78,283 147,844 156,643
Policy acquisition costs 19,887 18,349 42,251 37,829
Other underwriting and operating expenses 13,247 9,901 25,373 21,035
Policyholders' dividends 316 299 875 2,677
Real estate construction costs 8,233 10,711 13,983 18,764
Interest expense 1,416 1,528 2,836 3,087
-------- -------- -------- -------
Total expenses 117,528 119,071 233,162 240,035
Income from continuing operations before federal income tax 16,151 11,603 35,065 17,975
Federal income tax expense 5,451 4,092 11,965 6,106
-------- -------- -------- -------
Income from continuing operations 10,700 7,511 23,100 11,869
DISCONTINUED OPERATIONS:
Income from discontinued operations 2,689 5,231
-------- -------- -------- -------
NET INCOME $ 10,700 $ 10,200 $ 23,100 $ 17,100
-------- -------- -------- -------
-------- -------- -------- -------
EARNINGS PER SHARE:
Income from continuing operations $ 0.60 $ 0.40 $ 1.30 $ 0.63
Income from discontinued operations 0.14 0.28
-------- -------- -------- -------
Net income per share $ 0.60 $ 0.54 $ 1.30 $ 0.91
-------- -------- -------- -------
-------- -------- -------- -------
The accompanying notes are an integral part of this statement.
</TABLE>
PAGE 3
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
Dollars in thousands ENDED JUNE 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $227,111 $224,532
Investment income received 23,219 21,590
Proceeds from sales of real estate 14,795 20,093
Losses & loss adjustment expenses paid (162,866) (164,899)
Underwriting & other operating expenses paid (64,610) (61,685)
Real estate construction costs paid (26,595) (19,104)
Reinsurance premiums paid (11,644) (11,618)
Dividends paid to policyholders (1,387) (6,281)
Interest paid (3,863) (3,274)
Income taxes paid (12,563) (2,158)
------- -------
Net cash flows from continuing operating activities, excluding cash from
trading portfolio (18,403) (2,804)
Net cash from sales (purchases) of trading portfolio investments 7,050 1,414
------- -------
Net cash flows from operating activities, including cash from trading portfolio (11,353) (1,390)
Net cash flows from discontinued operating activities 8,262
------- -------
Net cash flows from operating activities (11,353) 6,872
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt securities Held-to-Maturity (5,342) (121,330)
Debt and equity securities Available-for-Sale (240,091) (71,100)
Other investments (1,659) (11,735)
Proceeds from maturities and exchanges of investments:
Debt securities Held-to-Maturity 5,781 14
Debt and equity securities Available-for-Sale 8,932 13,114
Other investments 2,178
Proceeds from sales of investments:
Debt and equity securities Available-for-Sale 277,132 156,622
Other investments 2,491 4,371
Capital and other expenditures (3,166) (3,175)
Net change in short-term investments (14,766) 41,185
Net cash used in investing activities of discontinued operations (14,994)
------- -------
Net cash flows from investing activities 29,312 (4,850)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advanced from bank line of credit 13,500
Cash repaid on bank line of credit (6,500)
Cash advanced from bank construction loans 14,751 14,840
Cash repaid on bank construction loans (16,272) (13,894)
Cash dividends paid to common stockholders (8,824) (9,406)
Proceeds from exercise of stock options 962 1,166
Purchase of treasury shares (7,404) (6,755)
Net cash provided by financing activates of discontinued operations 6,344
------- -------
Net cash flows from financing activities (16,787) (705)
------- -------
Net increase in cash 1,172 1,317
Cash at beginning of period 6,919 5,358
------- -------
Cash at June 30, $ 8,091 $ 6,675
------- -------
------- -------
(continued)
</TABLE>
PAGE 4
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(continued)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1996 1995
(Dollars in Thousands)
<S> <C> <C>
RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Income From Continuing Operations $ 23,100 $11,869
Adjustments to reconcile income from continuing operations to
net cash flows from operating activities:
Depreciation and amortization 1,730 1,724
Realized gains on investments (8,050) (1,179)
Net cash from trading portfolio 7,050 1,414
Decrease (increase) in:
Accrued investment income (449) (913)
Premiums receivable (12,678) (10,112)
Receivable from reinsurers (1,764) (5,271)
Deferred policy acquisition costs (974) (1,924)
Federal income taxes (599) 3,948
Real estate construction in progress (12,064) 450
Increase (decrease) in:
Unpaid losses and loss expenses (13,403) (3,048)
Unearned premiums 10,335 9,274
Policyholders' dividends accrued (1,975) (4,012)
Other policyholder funds (2,431) (1,418)
Other 819 (2,192)
Net cash from discontinued operating activities 8,262
-------- -------
Net cash flows from operating activities $(11,353) $ 6,872
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of this statement.
PAGE 5
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Computation of earnings per share:
Dollars and shares in thousands, except
per share data
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
(A) Net income $10,700 $10,200 $23,100 $17,100
------- ------- ------- -------
------- ------- ------- -------
(B) Number of shares used in calculating
primary earnings per share:
Weighted average outstanding shares
during the period 17,524 18,681 17,615 18,783
Additional common shares issuable under
employee stock options using the
treasury stock method (1) 250 85 166 93
------- ------ ------- -------
17,774 18,766 17,781 18,876
------- ------ ------- -------
------- ------ ------- -------
Net income per share (A)/(B) $ 0.60 $ 0.54 $ 1.30 $ 0.91
------- ------ ------- -------
------- ------ ------- -------
(C) Number of fully diluted shares:
Weighted average outstanding shares
during the period 17,524 18,681 17,615 18,783
Additional common shares issuable under
employee stock options using the
treasury stock method (2) 344 93 224 97
------- ------ ------- -------
17,868 18,774 17,839 18,880
------- ------ ------- -------
------- ------ ------- -------
Net income per share (A)/(C) $ 0.60 $ 0.54 $ 1.29 $ 0.91
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
(1) Based on the average market price during the period.
(2) Based on the higher of the average market price or price at the end of each
period.
Note 2. New Accounting Standard
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The provisions of SFAS No. 123 must be
applied to fiscal years beginning after December 15, 1995. SFAS No. 123
encourages a fair value-based method of accounting for an employee stock option
or similar equity instrument, but allows continued use of the intrinsic value-
method of accounting prescribed by Accounting Principles Board No. 25
"Accounting for Stock Issued to Employees" ("APB No. 25"). Companies electing
to continue to use APB No. 25 must make pro forma disclosures of net income and
earnings per share as if the fair value-based method of accounting were applied.
The company has elected to follow the provision of APB No. 25 and, accordingly,
will make the pro forma disclosures required by SFAS No. 123 in its financial
statements for the year ending December 31, 1996.
Note 3. Proposed Acquisition
On May 6, 1996, Zenith announced that its wholly-owned subsidiary, Zenith
Insurance Company ("ZIC"), entered into a Letter of Intent to acquire Associated
General Contractors Self-Insurers' Fund ("AGC-SIF"), a Florida workers'
compensation self-insurers' fund. Under the terms of the Letter of Intent, ZIC
will acquire AGC-SIF's assets and assume its liabilities, including the
liabilities of the insured members of AGC-SIF for future assessments. After the
closing date balances are verified, ZIC will distribute to the members of AGC-
SIF an amount equal to the net book value of the fund. AGC-SIF had 1995 premium
written of approximately $40 million.
The acquisition is subject to a number of conditions, including a due diligence
investigation, the negotiation and execution of definitive documentation, the
approval by the members of AGC-SIF and ZIC's Board of Directors, and regulatory
approvals, including approvals under the Hart-Scott-Rodino Antitrust
Improvements Act.
PAGE 6
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
In the opinion of management, all adjustments necessary for a fair presentation
of the results of operations for the periods presented (consisting only of
normal recurring adjustments) have been included. The results of operations for
an interim period are not necessarily indicative of the results for an entire
year.
On May 22, 1996, the Board of Directors declared a regular quarterly cash
dividend of $.25 per share on the outstanding shares, payable August 15, 1996 to
stockholders of record at the close of business on July 31, 1996.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Zenith's principal source of consolidated earnings is the income, including
investment income, from operations of its property and casualty insurance
business. The comparative results of operations are set forth in the table
below, followed by a discussion of the significant changes.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
DOLLARS IN THOUSANDS 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income, after tax $8,536 $7,985 $16,552 $15,529
Realized gains on investments, after tax 2,456 658 5,233 766
- ----------------------------------------------------------------------------------------------------------------
Sub-total 10,992 8,643 21,785 16,295
- -----------------------------------------------------------------------------------------------------------------
Property and Casualty, after tax:
Underwriting income (loss) 688 (169) 3,464 1,425
Catastrophe losses (3,835)
- -----------------------------------------------------------------------------------------------------------------
Property and casualty underwriting income (loss) 688 (169) 3,464 (2,410)
- -----------------------------------------------------------------------------------------------------------------
Income from real estate operations, after tax 375 364 538 863
Interest expense, after tax (920) (993) (1,843) (2,006)
Parent expenses, after tax (435) (334) (844) (873)
Income from discontinued operations 2,689 5,231
- -----------------------------------------------------------------------------------------------------------------
Total $10,700 $10,200 $23,100 $17,100
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
In December 1995, Zenith sold its wholly-owned life insurance subsidiary,
retaining the health insurance business previously written by such subsidiary.
In 1995, the results of life and annuity operations have been included as
discontinued operations and the results of health insurance operations have been
reclassified and included in Other Property and Casualty operations.
