UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1997
Commission file number 1-10861
GUARANTY NATIONAL CORPORATION
.............................
(Exact name of registrant as specified in its charter)
Colorado 84-0445021
........ ..........
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
9800 South Meridian Boulevard
Englewood, Colorado 80112
..................................................
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code(303) 754-8400
..............
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X No
As of May 9, 1997, there were 14,985,497 shares of
Registrant's $1.00 par value common stock issued and
outstanding exclusive of shares held by registrant.
<PAGE>
GUARANTY NATIONAL CORPORATION
Form 10-Q Index
For the Quarter Ended March 31, 1997
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report 3
Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1997 and
December 31, 1996 4
Consolidated Statements of Earnings for the three
months ended March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2.Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
PART 2.OTHER INFORMATION 14
SIGNATURES 15
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Guaranty National Corporation
We have reviewed the accompanying consolidated balance
sheet of Guaranty National Corporation and subsidiaries (the
"Company") as of March 31, 1997, and the related
consolidated statements of earnings and cash flows for the
three-month periods ended March 31, 1997 and 1996. These
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such consolidated
financial statements for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet
of the Company as of December 31, 1996, and the related
consolidated statements of earnings, changes in
shareholders' equity and cash flows for the year then ended
(not presented herein); and in our report dated February 14,
1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated
balance sheet as of December 31, 1996 is fairly stated, in
all material respects, in relation to the consolidated
balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Denver, Colorado
April 29, 1997
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
Investments:
Fixed maturities held to maturity, at cost $73,029 $80,271
Fixed maturities available for sale,
at market 417,287 390,290
-------- --------
490,316 470,561
Equity securities, at market 94,950 88,102
Other long-term investments 15,176 13,585
Short-term investments 69,453 94,993
-------- --------
Total investments 669,895 667,241
Cash 3,068 3,988
Accrued investment income 7,602 7,971
Accounts receivable, (less allowance of
$171 - 1997 and 1996) 49,057 45,557
Reinsurance recoverables and prepaids,
(less allowance of$200 - 1997 and 1996) 87,444 90,781
Property and equipment (less accumulated
depreciation of $14,461 - 1997 and
$13,508 - 1996) 29,283 29,833
Deferred policy acquisition costs 45,558 44,456
Goodwill (less accumulated amortization of
$6,703 - 1997 and $6,423 - 1996) 34,359 34,639
Other assets 1,920 4,626
-------- --------
Total assets $928,186 $929,092
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses $295,605 $303,266
Unpaid loss adjustment expenses 65,928 65,142
Unearned premiums 162,037 154,242
Notes payable 101,500 101,688
Reinsurance payables and deposits 7,346 7,268
Other liabilities 56,655 59,447
-------- --------
Total liabilities 689,071 691,053
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value;
authorized, 6,000,000 shares;
none issued and outstanding
Common stock, $1 par value;
authorized, 30,000,000 shares;
issued 14,975,497 shares - 1997
and 1996 14,975 14,975
Capital in excess of par 121,272 121,272
Retained earnings 91,231 84,685
Net unrealized investment gains 11,637 17,107
-------- --------
Total shareholders' equity 239,115 238,039
-------- --------
Total liabilities and shareholders' equity $928,186 $929,092
======== ========
See notes to consolidated financial statements.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Three Months Ended
March 31,
1997 1996
-------- --------
(Unaudited)
Revenue:
Premiums earned $128,675 $115,470
Net investment income 10,745 9,253
Realized investment gains 1,412 1,981
-------- --------
140,832 126,704
-------- --------
Expenses:
Losses and loss adjustment
expenses incurred 88,862 84,845
Policy acquisition costs 35,970 29,082
General and administrative 2,580 3,528
Interest 1,653 1,720
Other 347 288
-------- --------
129,412 119,463
-------- --------
Earnings before income taxes 11,420 7,241
Income taxes 3,002 1,454
-------- --------
Net earnings $8,418 $5,787
======== ========
Earnings per common share $0.56 $0.39
======== ========
Dividends per common share $0.125 $0.125
======== ========
See notes to consolidated financial statements.