PAGE 7
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PROPERTY AND CASUALTY OPERATIONS:
Premiums earned, underwriting results and combined ratios for the three and six
months ended June 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
DOLLARS IN THOUSANDS 1996 1995 Change 1996 1995 Change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums Earned
Workers' Compensation
California $35,722 $38,131 (6%) $73,686 $79,946 (8%)
Outside California 13,651 9,797 39% 27,213 18,683 46%
------------------------ --------------------
Total Workers' Compensation 49,373 47,928 3% 100,899 98,629 2%
Other Property & Casualty 49,820 47,631 5% 99,989 95,050 5%
Reinsurance 9,062 10,880 (17%) 19,604 19,819 (1%)
------------------------ ---------------------
Total $108,255 $106,439 2% $220,492 $213,498 3%
Underwriting Income (Loss) Before Taxes
Workers' Compensation ($4,322) ($4,039) ($5,632) ($5,333)
Other Property & Casualty 2,493 320 4,702 (5,606)
Reinsurance 2,875 3,840 6,378 7,595
------------------------ --------------------
Total $1,046 $121 $5,448 ($3,344)
Combined Loss and Loss Expense Ratios
Workers' Compensation
Losses 53.8% 50.2% 50.0% 45.7%
Loss Expenses 20.5% 28.8% 21.6% 29.4%
Underwriting Expenses 33.8% 28.8% 33.1% 27.6%
Policyholder Dividends 0.7% 0.6% 0.9% 2.7%
-------- ------ ------- --------
Combined Ratio 108.8% 108.4% 105.6% 105.4%
Other Property & Casualty
Losses & Loss Expenses 65.3% 72.2% 65.4% 76.9%
Underwriting Expenses 29.7% 27.1% 29.9% 29.0%
-------- ------ ------- --------
Combined Ratio 95.0% 99.3% 95.3% 105.9%
Reinsurance
Losses & Loss Expenses 57.3% 55.5% 52.2% 48.0%
Underwriting Expenses 11.0% 9.2% 15.3% 13.7%
-------- ------ ------ -------
Combined Ratio 68.3% 64.7% 67.5% 61.7%
Total Property & Casualty
Losses & Loss Expenses 68.8% 73.5% 67.1% 73.4%
Underwriting Expenses 29.9% 26.1% 30.0% 26.9%
Policyholder Dividends 0.3% 0.3% 0.4% 1.3%
-------- ------ ------- --------
Combined Ratio 99.0% 99.9% 97.5% 101.6%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
PAGE 8
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Underwriting results improved in the six months ended June 30, 1996 compared to
the corresponding period in 1995 principally because of the absence of
catastrophe losses in 1996 (catastrophe losses were $5.7 million in the first
quarter of 1995). In addition, the underwriting result of the Other Property
and Casualty Operation improved in the second quarter of 1996 compared to the
corresponding period in 1995 because of an overall lower frequency of losses in
1996.
Competition in the workers' compensation insurance business continues to be
intense, particularly in California. However, the claims loss ratio in Zenith's
Workers' Compensation operation continued to be favorable relative to both
Zenith's long-term historical experience and the actuarial assumptions used in
its premium rates. Expenses in Zenith's Workers' Compensation claims adjustment
process decreased in the quarter and six months ended June 30, 1996 compared to
the corresponding periods in 1995 due to progress made in bringing recurring
operating costs into line with reduced premium income. These reductions were
partially offset by increased underwriting expenses in the quarter and six
months ended June 30, 1996 compared to the corresponding periods in 1995. Such
increases were attributable to the re-evaluation of the allocation of corporate
and administrative costs relative to re-focusing Zenith's business in property
and casualty insurance operations, including investing activities, following the
sale of Zenith's life insurance subsidiary.
During the first six months of 1996, Zenith continued its expansion outside of
California with the opening of an office in Harrisburg, Pennsylvania to
commence operations in the North East United States. In addition, Zenith
announced the proposed acquisition of AGC-SIF in Florida (see Note 3 to the
Consolidated Financial Statements).
INVESTMENTS:
Fluctuations in interest rates continue to impact stockholders' equity due to
changes in the market value of fixed maturity securities. At June 30, 1996, the
unrealized loss on fixed maturities identified as Available-for-Sale was $9.9
million, before deferred taxes, compared to a gain of $11.0 million, before
deferred taxes, at December 31, 1995. This change resulted in a decrease in
stockholders' equity of $13.5 million, after deferred taxes, between
December 31, 1995 and June 30, 1996. Stockholders' equity will continue to be
affected by future volatility, if any, in the fixed maturity securities markets.
PAGE 9
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Investment income increased in the three and six months ended June 30, 1996
compared to the corresponding periods in 1995 principally due to an increase in
invested assets of the Parent.
The yields on invested assets, which vary with the general level of interest
rates, were as follows:
- --------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
INVESTMENT YIELDS ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
- --------------------------------------------------------------------------------
Pre-tax 6.2% 6.7% 6.0% 6.2%
Post-tax 4.1% 4.3% 4.0% 4.2%
- --------------------------------------------------------------------------------
Bonds with investment grade ratings represented approximately 96% of the
consolidated carrying values of investments in bonds at both June 30, 1996 and
December 31, 1995. At June 30, 1996, the average maturity of the investment
portfolio was 5.2 years, compared to 3.9 years at December 31, 1995.
The change in the carrying value of Zenith's consolidated investment portfolio
during 1996 was as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Carrying Value at December 31, 1995 $835,214
Purchases at cost 247,092
Maturities and exchanges of investments (21,763)
Proceeds from sales of investments:
Available-for-sale (277,132)
Other investments (2,491)
---------
Total proceeds from disposals of investments (279,623)
Realized gains from maturities and exchanges of investments:
Available-for-sale 28
Realized gains (losses) from sales of investments:
Available-for-sale 6,567
Trading portfolio (71)
Other investments 1,526
----------
Total realized gains on investments 8,050
Unrealized losses on investments (21,335)
Increase in short-term investments 14,766
Net accretion of fixed maturities and other changes 1,278
- --------------------------------------------------------------------------------------------------------------------
Carrying Value at June 30, 1996 $783,679
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
PAGE 10
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY:
Zenith is principally dependent upon its portfolio of marketable securities and
the investment yields thereon; dividends from its insurance subsidiaries, whose
operations are supported by their own cash flows, and available lines of credit
($50,000,000 at June 30, 1996) to pay its expenses, service debt and pay any
cash dividends which may be declared to its stockholders.
After adjusting for the effects of the cash flows from the trading portfolio in
both periods, net cash flow from continuing operations declined in the six
months ended June 30, 1996 compared to the corresponding period in 1995. The
net outflow was primarily due to negative cash flow in Perma-Bilt, Zenith's real
estate construction subsidiary, attributable, principally, to land acquisitions
in the first six months of 1996.
PAGE 11
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Stockholders' Meeting of Zenith was held on May 22, 1996. Two
matters were presented to a vote of the Stockholders.
One matter was the election of Directors. The tabulation of votes for the
nominees, all of whom were elected, is as follows:
DIRECTOR VOTES FOR VOTES WITHHELD
- -------- ----------- --------------
George E. Bello 13,250,954 569,491
Max M. Kampelman 13,250,084 570,361
Jack M. Ostrow 13,250,084 570,361
William Steele Sessions 13,251,954 568,491
Harvey L. Silbert 13,153,594 666,851
Robert M. Steinberg 13,034,265 786,180
Saul P. Steinberg 13,051,643 768,802
Gerald Tsai, Jr. 13,248,653 571,792
Stanley R. Zax 13,251,195 569,250
With respect to the election of Directors, there were no votes cast against any
Director, no abstentions and no broker non-votes.
The second matter was a vote to approve the 1996 Employee Stock Option Plan, a
non-qualified stock option plan for officers and employees of Zenith and its
subsidiaries. The matter was approved by the Stockholders. The tabulation of
votes is as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- --------- ------- ----------------
9,828,098 1,576,209 502,078 1,914,060
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
[a] Exhibits
[3.1] Certificate of Incorporation of Zenith as in effect immediately
prior to November 22, 1985. (Filed as Exhibit 3 to Zenith's
Amendment on Form 8, dated October 10, 1985, to Zenith's Current
Report on Form 8-K, dated July 26, 1985 and incorporated herein
by reference). Certificate of Amendment to Certificate of
Incorporation of Zenith, effective November 22, 1985. (Filed as
Zenith's Current Report on Form 8-K, dated November 22, 1985 and
incorporated herein by reference).
[3.2] By-Laws of Zenith, as currently in effect. (Filed as Exhibit 3.2
to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1988 and incorporated herein by reference).
[10.1] Revolving Note Agreement, dated July 1, 1996, between Zenith and
City National Bank
[10.2] Second Amendment, dated June 28, 1996, to the Revolving Note
Agreement, dated December 15, 1994 between Zenith and Sanwa Bank
California
[10.3] Stock Option Agreement, dated as of March 15, 1996, between
Zenith and Stanley R. Zax
[10.4] Amendment No. 2 to the Zenith National Insurance Corp. Amended
and Restated Non-Qualified Stock Option Plan, dated as of April
9, 1996
[10.5] Zenith National Insurance Corp. 1996 Employee Stock Option Plan,
approved by the stockholders on May 22, 1996
[11] Statement re: computation of per share earnings Part I, Item 1,
Note 1 of the consolidated financial statements is incorporated
herein by reference
[27] Financial Data Schedule
[b] Reports on Form 8-K
None
PAGE 12
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZENITH NATIONAL INSURANCE CORP.
Registrant
Date: August 14, 1996 /s/ Stanley R. Zax
----------------------------------------
Stanley R. Zax, Chairman of the Board
& President (Principal Executive
Officer)
Date: August 14, 1996 /s/ Fredricka Taubitz
----------------------------------------
Fredricka Taubitz, Executive Vice
President & Chief Financial Officer
(Principal Accounting Officer)
PAGE 13
<PAGE>
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
[3.1] Certificate of Incorporation of Zenith as in effect immediately
prior to November 22, 1985. (Filed as Exhibit 3 to Zenith's
Amendment on Form 8, dated October 10, 1985, to Zenith's Current
Report on Form 8-K, dated July 26, 1985 and incorporated herein
by reference).
Certificate of Amendment to Certificate of Incorporation of
Zenith, effective November 22, 1985. (Filed as Zenith's Current
Report on Form 8-K, dated November 22, 1985 and incorporated
herein by reference).
[3.2] By-Laws of Zenith, as currently in effect. (Filed as Exhibit 3.2
to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1988 and incorporated herein by reference).
[10.1] Revolving Note Agreement, dated July 1, 1996, between Zenith and
City National Bank
[10.2] Second Amendment, dated June 28, 1996, to the Revolving Note
Agreement, dated December 15, 1994 between Zenith and Sanwa
Bank California
[10.3] Stock Option Agreement, dated as of March 15, 1996, between
Zenith and Stanley R. Zax
[10.4] Amendment No. 2 to the Zenith National Insurance Corp. Amended
and Restated Non-Qualified Stock Option Plan, dated as of April
9, 1996
[10.5] Zenith National Insurance Corp. 1996 Employee Stock Option Plan,
approved by the stockholders on May 22, 1996
[11] Statement re: computation of per share earnings incorporated 6
herein by reference to Part I, Item 1, Note 1 of the consolidated
financial statements
[27] Financial Data Schedule
</TABLE>
PAGE 14
<PAGE>
REVOLVING NOTE
$20,000,000.00 Beverly Hills, California
July 1, 1996
On July 1, 1997 ("Termination Date"), ZENITH NATIONAL INSURANCE CORP., a
Delaware corporation ("Borrower"), promises to pay to the order of CITY NATIONAL
BANK, a national banking association ("CNB"), at its office in this city, in
United States Dollars and in immediately available funds, the principal sum of
TWENTY MILLION DOLLARS ($20,000,000.00) ("Revolving Credit Commitment") or so
much thereof as may be advanced and then outstanding, plus interest on the
unpaid balance, until fully repaid, at a rate computed on the basis of a 360-day
year, actual days elapsed, at the rates, times and in accordance with the terms
set forth in the INTEREST RATE PROVISIONS attached hereto and by this reference
made a part hereof as though fully set forth herein at length.
Anything herein to the contrary notwithstanding, all principal and
interest remaining unpaid on the Termination Date, shall be immediately due and
payable.
As provided herein, all or any portion of the principal balance of this
Note may be borrowed, repaid and reborrowed from time to time prior to the
Termination Date, provided at the time of any borrowing no Event of Default (as
hereinafter defined) exists, and provided further that the total borrowings
outstanding at any one time shall not exceed the Revolving Credit Commitment.
Each borrowing and repayment shall be noted in the books and records of CNB.
The excess of borrowing over repayments shall evidence the principal balance due
hereon from time to time and at any time. Borrowing hereunder shall be
conclusively presumed to have been made to or for the benefit of Borrower when
noted in such books and records.
Interest accruing on this Note shall be payable quarterly, in arrears,
on the first (1st) day of each January, April, July, and October.
Borrower shall pay CNB a commitment fee equal to $25,000.00, payable in
four (4) equal consecutive quarterly installments of $6,250.00 each, payable on
the first (1st) day of each January, April, July and October, with the first
payment due October 1st.
Borrower shall pay CNB an unused facility fee equal to one-eighth of one
percent per annum (0.125%) applied on a daily basis to the unused portion of the
Revolving Credit Commitment, payable quarterly, in arrears, on the first (1st)
day of each January, April, July and October, with the first payment due October
1st.
The occurrence of any of the following with respect to Borrower shall
constitute an "Event of Default" hereunder:
1. Failure to make any payment of principal or interest when due under this
Note, when such failure continues for ten (10) days after notice from
CNB that Borrower is in default hereunder if payment is not made;
1
<PAGE>
2. Filing of a petition by or against Borrower under any provisions of the
BANKRUPTCY CODE;
3. Appointment of a receiver or an assignee for the benefit of Borrower's
creditors;
4. Commencement of dissolution or liquidation proceedings or the
disqualification of Borrower, whether a corporation, partnership, joint
venture or any other type of entity;
5. Any financial statement provided by Borrower to CNB is materially false
or misleading;
6. Any material default in the payment or performance of any material
obligation, or any material default under any material provisions of any
material contract or instrument pursuant to which Borrower has incurred
any material obligation for borrowed money, any material purchase
obligation or any other material liability of any kind to any person or
entity, including CNB;
7. Any sale or transfer of all or a substantial or material part of the
assets of Borrower, other than in the ordinary course of business; or
8. Any material violation, breach or default under this Note, any letter
agreement or any other contract or instrument executed in connection
with this Note or securing this Note.
Upon the occurrence of any Event of Default, CNB, at its option, may
declare all sums of principal and interest outstanding hereunder to be
immediately due and payable without presentment, demand, protest or notice of
dishonor all of which are expressly waived by Borrower. Borrower agrees to pay
all costs and expenses, including reasonable attorneys' fees, expended or
incurred by CNB (or allocable to CNB's in-house counsel) in connection with the
enforcement of this Note or the collection of any sums due hereunder and
irrespective of whether suit is filed. Any principal or interest not paid when
due hereunder shall thereafter bear additional interest from its due date at the
Overdue Rate set forth in the Interest Rate Provisions and continuing thereafter
until paid or cured, if curing is permitted.
This Note and all matters relating thereto, shall be governed by the
laws of the State of California.
ZENITH NATIONAL INSURANCE CORP., a
Delaware corporation
By: /s/ Stanley R. Zax
----------------------------------------
Stanley R. Zax, President and
Chairman of the Board
2
<PAGE>
INTEREST RATE PROVISION
The terms and provisions herein set forth shall control and determine the
rate, calculation and payment of interest under that $20,000,000.00 Revolving
Note ("Note"), dated July 1, 1996, executed by ZENITH NATIONAL INSURANCE CORP.,
a Delaware corporation ("Borrower"), in favor of CITY NATIONAL BANK, a national
banking association ("CNB").
1. DEFINITIONS. Except as otherwise defined herein or in the Note, the
following definitions apply:
1.1 "BUSINESS DAY" shall mean a day that CNB's Head Office is open and
conducts a substantial portion of its business.
1.2 "EUROCURRENCY RESERVE REQUIREMENT" shall mean for a LIBOR Loan for the
Interest Period therefor, the aggregate (without duplication) of the rates
(expressed as a decimal) of reserves (including, without limitation, any basic,
marginal, supplemental, or emergency reserves) that are required to be
maintained by banks during the Interest Period under any regulations of the
Board of Governors of the Federal Reserve System, or any other governmental
authority having jurisdiction with respect thereto, applicable to funding based
on so-called "Eurocurrency Liabilities", including Regulation D (12 CFR 224).
1.3 "INTEREST PERIOD" shall mean, as to any LIBOR Loan, (a) the period
commencing on the date the LIBOR Loan is made (including the date a Prime Loan
is converted to a LIBOR Loan, or a LIBOR Loan is renewed as a LIBOR Loan, which,
in the latter case, shall be the last day of the expiring Interest Period) and
ending one (1), two (2), three (3) or six (6) months thereafter, as selected by
the Borrower in its irrevocable Notice of Borrowing/Interest Selection;
provided, however, (y) any Interest Period that would end on a day not a
Business Day, shall extend to the next Business Day; and (z) no Interest Period
may extend beyond the Termination Date.
1.4 "LIBOR BASE RATE" shall mean the British Banker's Association
definition of the London InterBank Offered Rates as made available by Telerate
Monitor on Telerate Screen 3750, or such other information service available to
CNB, for the applicable Interest Period for the LIBOR Loan selected by Borrower
in its irrevocable Notice of Borrowing/Interest Selection, and as quoted by CNB
on the Business Day Borrower requests a LIBOR Loan.
1.5 "LIBOR INTEREST RATE" shall mean, for each Libor Loan, the rate per
year (rounded upward to the nearest one-sixteenth (1/16th) of one percent
(0.0625%), if necessary) determined by CNB to be the quotient of (a) the LIBOR
Base Rate divided by (b) one minus the Eurocurrency Reserve Requirement for the
Interest Period; which is expressed by the following formula:
LIBOR BASE RATE
1 - Eurocurrency Reserve Requirement
1.6 "LIBOR LOAN" shall mean a Loan which bears interest in relation to the
LIBOR Interest Rate.
1
<PAGE>
1.7 "LOAN(S)" shall mean the principal balance outstanding on the Note,
and any LIBOR Loan and/or any Prime Loan made thereunder, as the case may be.
1.8 "NOTICE OF BORROWING/INTEREST SELECTION" or "NOTICE" shall mean that
Notice of Borrowing/Interest Selection attached hereto as Exhibit "A".
1.9 "PRIME LOAN" shall mean a Loan which bears interest in relation to the
Prime Rate.
1.10 "PRIME RATE" shall mean the rate most recently announced by CNB at its
principal office in Beverly Hills, California, as its "Prime Rate." Any change
in the Prime Rate will be effective on the date such change is announced.
2. RATE OF INTEREST. Subject to Section 2.1, below, each Loan shall bear
interest on the unpaid principal amount therefrom the date of disbursement
through maturity (whether by acceleration or otherwise), at a rate equal to, at
the Borrower's option as indicated on Borrower's Notice of Borrowing/Interest
Selection, either (a) for a LIBOR Loan, the sum of the LIBOR Interest Rate plus
THREE-QUARTERS OF ONE percent (0.75%) per year, or (b) for a Prime Loan, the sum
of the Prime Rate, as it shall exist from time to time, minus FIFTY-FIVE
HUNDREDTHS OF ONE percent (0.55%) per year, in all cases computed on the basis
of a 360 day year, actual days elapsed. A Loan shall be a Prime Loan any time
it is not a LIBOR Loan.
2.1 OVERDUE INTEREST. Notwithstanding anything to the contrary contained
in the Note, upon the occurrence of an Event of Default, and the acceleration of
all sums of principal or interest to be due and payable, (and without
constituting a waiver of the Event of Default), the interest rate on the unpaid
principal balance shall be increased to a rate ("Overdue Rate") equal to two
percent (2.0%) per year higher than the interest rate as determined in paragraph
2, above, provided, however, for the purposes of this paragraph, a LIBOR Loan
shall be treated as a Prime Loan upon the end of an Interest Period. Interest
at the Overdue Rate shall be calculated on a 360 day basis, actual days elapsed,
on the outstanding principal balance and interest at said Overdue Rate shall be
due and owing, and shall accrue and be payable from the date that all sums of
principal or interest are due and payable due to the occurrence of the Event of
Default, to and including the date which is the earlier of the date of payment
in full of the amount owing under the Note, or the date of Borrower's cure of
such event (but only if such cure is permitted).