<PAGE>
GUARANTY NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
1997 1996
-------- --------
(Unaudited)
Operating Activities:
Premiums collected $132,528 $120,610
Net investment income collected 9,649 9,459
Losses and loss adjustment expenses paid (89,801) (84,425)
Policy acquisition costs and general and
administrative expenses paid (42,982) (39,789)
Interest paid (1,636) (1,712)
Other receipts (payments) (550) 3,715
-------- --------
Net cash provided by operating activities 7,208 7,858
-------- --------
Investing Activities:
Maturities of fixed maturities
held to maturity 4,131
Maturities of fixed maturities
available for sale 12,115 15,508
Sales of fixed maturities
available for sale 18,057 22,323
Sales of equity securities 9,079 9,204
Sales of property and equipment 264
Redemption of mortage loans 3
Net change in short-term investments 25,551 1,927
Purchases of fixed maturities
held to maturity (8,506)
Purchases of fixed maturities
available for sale (60,443) (24,011)
Purchases of equity securities (13,631) (8,761)
Net change in other long-term investments (483) (321)
Purchases of property and equipment (708) (1,436)
-------- --------
Net cash (used in) provided by
investing activities (6,068) 5,930
-------- --------
Financing Activities:
Repayment of notes payable (188) (750)
Dividends paid (1,872) (1,870)
-------- --------
Net cash used in financing activities (2,060) (2,620)
-------- --------
Net Increase (Decrease) in Cash (920) 11,168
Cash, Beginning of Period 3,988 6,794
-------- --------
Cash, End of Period $3,068 $17,962
======== ========
See notes to consolidated financial statements.
<PAGE>
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial
statements of Guaranty National Corporation and subsidiaries
(the "Company") have been prepared in accordance with
generally accepted accounting principles applicable to
interim reporting and do not include all of the information
and footnotes required for complete financial statements.
In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
three months ended March 31, 1997, are not necessarily
indicative of the results that may be expected for the year
ending December 31, 1997.
Although these financial statements are unaudited, they
have been reviewed by the Company's independent accountants,
Deloitte & Touche LLP, for conformity with accounting
requirements for interim financial reporting. Their report
on such review is included herein. These financial
statements should be read in conjunction with the financial
statements and related notes included in the Company's
Annual Report to Shareholders and Form 10-K for the year
ended December 31, 1996, for the more complete explanations
therein.
Certain reclassifications have been made to the 1996
financial statements to conform with presentations used in
1997.
NOTE 2 - EARNINGS PER SHARE
Earnings per common share has been computed using the
weighted average number of shares and equivalent shares
outstanding of 14,987,533 and 14,963,367 for the three
months ended March 31, 1997, and 1996, respectively. The
common stock equivalents are stock options which result in a
dilutive effect from assumed exercise of the options.
During the first quarter of 1997, Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share"
was issued. This SFAS is effective for financial statements
issued for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted. The
SFAS replaces primary earnings per share with basic earnings
per share (computed by dividing income available to common
stockholders (the numerator) by the weighted-average number
of common shares outstanding (the denominator during the
period). Adoption of SFAS No. 128 would have had no effect
on earnings per share for March 31, 1997 and 1996.
NOTE 3 - INVESTMENTS
At March 31, 1997, and December 31, 1996, the estimated
aggregate fair value of fixed maturities held to maturity
was $73,015,000 and $81,430,000, respectively, the cost of
fixed maturities available for sale was $416,607,000 and
$382,415,000, respectively, and the cost of equity
securities was $77,727,000 and $69,658,000, respectively.
At March 31, 1997, and December 31, 1996, the Company had
investments in noninvestment grade securities with a cost of
$62,751,000 and $55,205,000 respectively, which are carried
at fair values of $63,052,000 and $56,477,000, respectively.
<PAGE>
Realized investment gains (losses), which includes gains
(losses) on calls of fixed maturities, for the three months
ended March 31, 1997 and 1996, as well as a write down for
other-than-temporary investment impairments of approximatley
$160,000 and $134,000 for the three months ended March 31,
1997 and 1996, respectively, are as follows (in thousands):
March 31, March 31,
Three Months Ended 1997 1996
- ------------------ -------- --------
Fixed maturities
available for sale:
Gains $476 $660
Losses (379) (20)
------ ------
97 640
------ ------
Equity securities:
Gains 2,325 1,806
Losses (1,010) (465)
----- ------
1,315 1,341
------ ------
Total $1,412 $1,981
====== ======
NOTE 4 - REINSURANCE
In the ordinary course of business, the Company reinsures
certain risks, generally on an excess of loss basis with
other insurance companies. Such reinsurance arrangements
serve to limit the Company's maximum loss per occurrence on
casualty losses to $400,000, $300,000 on property losses and
$600,000 for catastrophe losses. Reinsurance does not
discharge the primary liabilitiy of the original insurer.
Amounts recoverable from reinsurers are recognized and
estimated in a manner consistent with the claim liabilities
arising from the reinsured policies and incurred but not
reported losses.