3. PAYMENT OF INTEREST. Interest on the Loans shall accrue daily and be
payable (a) quarterly, in arrears, on the first (1st) day of each January,
April, July, and October, with the first payment due October 1st; and (b) on the
maturity of the Note (whether accelerated or otherwise).
4. NOTICE OF BORROWING AND INTEREST SELECTION. Borrower may, on the date of
the Note, or from time to time thereafter, request that a Loan be a LIBOR
Loan (including conversion of a Prime Loan to a LIBOR Loan, or continuation
of a LIBOR Loan as a LIBOR Loan upon the expiration of the Interest Period)
or a Prime Loan by delivering to CNB, with respect to a LIBOR Loan, no
earlier than two (2) Business Days before the LIBOR Loan is to be made, and
with respect to a LIBOR Loan or Prime Loan, no later than one o'clock (1:00)
p.m., Pacific Time, on the day the Loan is to be made, its irrevocable
written Notice of Borrowing/Interest Selection. The Notice shall designate
(a) the date of the Loan, (b) the principal amount of the Loan, (c) whether
the Loan will be a LIBOR Loan or a Prime Loan, and (d) if a LIBOR Loan, the
Interest Period. The
2
<PAGE>
Notice shall be delivered to CNB at 400 N. ROXBURY DR., BEVERLY HILLS, CA,
90210, ATTENTION: ERICH BOLLINGER, WESTSIDE COMMERCIAL BANKING CENTER, or by
telephone facsimile to CNB at (310) 888-6146, or such other address or
facsimile number as CNB advises Borrower in writing. The Notice will not be
effective until actually received by CNB as herein provided. If Borrower
fails to select a LIBOR Loan in accordance herewith, any Loan made shall be a
Prime Loan, and any outstanding LIBOR Loan shall be deemed a Prime Loan upon
expiration of the Interest Period.
5. AVAILABILITY OF LIBOR LOANS. Notwithstanding anything herein to the
contrary, each LIBOR Loan shall be in the minimum amount of $500,000.00 and,
thereafter, in increments of $250,000.00. Borrower may not have more than five
(5) LIBOR Loans outstanding at any one time under the Revolving Credit
Commitment. Borrower may have Prime Loans and LIBOR Loans outstanding
simultaneously.
6. PREPAYMENT OF PRINCIPAL. Borrower may prepay the principal amount
outstanding on a Prime Loan at any time and in any amount without a prepayment
fee. Borrower may prepay the full outstanding principal balance on a LIBOR Loan
prior to the end of the Interest Period ("LIBOR Prepayment"), provided, however,
that any LIBOR Prepayment is subject to Borrower's concurrent payment of a
prepayment fee ("LIBOR Prepayment Fee") in the amount determined by the LIBOR
Prepayment Fee Formula set forth below. Borrower may not make a partial
principal prepayment on a LIBOR Loan.
6.1 Borrower must deliver to CNB written notice of its intention to make a
LIBOR Prepayment at least two (2) Business Days prior to the intended payment
date specifying the amount and date of the LIBOR Prepayment.
6.2 LIBOR Prepayment Fee Formula. Each LIBOR Prepayment shall be
accompanied by a LIBOR Prepayment Fee equal to the amount, if any, by which (a)
the additional interest which would have been earned by CNB on the LIBOR Loan
had it not been paid until the last day of the Interest Period, exceeds (b) the
interest which would have been recoverable by CNB placing the amount of the
LIBOR Loan on deposit in the LIBOR market for a period starting on the date on
which it was prepaid and ending on the last day of the applicable Interest
Period.
7. SUSPENSION OF LIBOR LOANS. In the event (a) CNB shall, on any Business
Day, be unable to determine the LIBOR Base Rate applicable for a new, continued,
or converted LIBOR Loan for any reason, or (b) any law, regulation, or
governmental order, rule or determination, shall make it unlawful for CNB to
make a LIBOR Loan, Borrower's right to select LIBOR Loans shall be suspended
until CNB is again able to determine the LIBOR Base Rate or make LIBOR Loans, as
the case may be, and during such suspension time, new Loans and LIBOR Loans
whose Interest Period terminate, may only be Prime Loans.
3
<PAGE>
EXHIBIT A
NOTICE OF BORROWING/INTEREST SELECTION
This Notice of Borrowing/Interest Selection ("Notice") is executed and
delivered by ZENITH NATIONAL INSURANCE CORP., a Delaware corporation
("Borrower"), to CITY NATIONAL BANK, a national banking association ("CNB"),
pursuant to that Revolving Note ("Note") dated July 1, 1996, executed by
Borrower in favor of CNB. Any terms not defined herein shall have the meanings
defined in the Note or the Interest Rate Provision.
1. REQUEST FOR A LOAN. Borrower requests a Loan under the Note as follows:
1.1 Interest Selection- State "LIBOR" or "Prime":______________________
1.2 Principal Amount of Loan: $ _____________________ [IF LIBOR LOAN, MINIMUM
OF $500,000 AND INCREMENTS OF $250,000]
1.3 LIBOR Loan- Effective Date of Interest Period: ____________________ ,
19 ___
1.4 LIBOR Loan - Interest Period: ________ month(s) [1, 2, 3 or 6 months
only]
2. CONVERSION TO LIBOR LOAN. Borrower requests conversion of the
outstanding Prime Loan to a LIBOR Loan.
2.1 Effective Date of Conversion: __________________, 19 ____
2.2 Principal Amount of Conversion: $ ________________ [MINIMUM OF
$500,000 AND INCREMENTS OF $250,000]
2.3 Interest Period: _________ month(s) [1, 2, 3 or 6 months only]
3. RENEWAL OF LIBOR LOAN. Borrower requests renewing an outstanding LIBOR
Loan as follows:
3.1 Principal Amount of Renewal of LIBOR Loan: $ ____________________
[INCREMENTS OF $ ] (Amount of LIBOR Loan not renewed as a LIBOR
------------------
Loan will be a Prime Loan)
3.2 Date of Renewal: ____________________, 19 ____ [LAST DATE OF
CURRENT INTEREST PERIOD]
3.3 Interest Period: ________ month(s) [1, 2, 3 or 6 months only]
4. CONVERSION TO PRIME LOAN. LIBOR Loans shall automatically convert to a
Prime Loan at the end of an Interest Period if CNB fails to timely receive a
Notice for an outstanding LIBOR Loan.
5. WARRANTY. In connection with the advance/conversion/renewal of the Loans
requested herein, Borrower hereby represents and warrants to CNB that, as of the
date of the such advance/conversion/renewal of the Loan requested herein, no
Event of Default has occurred and is continuing. (If the foregoing statement is
not true and correct, attach a statement specifying in detail the circumstances
thereof and the actions Borrower is taking or proposes to take with respect
thereto.)
This Notice is executed on _______________, 19___ , by an authorized
officer of Borrower, on behalf of Borrower.
"Borrower" ZENITH NATIONAL INSURANCE CORP. a
Delaware corporation
By:
------------------------------------
Its:
------------------------------------
<PAGE>
[LOGO]-REGISTERED TRADEMARK -CITY NATIONAL DISBURSEMENT INSTRUCTIONS
BANK
Branch: Westside CBC #067
------------------
Date: July 1, 1996
------------
City National Bank is authorized to disburse the proceeds of that certain
note dated July 1, 1996, in the amount of $20,000,000.00, executed by the
undersigned Borrower as follows:
<TABLE>
<CAPTION>
CREDIT ACCOUNT NO. IN THE NAME OF AMOUNT
<S> <C> <C>
$
- ---------------------- ------------------------------- -----------------
$
- ---------------------- ------------------------------- ----------------
ISSUE CASHIER'S CHECK(S)/DRAFT(S) PAYABLE TO:
$
- ---------------------- ------------------------------- ----------------
$
- ---------------------- ------------------------------- ----------------
WIRE FUNDS TO BANK ACCOUNT NO. IN THE NAME OF
$
- ---------------------- ------------------------------- ----------------
$
- ---------------------- ------------------------------- ----------------
RENEW LOAN NO. IN THE NAME OF
11552 Zenith National Insurance Corp. $
- ---------------------- ------------------------------- -----------------
$
- ---------------------- ------------------------------- ----------------
APPLY TO LOAN NO. IN THE NAME OF
$
- ---------------------- ------------------------------- ----------------
$
- ---------------------- ------------------------------- ----------------
REMAINING AMOUNT AVAILABLE AS OF THIS DATE $ 20,000,000.00
-----------------
TOTAL: $ 20,000,000.00
-----------------
</TABLE>
DISBURSE AS REQUESTED BY: (IDENTIFY PERSONS AUTHORIZED TO MAKE REQUESTS)
Stanley R. Zax, Fredricka Taubitz or Norman M. Dickson by verbal or written
- -----------------------------------------------------------------------------
request
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Zenith National Insurance Corp.,
a Delaware corporation
By: /s/ Stanley R. Zax
- --------------------------------------------------
Stanley R. Zax, Chairman of the Board/Pres.
- --------------------------------------------------
- --------------------------------------------------
- --------------------------------------------------
<PAGE>
[LOGO]-REGISTERED TRADEMARK-CITY NATIONAL BANK LOAN FEES AND CHARGES
Borrower: Zenith National Insurance Corp. Date: 7-1-96
------------------------------- -------
Branch Name and No.: Westside CBC #067
-----------------
Customer No.: 036-2090600 Note No.: 11552
----------- ------
In connection with the above referenced loan, fees and charges, as estimated,
are as follows:
Certificate of Status $6.00
Total Estimated Fees $6.00
Actual fees may be higher or lower than estimated fees. Any excess funds will
be deposited to Borrower's Checking Account or reimbursed by Cashier's Check.
If fees collected are insufficient to cover out of pocket costs, the Borrower
will be billed directly for the balance unless authorization to debit the
account is received.
Zenith National Insurance Corp., a
Delaware corporation
By: /s/ Stanley R. Zax
--------------------------------------------
Stanley R. Zax, Chairman of the Board/Pres.
================================================================================
To: City National Bank
I hereby authorize you to charge the aforementioned fees and charges to
depository account number _______________________.
- ------------------------- -----------------------
Date Borrower
<PAGE>
AMENDMENT TO LINE OF CREDIT AGREEMENT
This Second Amendment to Line of Credit Agreement (the "Amendment") is made
and entered into this 28th day of June, 1996, by and between SANWA BANK
CALIFORNIA (the "Bank") and ZENITH NATIONAL INSURANCE CORP. (the "Borrower")
with respect to the following:
This Amendment shall be deemed to be a part of and subject to that certain
Line of Credit Agreement dated as of December 15, 1994, as heretofore amended,
and any and all addenda and riders heretofore made (collectively the
"Agreement"). Unless otherwise defined herein, all terms used in this Amendment
shall have the same meanings as in the Agreement. To the extent that any of the
terms or provisions of this Amendment conflict with those contained in the
Agreement, the terms and provisions contained herein shall control.
WHEREAS, the Borrower and the Bank mutually desire to extend and/or modify
the Agreement.
NOW THEREFORE, for value received and hereby acknowledged, the Borrower and
the Bank agree as follows:
1. CHANGE IN INTEREST RATE. Section 1.02 C. 1 and 2 of the Agreement
are deleted in their entirety and the following is substituted in lieu thereof:
"1. REFERENCE RATE ADVANCES. A variable rate equivalent to an
index for a variable interest rate which is quoted, published or
announced from time to time by the Bank as its reference rate and
as to which loans may be made by the Bank at, below or above such
reference rate (the "Reference Rate") minus 0.50% per annum (the
"Variable Rate"). Interest shall be adjusted concurrently with
any change in the Reference Rate. An Advance based upon the
Variable Rate is hereinafter referred to as a "Reference Rate
Advance." Each such Reference Rate Advance must be in the
minimum amount of $100,000.00.
2. FED FUNDS ADVANCES. A variable rate per annum (the "Federal
Funds Rate"), for each day in which the Advance is based upon the
Federal Funds Rate (a "Fed Funds Advance"), equivalent to 0.75%
in excess of the interest rate equal to the weighted average of
the rates on overnight Federal funds transactions with members of
the Federal Reserve System, quoted to the Bank on such day by
Federal funds brokers of recognized standing which are selected
by the Bank in its sole discretion or, if such day is not a
business day, for the immediately preceding business day. With
respect to this section 1.02(C)(2), a business day means a day in
which banks are open generally in Chicago and New York for the
conduct of substantially all of their commercial lending
activities. Fed Funds Advances must be in the minimum amount of
$250,000.00.
2. MODIFICATION OF FINANCIAL CONDITION. Section 4.10 F. of the
Agreement is deleted in its entirety and the following is substituted in lieu
thereof:
"F. ADVANCES TO PERMA-BILT. Advances and loans extended to
Perma-Bilt of no more than $45,000,000".
3. CONFIRMATION OF OTHER TERMS AND CONDITIONS OF THE AGREEMENT.
Except as specifically provided in this Amendment, all other terms, conditions
and covenants of the Agreement unaffected by this Amendment shall remain
unchanged and shall continue in full force and effect and the Borrower hereby
covenants and agrees to perform and observe all terms, covenants and agreements
provided for in the Agreement, as hereby amended.
[PAGE 1 ENDS HERE. SIGNATURES APPEAR ON PAGE 2]
-1-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto
as of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA ZENITH NATIONAL INSURANCE CORP.
By: /s/ John C. Hyche By: /s/ Stanley R. Zax
------------------------------- ----------------------------------
Name: John C. Hyche Name: Stanley R. Zax
------------------------------ --------------------------------
Title: Vice President Title: President and Chairman of the
----------------------------- ------------------------------
Board
---------
-2-
<PAGE>
STOCK OPTION AGREEMENT
This Stock Option Agreement ("Option Agreement"), effective as of the 15th
day of March, 1996 (the "Effective Date"), is entered into on this 24th day of
May, 1996, between ZENITH NATIONAL INSURANCE CORP. ("ZENITH"), a Delaware
corporation, and STANLEY R. ZAX ("EMPLOYEE").
ZENITH desires to afford EMPLOYEE an opportunity to purchase ZENITH's one
dollar par value common stock (the "Common Stock"), as hereinafter provided,
pursuant to the terms of ZENITH's 1996 Employee Stock Option Plan (the "1996
Plan").
Now, therefore, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the parties hereto agree as
follows:
Section 1. GRANT OF OPTION. ZENITH hereby irrevocably grants to
EMPLOYEE the right and option (the "Option") to purchase all or any part of an
aggregate of One Million (1,000,000) shares of Common Stock (such number being
subject to adjustment as provided in Section 8 hereof) on the terms and
conditions herein set forth.
Section 2. PURCHASE PRICE. The purchase price of the Common Stock
subject to the Option shall be Twenty Three Dollars and Sixty-Two 1/2 Cents
($23.6250) per share.
<PAGE>
Section 3. TERMS OF OPTION. The term of the Option shall be for a
period commencing on the Effective Date and ending on March 14, 2006. The
Option may be exercised from time to time as set forth below in this Section 3,
provided, however, that notwithstanding the provisions set forth below, the
Option may be exercised in full upon the occurrence of the events set forth in
Section 6 or 7 hereof, or upon a "Change in Control" of ZENITH as defined in
Section 11.3 of that certain Employment Agreement dated December 6, 1994 between
ZENITH and EMPLOYEE (the "Employment Agreement") as such agreement is in effect
on the date hereof.
(a) During the period beginning on March 15, 1997 and ending on March
14, 1998, the Option may be exercised to the extent of one-fifth
(1/5th) of the aggregate number of shares set forth in Section 1
hereof;
(b) During the period beginning on March 15, 1998 and ending on March
14, 1999, the Option may be exercised to the extent of one-fifth
(1/5th) of the aggregate number of shares set forth in Section 1,
plus the excess of one-fifth (1/5th) of the aggregate number of
shares set forth in Section 1 over the number of shares actually
purchased pursuant to exercise of the Option during the period
ending on March 14, 1998;
2
<PAGE>
(c) During the period beginning on March 15, 1999 and ending on March
14, 2000, the Option may be exercised to the extent of one-fifth
(1/5th) of the aggregate number of shares set forth in Section 1,
plus the excess of two-fifths (2/5ths) of the aggregate number of
shares set forth in Section 1 over the number of shares actually
purchased pursuant to exercise of the Option during the period
ending on March 14, 1999;
(d) During the period beginning on March 15, 2000 and ending on March
14, 2001, the Option may be exercised to the extent of one-fifth
(1/5th) of the aggregate number of shares set forth in Section 1,
plus the excess of three-fifths (3/5ths) of the aggregate number
of shares set forth in Section 1 over the number of shares
actually purchased pursuant to exercise of the Option during the
period ending on March 14, 2000; and
(e) During the period beginning on March 15, 2001 and ending on March
14, 2006, the Option may be exercised to the extent not
previously exercised.
The purchase price of the Common Stock to be purchased hereunder shall be paid
by EMPLOYEE in full at the time of issuance of the shares: (1) in cash; (2)
with previously acquired shares of Common Stock having a fair market value equal
to the
3
<PAGE>
purchase price; (3) with a combination of cash and previously acquired shares of
Common Stock having an aggregate fair market value equal to the purchase price;
or (4) as otherwise permitted from time to time under the terms of the 1996
Plan. Except as provided in Section 6 or 7 hereof, the Option may not be
exercised at any time unless the EMPLOYEE shall have been in the continuous
employ of ZENITH or any subsidiary from the Effective Date to the date of
exercise of the Option.
Section 4. METHOD OF EXERCISE. EMPLOYEE may exercise his right
under the Option by delivering a notice of exercise in writing to ZENITH at its
principal corporate headquarters. Such notice shall state: (i) the number of
shares with respect to which the Option is then being exercised, (ii) the date
on which EMPLOYEE will take and pay for such shares, and (iii) the method of
payment for such shares. Stock certificates shall be registered in the name of
EMPLOYEE (or, subject to the requirements of applicable law, EMPLOYEE's nominee
or designee) and shall issue against receipt of payment in full in accordance
with the methods of exercise set forth in Section 3 hereof.
Section 5. NONTRANSFERABILITY. The Option shall not be
transferable otherwise than by will or the laws of descent and distribution, and
the Option may be exercised, during the lifetime of EMPLOYEE, only by him. More
particularly but without limiting the generality of the foregoing, the Option
may not be assigned, transferred (except as provided above), pledged or
hypothecated in any way, shall
4
<PAGE>
not be assignable by operation of law, and shall not be subject to execution,
attachment, or similar process. Any attempted assignment, transfer, pledge,
hypothecation, or other disposition of the Option contrary to the provisions
hereof, and the levy of any execution, attachment, or similar process upon
the Option shall be null and void and without effect.
Section 6. TERMINATION OF EMPLOYMENT. In the event EMPLOYEE
shall cease to be an employee of ZENITH or any subsidiary during the term of
this Agreement for any reason other than his death or his breach of any of his
material obligations under the Employment Agreement or any successor agreement,
EMPLOYEE shall have the right to exercise his rights under the Option as to all
or any portion of the aggregate number of shares set forth in Section 1 hereof
(without regard to Section 3 hereof) as to which he has not theretofore
exercised such rights, within three months from the date of termination of his
employment but in no event after March 14, 2006, whichever shall first occur.
The Option, to the extent not so exercised, shall thereupon terminate. The
granting of the Option shall not constitute or be evidence of any agreement or
undertaking, expressed or implied, on the part of ZENITH or any subsidiary to
employ EMPLOYEE for a specified period; nor shall it interfere with the right of
ZENITH or any subsidiary to terminate EMPLOYEE's employment at any time. In the
event of the termination of EMPLOYEE's employment by reason of EMPLOYEE's breach
of any of his
5
<PAGE>
material obligations under the Employment Agreement or any successor agreement,
the exercisability of the Option shall be as provided for in the Employment
Agreement or such successor agreement, as applicable; or if not provided for
therein, the Option shall be exercisable, to the extent exercisable on the date
of any such termination of employment, for a period of ninety (90) days
following the date of such termination.
Section 7. EXERCISE ON DEATH. If EMPLOYEE shall die during the
term of this Agreement while employed by ZENITH or any subsidiary or within
three (3) months following the date of termination of such employment, the
Option may be exercised, at any time within one (1) year following the date of
EMPLOYEE's death but in no event after March 14, 2006, whichever shall first
occur, as to all or any portion of the aggregate number of shares set forth in
Section 1 hereof as to which Employee has not theretofore exercised such rights,
and without regard to Section 3 hereof, by EMPLOYEE's executors or
administrators or by any person or persons who may have acquired the Option from
the EMPLOYEE by bequest or inheritance. The Option, to the extent not so
exercised, shall thereupon terminate.
Section 8. CHANGES IN CAPITAL STRUCTURE. In the event of any
merger, reorganization, consolidation, recapitalization, stock dividend or other
6
<PAGE>
change in corporate structure affecting the Common Stock, the Option shall be
adjusted as provided in Section 3 of the 1996 Plan.
Section 9. RIGHTS AS STOCKHOLDER. Except as expressly provided in
Section 8 hereof, EMPLOYEE shall have no rights as a stockholder with respect to
any optioned shares until EMPLOYEE has given written notice of exercise of the
Option, paid in full for such shares and, if requested by ZENITH, executed the
investment letter described in Section 10 hereof, including but not limited to
the occasion of any subdivision or consolidation of any ZENITH stock or
securities; or the payment of any stock dividend; or any other increase or
decrease in the number or amount of any ZENITH stock or securities; or any
rights with respect to any dissolution, liquidation, reorganization, merger, or
consolidation, or spin-off of assets or stock of ZENITH or another corporation.
Section 10. INVESTMENT LETTER. EMPLOYEE, by execution of this
Option Agreement, hereby represents and agrees that any Common Stock which has
not been registered under the provisions of the Securities Act of 1933, as
amended (the "Securities Act"), will be purchased for investment and not with a
view to distribution or resale. EMPLOYEE further agrees to execute, if
requested by the Company, prior to the issuance of any shares purchased by him
under the Option and as a condition upon which any such shares shall be issued,
excepting those
7
<PAGE>
shares which have been registered under the provisions of the Securities Act, a
letter in such form as ZENITH may reasonably request setting forth the
representations and agreements of EMPLOYEE that such shares are being purchased
for investment and not with a view to their resale or distribution.
Section 11. INVESTMENT RESTRICTION. Any shares issued upon the
exercise of the Option, excepting those shares which have been registered under
the provisions of the Securities Act, shall be acquired for investment purposes
only, and the certificates representing such shares shall bear a restrictive
investment legend to the following effect:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"). The shares
have been acquired for investment and may not be sold, transferred,
pledged, or hypothecated in the absence of an effective registration
statement for the shares under the Act or an opinion of counsel to
Zenith National Insurance Corp. that such transaction would not be in
violation of the provisions of the Act.
Section 12. GENERAL. ZENITH shall at all times during the term of
the Option reserve and keep available a number of shares of Common Stock
sufficient to satisfy the requirements of this Option Agreement, and shall pay
all original issue taxes with respect to the issuance of shares pursuant to this
Option Agreement and all other fees and expenses incurred by ZENITH in
connection therewith.
8
<PAGE>
Section 13. ARRANGEMENT FOR TAX PAYMENT. EMPLOYEE shall make any
arrangements required by ZENITH to provide that the amount of any tax required
to be withheld by ZENITH or any subsidiary as a result of the exercise of this
Option is available for payment of such tax withholding obligations.
IN WITNESS WHEREOF, ZENITH has caused this Option Agreement to be duly
executed and EMPLOYEE has hereunto set his hand on this 24th day of May, 1996.
ZENITH NATIONAL INSURANCE CORP.
[Corporate Seal] By: /s/ Fredricka Taubitz
---------------------
Its: Executive Vice President and C.F.O
-----------------------------------
ATTEST:
/s/ John J. Tickner
- -------------------------------
Secretary
/s/ Stanley R. Zax
------------------------------
EMPLOYEE
<PAGE>
AMENDMENT NO. 2
TO THE ZENITH NATIONAL INSURANCE CORP.
AMENDED AND RESTATED NON-QUALIFIED STOCK OPTION PLAN
Effective as of the date hereof, Subsection 6(d) of the Zenith
National Insurance Corp. Amended and Restated Non-Qualified Stock Option
Plan (the "Plan") shall be amended in its entirety to read as follows:
(d) METHOD OF EXERCISE. Subject to the terms of the option agreement,
Options may be exercised in whole or in part at any time during
the option period, by giving written notice of exercise to Zenith
at its principal corporate headquarters. Such notice shall
specify (i) the number of shares to be purchased, and (ii) the
date on which the Optionee will take and pay for such shares.
The Optionee may pay the option price by delivery of (i) cash or
cash equivalent (as approved by the Administrator), (ii)
previously acquired shares of Common Stock having a Fair Market
Value on the date of payment equal to the option price, (iii) an
executed irrevocable exercise notice to Zenith and irrevocable
instructions to a broker-dealer to sell a sufficient portion of
the optioned shares to pay the exercise price and deliver the
sale proceeds directly to Zenith (as approved by the
Administrator) or any other cashless exercise procedure approved
by the Administrator, or (iv) any combination of (i), (ii) and
(iii) such that the sum thereof equals the option price.
Certificates of Common Stock shall be registered in the name of
the person exercising the Option (or such person's designee) and
shall issue against receipt by Zenith of payment in full therefor
in accordance with the foregoing payment provision. All shares
purchased upon the exercise of rights granted by an Option shall
be fully paid and nonassessable.
IN WITNESS WHEREOF, this Amendment is executed this 9th day of
April, 1996.
ZENITH NATIONAL INSURANCE CORP.
By: /s/ Stanley Zax
----------------------------------
Its: Chairman and President
<PAGE>
ZENITH NATIONAL INSURANCE CORP.
1996 EMPLOYEE STOCK OPTION PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the Zenith National Insurance Corp. 1996 Employee
Stock Option Plan (the "Plan"). The Plan was adopted by the Board on March 7,
1996, as amended March 15, 1996, subject to the approval of the stockholders of
the Company, which approval was obtained on May 22, 1996. The purpose of the
Plan is to enable the Company to attract and retain highly qualified personnel
who will contribute to the Company's long term success by their ability,
ingenuity and industry and to provide incentives to the participating officers
and employees that are linked directly to increases in stockholder value and
will therefore inure to the benefit of all stockholders of the Company.
For purposes of the Plan, the following terms shall be defined as set forth
below:
(1) "ADMINISTRATOR" means, with respect to Participants other than
Executive Officers of Zenith, the Board; and, with respect to Participants
who are Executive Officers of Zenith, the Performance Bonus Committee or
other Committee in accordance with Section 2.
(2) "BOARD" means the Board of Directors of the Company.
(3) "CODE" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor thereto.
(4) "COMMITTEE" means the Performance Bonus Committee of the Board plus
such additional individuals as the Board shall designate in order to fulfill
(i) the Disinterested Persons requirement of Rule 16b-3 as promulgated by
the Securities and Exchange Commission (the "Commission") under the
Securities Exchange Act of 1934 (the "Exchange Act"), and as such Rule may
be amended from time to time, or any successor definition adopted by the
Commission and (ii) the "outside director" requirement of Section 162(m) of
the Code and the regulations promulgated thereunder, or any other committee
the Board may subsequently appoint to administer the Plan. The Committee
shall be composed entirely of individuals who meet the qualifications
referred to in Rule 16b-3 and Section 162(m).
(5) "COMPANY" means Zenith National Insurance Corp., a Delaware
corporation (or any successor corporation).
(6) "DISINTERESTED PERSON" shall have the meaning set forth in Rule
16b-3 of the Exchange Act, and as such Rule may be amended from time to
time, or any successor definition adopted by the Commission.
(7) "EFFECTIVE DATE" shall mean the date provided pursuant to Section
10.
(8) "ELIGIBLE EMPLOYEE" means an officer or employee of the Company or
any Subsidiary.
(9) "FAIR MARKET VALUE" means, as of any given date, with respect to any
awards granted hereunder, at the discretion of the Administrator and subject
to such limitations as the Administrator may impose, (A) if the Stock is
publicly traded, the closing sale price of the Stock on such date as
reported in the Wall Street Journal, or the average of the closing price of
the Stock on each day on which the Stock was traded over a period of up to
twenty trading days immediately prior to such date, (B) the
1
<PAGE>
fair market value of the Stock as determined in accordance with a method
prescribed in the agreement evidencing any award hereunder, or (C) the fair
market value of the Stock as otherwise determined by the Administrator in
the good faith exercise of its discretion.
(10) "LIMITED STOCK APPRECIATION RIGHT" means a Stock Appreciation Right
that can be exercised only in the event of a "Change in Control" (as defined
in any award agreement providing for the grant of a Limited Stock
Appreciation Right).
(11) "NON-QUALIFIED STOCK OPTION" means a Stock Option that is not an
"incentive stock option" within the meaning of Section 422 of the Code.
(12) "PARTICIPANT" means any Eligible Employee selected by the
Administrator, pursuant to the Administrator's authority in Section 2 below,
to receive grants of Stock Options, Stock Appreciation Rights, Limited Stock
Appreciation Rights or any combination of the foregoing.
(13) "STOCK" means the common stock, $1.00 par value, of the Company.
(14) "STOCK APPRECIATION RIGHT" means the right pursuant to an award
granted under Section 6 to receive an amount equal to the difference between
(A) the Fair Market Value, as of the date such Stock Appreciation Right or
portion thereof is surrendered, of the shares of Stock covered by such right
or such portion thereof, and (B) the aggregate exercise price of such right
or such portion thereof.
(15) "STOCK OPTION" means any Non-Qualified Stock Option to purchase
shares of Stock granted pursuant to Section 5.
(16) "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations (other than the last corporation) in the unbroken chain owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered in accordance with the requirements of Rule
16b-3 of the Exchange Act and of Section 162(m) of the Code (but only to the
extent necessary to maintain qualification of the Plan under Rule 16b-3 of the
Exchange Act and Section 162(m) of the Code). Unless otherwise determined by the
Board, the Plan shall be administered by the Board with respect to Participants
other than Executive Officers of Zenith and, with respect to Participants who
are Executive Officers of Zenith, by the Committee (initially, the Performance
Bonus Committee) which shall be appointed by the Board and which shall serve at
the pleasure of the Board.
Pursuant to the terms of the Plan, the Administrator shall have the power
and authority to grant to Eligible Employees: (a) Stock Options, (b) Stock
Appreciation Rights or Limited Stock Appreciation Rights, or (c) any combination
of the foregoing.
In particular, the Administrator shall have the authority:
(a) to select those employees of the Company and its subsidiaries who
shall be Participants;
(b) to determine whether and to what extent Stock Options, Stock
Appreciation Rights, Limited Stock Appreciation Rights, or a combination of
the foregoing, are to be granted hereunder to Participants;
(c) to determine the number of shares to be covered by each such award
granted hereunder;
2
<PAGE>
(d) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder, including the effect, if
any, of a change in control of the Company on any such award; and
(e) to determine the terms and conditions, not inconsistent with the
terms of the Plan, which shall govern all written instruments evidencing the
Stock Options, Stock Appreciation Rights, Limited Stock Appreciation Rights
or any combination of the foregoing.
The Administrator shall have the authority, in its discretion, to adopt,
alter and repeal such administrative rules, guidelines and practices governing
the Plan as it shall from time to time deem advisable; to interpret the terms
and provisions of the Plan and any award issued under the Plan (and any
agreements relating thereto); and to otherwise supervise the administration of
the Plan.
All decisions made by the Administrator pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and the
Participants.
SECTION 3. STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for issuance
under the Plan shall be 2,000,000 plus that number of shares reserved and
available for grant pursuant to new awards under the Zenith National Insurance
Corp. Non-Qualified Stock Option Plan (the "Old Stock Option Plan") immediately
prior to the time the Old Stock Option Plan is terminated, which time will be
the date the Company's stockholders approve the Plan. Such shares may consist,
in whole or in part, of authorized and unissued shares or treasury shares. The
aggregate number of shares of Stock as to which Stock Options, Stock
Appreciation Rights and Limited Stock Appreciation Rights may be granted to any
single individual during any one calendar year may not, subject to adjustment as
provided in this Section 3, exceed 1,000,000.
To the extent that a Stock Option expires or is otherwise terminated without
being exercised, such shares shall again be available for issuance in connection
with future awards under the Plan. If any shares of Stock have been pledged as
collateral for indebtedness incurred by a Participant in connection with the
exercise of a Stock Option and such shares are returned to the Company in
satisfaction of such indebtedness, such shares shall again be available for
issuance in connection with future awards under the Plan. Notwithstanding the
foregoing provisions of this paragraph, for purposes of determining the number
of shares of Stock available for issuance to persons subject to Section 162(m)
of the Code, such shares shall not again be available for issuance in connection
with future awards to such persons.
In the event of any merger, reorganization, consolidation, recapitalization,
stock dividend or other change in corporate structure affecting the Stock, a
substitution or adjustment shall be made in (i) the aggregate number of shares
reserved for issuance under the Plan and (ii) the kind, number and option price
of shares subject to outstanding Stock Options granted under the Plan. Such
other substitutions or adjustments shall be made as may be determined by the
Administrator, in its sole discretion. An adjusted option price shall also be
used to determine the amount payable by the Company upon the exercise of any
Stock Appreciation Right or Limited Stock Appreciation Right associated with any
Stock Option. In connection with any event described in this paragraph, the
Board may provide, in its discretion, for the cancellation of any outstanding
awards and payment in cash or other property therefor.
SECTION 4. ELIGIBILITY.
Officers (including officers who are directors of the Company) and employees
of the Company or any Subsidiary (the "Eligible Employees") who are responsible
for or are in a position to contribute to the long term success of the Company
shall be eligible to be granted Stock Options, Stock Appreciation Rights or
3
<PAGE>
Limited Stock Appreciation Rights hereunder. The Participants under the Plan
shall be selected from time to time by the Administrator, in its sole
discretion, from among the Eligible Employees recommended by the senior
management of the Company, and the Administrator shall determine, in its sole
discretion, the number of shares covered by each award.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone or in addition to other awards granted
under the Plan. Any Stock Option granted under the Plan shall be in such form as
the Administrator may from time to time approve, and the provisions of Stock
Option awards need not be the same with respect to each optionee. Recipients of
Stock Options shall enter into a subscription and/or award agreement with the
Company, in such form as the Administrator shall determine, which agreement
shall set forth, among other things, the option price of the option, the term of
the option and provisions regarding exercisability of the option granted
thereunder.
The Stock Options granted under the Plan shall be Non-Qualified Stock
Options.
The Administrator shall have the authority to grant any Eligible Employee
Non-Qualified Stock Options (with or without Stock Appreciation Rights or
Limited Stock Appreciation Rights). More than one option may be granted to the
same optionee and be outstanding concurrently hereunder.
Stock Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Administrator in its discretion
shall deem appropriate:
(1) OPTION PRICE. The option price per share of Stock purchasable under
a Stock Option shall be determined by the Administrator in its sole
discretion at the time of grant but shall not be less than the Fair Market
Value of the Stock on the date such Stock Option is granted.
(2) OPTION TERM. The term of each Stock Option shall be fixed by the
Administrator, but no Stock Option shall be exercisable more than ten (10)
years after the date such Stock Option is granted.
(3) EXERCISABILITY. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Administrator at or after grant. The Administrator may provide, in its
discretion, that any Stock Option shall be exercisable only in installments,
and the Administrator may waive such installment exercise provisions at any
time in whole or in part based on such factors as the Administrator may
determine, in its sole discretion.
(4) METHOD OF EXERCISE. Subject to Section 5(3) above, Stock Options may
be exercised in whole or in part at any time during the option period, by
giving written notice of exercise to the Company specifying the number of
shares to be purchased, accompanied by payment in full of the aggregate
option price by delivery of (i) cash or cash equivalents (as approved by the
Administrator), (ii) previously acquired shares of Common Stock having a
Fair Market Value on the date of payment equal to the aggregate option
price, (iii) an executed irrevocable exercise notice to the Company and
irrevocable instructions to a broker-dealer to sell a sufficient portion of
the optioned shares to pay the aggregate option price and deliver the sale
proceeds directly to the Company (as approved by the Administrator) or any
other cashless exercise procedure approved by the Administrator, or (iv) any
combination of (i), (ii) and (iii) such that the sum thereof equals the
aggregate option price. An optionee shall generally have the rights to
dividends and any other rights of a stockholder with respect
4
<PAGE>
to the Stock subject to the option only after the optionee has given written
notice of exercise, has paid in full for such shares, and, if requested, has
given the representation described in paragraph (1) of Section 9.
The Administrator may require the voluntary surrender of all or a
portion of any Stock Option granted under the Plan as a condition precedent
to the grant of a new Stock Option. Subject to the provisions of the Plan,
such new Stock Option shall be exercisable at the price, during such period
and on such other terms and conditions as are specified by the Administrator
at the time the new Stock Option is granted; PROVIDED, HOWEVER, should the
Administrator so require, the number of shares subject to such new Stock
Option shall not be greater than the number of shares subject to the
surrendered Stock Option. Upon their surrender, Stock Options shall be
canceled and the shares previously subject to such canceled Stock Options
shall again be available for grants of Stock Options and other awards
hereunder, except as otherwise provided herein with respect to persons
subject to Section 162(m) of the Code.
(5) LOANS. The Company may make loans available to Stock Option holders
in connection with the exercise of outstanding options granted under the
Plan, as the Administrator, in its discretion, may determine. Such loans
shall (i) be evidenced by promissory notes entered into by the Stock Option
holders in favor of the Company, (ii) be subject to the terms and conditions
set forth in this Section 5(5) and such other terms and conditions, not
inconsistent with the Plan, as the Administrator shall determine, (iii) bear
interest, if any, at such rate as the Administrator shall determine, and
(iv) be subject to Board approval (or to approval by the Administrator to
the extent the Board may delegate such authority). In no event may the
principal amount of any such loan exceed the sum of (x) the aggregate option
price less the aggregate par value of the shares of Stock covered by the
option, or portion thereof, exercised by the holder, and (y) any Federal,
state, and local income tax attributable to such exercise. The initial term
of the loan, the schedule of payments of principal and interest under the
loan, the extent to which the loan is to be with or without recourse against
the holder with respect to principal or interest and the conditions upon
which the loan will become payable in the event of the holder's termination
of employment shall be determined by the Administrator. Unless the
Administrator determines otherwise, when a loan is made, shares of Stock
having a Fair Market Value at least equal to the principal amount of the
loan shall be pledged by the holder to the Company as security for payment
of the unpaid balance of the loan, and such pledge shall be evidenced by a
pledge agreement, the terms of which shall be determined by the
Administrator, in its discretion; PROVIDED, HOWEVER, that each loan shall
comply with all applicable laws, regulations and rules of the Board of
Governors of the Federal Reserve System and any other governmental agency
having jurisdiction.
(6) NON-TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
Administrator subject to the limitations on transferability set forth in
Rule 16b-3, no Stock Option shall be transferable by the optionee, and all
Stock Options shall be exercisable, during the optionee's lifetime, only by
the optionee.
(7) TERMINATION BY DEATH. If an Optionee should die while employed by
the Company or any of its subsidiaries or within three (3) months of the
termination of such employment, any Stock Option held by such optionee may
thereafter be exercised, to the extent the optionee would have been entitled
to do so at the date of death or the termination of employment (whichever
first occurs) or on such accelerated basis as the Administrator shall
determine at or after grant. Such option may be so exercised at any time
within one (1) year from the date of such optionee's death or until the
expiration of the stated term of
5
<PAGE>
such Stock Option, whichever period is shorter, by the optionee's executors
or administrators or by any person or persons who shall have acquired the
Stock Option from the optionee by bequest, inheritance or otherwise.
(8) TERMINATION OTHER THAN BY DEATH. In the event an optionee shall
cease to be an employee of the Company or its subsidiaries for any reason
other than death, any Stock Option held by the optionee may be exercised
within three (3) months from the date of termination of employment (or until
the expiration of the stated term of such Stock Option, if earlier) to the
extent such Stock Option was exercisable as of the date of such termination
of employment or on such accelerated basis as the Administrator shall
determine at or after grant.
SECTION 6. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS.
(1) GRANT AND EXERCISE. Stock Appreciation Rights and Limited Stock
Appreciation Rights may be granted either alone ("Free Standing Rights") or in
conjunction with all or part of any Stock Option granted under the Plan
("Related Rights"). In the case of a Non-Qualified Stock Option, Related Rights
may be granted either at or after the time of the grant of such Stock Option.
A Related Right or applicable portion thereof granted in conjunction with a
given Stock Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Option, except that, unless
otherwise provided by the Administrator at the time of grant, a Related Right
granted with respect to less than the full number of shares covered by a related
Stock Option shall only be reduced if and to the extent that the number of
shares covered by the exercise or termination of the related Stock Option
exceeds the number of shares not covered by the Related Right.
A Related Right may be exercised by an optionee, in accordance with
paragraph (2) of this Section 6, by surrendering the applicable portion of the
related Stock Option. Upon such exercise and surrender, the optionee shall be
entitled to receive an amount determined in the manner prescribed in paragraph
(2) of this Section 6. Stock Options which have been so surrendered, in whole or
in part, shall no longer be exercisable to the extent the Related Rights have
been so exercised.
(2) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Administrator, including the
following:
(a) Stock Appreciation Rights that are Related Rights ("Related Stock
Appreciation Rights") shall be exercisable only at such time or times and to
the extent that the Stock Options to which they relate shall be exercisable
in accordance with the provisions of Section 5 and this Section 6 of the
Plan; PROVIDED, HOWEVER, that no Related Stock Appreciation Right shall be
exercisable during the first six months of its term, except that this
additional limitation shall not apply in the event of death or disability of
the optionee prior to the expiration of such six-month period.
(b) Upon the exercise of a Related Stock Appreciation Right, an optionee
shall be entitled to receive up to, but not more than, an amount in cash or
that number of shares of Stock (or in some combination of cash and shares of
Stock) equal in value to the excess of the Fair Market Value of one share of
Stock as of the date of exercise over the option price per share specified
in the related Stock Option multiplied by the number of shares of Stock in
respect of which the Related Stock Appreciation Right is being exercised,
with the Administrator having the right to determine the form of payment.
6
<PAGE>
(c) Related Stock Appreciation Rights shall be exercisable or
transferable only when and to the extent that the underlying Stock Option
would be exercisable or transferable under paragraphs (3) and (6) of Section
5 of the Plan.
(d) Upon the exercise of a Related Stock Appreciation Right, the Stock
Option or part thereof to which such Related Stock Appreciation Right is
related shall be deemed to have been exercised for the purpose of the
limitation set forth in Section 3 of the Plan on the number of shares of
Stock to be issued under the Plan, provided, however, that with respect to
grants made to persons not subject to Section 162(m) of the Code, such
exercise shall be deemed to take place for such purposes only to the extent
of the number of shares issued under the Related Stock Appreciation Right.
(e) Stock Appreciation Rights that are Free Standing Rights ("Free
Standing Stock Appreciation Rights") shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Administrator at or after grant; PROVIDED, HOWEVER, that no Free Standing
Stock Appreciation Right shall be exercisable during the first six months of
its term, except that this limitation shall not apply in the event of death
or disability of the recipient of the Free Standing Stock Appreciation Right
prior to the expiration of such six-month period.
(f) The term of each Free Standing Stock Appreciation Right shall be
fixed by the Administrator, but no Free Standing Stock Appreciation Right
shall be exercisable more than ten (10) years after the date such right is
granted.
(g) Upon the exercise of a Free Standing Stock Appreciation Right, a
recipient shall be entitled to receive up to, but not more than, an amount
in cash or that number of shares of Stock (or any combination of cash or
shares of Stock) equal in value to the excess of the Fair Market Value of
one share of Stock as of the date of exercise over the price per share
specified in the Free Standing Stock Appreciation Right (which price shall
be no less than 100% of the Fair Market Value of the Stock on the date of
grant) multiplied by the number of shares of Stock in respect to which the
right is being exercised, with the Administrator having the right to
determine the form of payment.
(h) Free Standing Stock Appreciation Rights shall be exercisable or
transferable only when and to the extent that a Stock Option would be
exercisable or transferable under paragraphs (3) and (6) of Section 5 of the
Plan.
(i) In the event a Participant who has received Free Standing Stock
Appreciation Rights shall cease to be an employee of the Company or its
subsidiaries for any reason, such rights shall be exercisable to the same
extent that a Stock Option would have been exercisable in the event of such
termination of employment as set forth in Sections 5(7) and 5(8).
(j) Limited Stock Appreciation Rights may only be exercised within the
30-day period following a "Change in Control" (as defined by the
Administrator in the agreement evidencing such Limited Stock Appreciation
Right) and, with respect to Limited Stock Appreciation Rights that are
Related Rights ("Related Limited Stock Appreciation Rights"), only to the
extent that the Stock Options to which they relate shall be exercisable in
accordance with the provisions of Section 5 and this Section 6 of the Plan;
PROVIDED, HOWEVER, that no Related Limited Stock Appreciation Right shall be
exercisable during the first six months of its term, except that this
additional limitation shall not apply in the event of death or disability of
the optionee prior to the expiration of such six-month period.
(k) Upon the exercise of a Limited Stock Appreciation Right, the
recipient shall be entitled to receive an amount in cash equal in value to
the excess of the "Change in Control Price" (as defined in
7
<PAGE>
the agreement evidencing such Limited Stock Appreciation Right) of one share
of Stock as of the date of exercise over (A) the option price per share
specified in the related Stock Option, or (B) in the case of a Limited Stock
Appreciation Right which is a Free Standing Stock Appreciation Right, the
price per share specified in the Free Standing Stock Appreciation Right,
such excess to be multiplied by the number of shares in respect of which the
Limited Stock Appreciation Right shall have been exercised.
SECTION 7. AMENDMENT AND TERMINATION.
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made that would impair the rights of a
Participant under any award theretofore granted without such Participant's
consent, or that without the approval of the stockholders (as described below)
would:
(1) except as provided in Section 3, increase the total number of shares
of Stock reserved for the purpose of the Plan;
(2) change the class of officers and employees eligible to participate
in the Plan; or
(3) extend the maximum option period under paragraph (2) of Section 5 of
the Plan.
Notwithstanding the foregoing, stockholder approval under this Section 8
shall only be required at such time and under such circumstances as stockholder
approval would be required under Rule 16b-3 of the Exchange Act and/or Section
162(m) of the Code with respect to any material amendment to any employee
benefit plan of the Company.
The Administrator may amend the terms of any award theretofore granted,
prospectively or retroactively, but, subject to Section 3 above, no such
amendment shall impair the rights of any holder without his or her consent.
SECTION 8. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive
compensation. With respect to any payments not yet made to a Participant by the
Company, nothing contained herein shall give any such Participant any rights
that are greater than those of a general creditor of the Company.
SECTION 9. GENERAL PROVISIONS.
(1) The Administrator may require each person purchasing shares pursuant
to a Stock Option to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to distribution thereof.
The certificates for such shares may include any legend which the
Administrator deems appropriate to reflect any restrictions on transfer. All
certificates for shares of Stock delivered under the Plan shall be subject
to such stock-transfer orders and other restrictions as the Administrator
may deem advisable under the rules, regulations, and other requirements of
the Commission, any stock exchange upon which the Stock is then listed, and
any applicable federal or state securities law, and the Administrator may
cause a legend or legends to be placed on any such certificates to make
appropriate reference to such restrictions.
(2) Nothing contained in the Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of
the Plan shall not confer upon any officer or other employee of the Company
any right to continued employment with the Company, as the case may be, nor
shall it interfere in any way with the right of the Company to terminate the
employment of any of its officers or employees at any time.
8
<PAGE>
(3) Each Participant shall, no later than the date as of which the value
of an award first becomes includible in the gross income of the Participant
for federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Administrator regarding payment of, any federal, state,
or local taxes of any kind required by law to be withheld with respect to
the award. The obligations of the Company under the Plan shall be
conditional on the making of such payments or arrangements, and the Company
shall, to the extent permitted by law, have the right to deduct any such
taxes from any payment of any kind otherwise due to the Participant.
(4) No member of the Board or the Administrator, nor any officer or
employee of the Company acting on behalf of the Board or the Administrator,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of the
Board or the Administrator and each and any officer or employee of the
Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such
action, determination or interpretation.
SECTION 10. EFFECTIVE DATE OF PLAN.
The Plan became effective (the "Effective Date") on March 7, 1996, the date
the Board of Directors formally approved the Plan, as amended March 15, 1996,
subject to the approval of the stockholders of the Corporation, which approval
was obtained on May 22, 1996.
SECTION 11. TERM OF PLAN.
No Stock Option, Stock Appreciation Right or Limited Stock Appreciation
Right shall be granted pursuant to the Plan on or after the tenth anniversary of
the date on which the stockholders approved the Plan, but awards theretofore
granted may extend beyond that date.
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 657,237
<DEBT-CARRYING-VALUE> 56,076
<DEBT-MARKET-VALUE> 54,854
<EQUITIES> 31,493
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 783,679
<CASH> 8,091
<RECOVER-REINSURE> 66,545
<DEFERRED-ACQUISITION> 21,313
<TOTAL-ASSETS> 1,100,952
<POLICY-LOSSES> 504,149
<UNEARNED-PREMIUMS> 129,926
<POLICY-OTHER> 10,125
<POLICY-HOLDER-FUNDS> 13,060
<NOTES-PAYABLE> 81,675
0
0
<COMMON> 24,365
<OTHER-SE> 300,254
<TOTAL-LIABILITY-AND-EQUITY> 1,100,952
220,492
<INVESTMENT-INCOME> 24,890
<INVESTMENT-GAINS> 8,050
<OTHER-INCOME> 14,795
<BENEFITS> 147,844
<UNDERWRITING-AMORTIZATION> 42,251
<UNDERWRITING-OTHER> 25,373
<INCOME-PRETAX> 35,065
<INCOME-TAX> 11,965
<INCOME-CONTINUING> 23,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,100
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