Premiums, losses, and loss adjustment expenses, including
the effect of reinsurance, are comprised of (in thousands):
Three Months Ended March 31,
1997 1996
---------------------- ----------------------
Written Earned Written Earned
-------- -------- -------- --------
Premiums:
Direct $135,488 $129,770 $125,202 $118,556
Assumed 12,187 9,862 11,837 9,559
Ceded (9,378) (10,957) (13,426) (12,645)
-------- -------- -------- --------
Net $138,297 $128,675 $123,613 $115,470
======== ======== ======== ========
% Assumed
to Net 8.81% 9.58%
==== ====
Losses and loss
adjustment expenses: Incurred Incurred
-------- --------
Direct $85,051 $86,357
Assumed 9,086 4,162
Ceded (5,275) (5,674)
------- -------
Net $88,862 $84,845
======= =======
NOTE 5 - COMMITMENTS AND CONTINGENCIES
During 1995, the Company acquired Viking Insurance Company
of Wisconsin ("Viking") in a business combination accounted
for as a purchase. As part of the 1995 Viking acquisition,
and based upon Viking's favorable loss development since the
acquisition date, the Company estimates that it will pay
Talegen Holdings, Inc. ("Seller") an additional purchase
price in the maximum amount agreed to in the purchase
agreement. This amount, which is
<PAGE>
approximately $4,333,000 plus interest at 6.28%, will be
payable to the Seller as of December 31, 1998. The Company
has accrued this amount and the related interest payable in
the accompanying consolidated balance sheet.
As discussed in the Company's report on Schedule 14D-9,
filed with the Securities and Exchange Commission on May 22,
1996, as amended on June 1, 1996 and June 7, 1996 and June
19, 1996, three separate complaints naming the Company and
one or more of its directors, and Orion Capital Corporation
("Orion"), as defendants were filed on behalf of the
Company's shareholders, alleging that the Orion tender offer
was unfair and inadequate. On July 2, 1996, counsel for
Orion and the Company signed a Memorandum of Understanding
providing for the settlement and dismissal of the three
cases, based on the revisions which the Purchasers had made
in the terms of the Offer to Purchase. In the judgment of
the Company's management, the costs incurred to defend and
settle these complaints will not have a materially adverse
effect on the results of the Company's operations. The
estimated settlement costs have been accrued in the
Company's consolidated financial statements as of March 31,
1997.
In addition to the three complaints described above, the
Company is subject to litigation in the normal course of
operating its insurance business. The Company is not
engaged in any such litigation which it believes would have
a material adverse impact on its financial condition or
result of operations, taking into account the reserves
established therefore and giving effect to insurance.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results for the Quarters Ended March 31, 1997 and March 31, 1996
Guaranty National Corporation and its subsidiaries (the
"Company") manage their property and casualty business in
three operating units: commercial lines, personal lines and
collateral protection insurance. Gross premiums written and
GAAP combined ratios by operating unit for the quarters
ended March 31, 1997 and 1996, are summarized below:
Three Months Ended
March 31,
1997 1996
------- --------
(Dollars in thousands)
Personal Lines:
Gross premiums written $82,721 $65,282
GAAP combined ratio 96.7% 101.0%
Commercial Lines:
Gross premiums written $42,298 $51,964
GAAP combined ratio 104.8% 104.4%
Collateral Protection:
Gross premiums written $22,656 $19,793
GAAP combined ratio 97.1% 97.5%
Total:
Gross premiums written $147,675 $137,039
GAAP combined ratio 99.1% 101.6%
Personal lines gross premiums written increased 27% for the
first quarter of 1997 compared to the first quarter of 1996.
The premium volume growth in the private passenger line of
business was due mainly to newly-enacted legislation in the
state of California which requires all drivers to maintain
liability insurance. This change in California law resulted
in a significant increase in the personal lines one-month
product business. First quarter 1997 gross premiums written
in the state of California were $37.4 million compared to
$18.8 million for the same period in 1996, representing 45%
of total personal lines premiums for the quarter. Personal
lines policies in-force at March 31, 1997 increased 23% from
December 31, 1996. Although the extent and duration of the
increase in California premium can not be predicted, the
Company believes it will continue to record significant
premium increases through the remainder of 1997.
The personal lines loss ratio (incurred losses and loss
adjustment expense) for the first quarter of 1997 was 71.5%
compared to 75.5% for the first quarter of 1996. The
decrease in the loss ratio resulted from a 6.3 point
decrease in the incurred loss component, partially offset by
an increase in the loss adjustment expense component of 2.3
points. The lower incurred loss component was primarily due
to lower claim frequency. The loss adjustment expense ratio
increased 2.3 points due mainly to this unit's emphasis on
improving claim handling and on reducing insurance fraud,
which resulted in higher legal expenses. During the second
quarter of 1997, the Company will open a second claims
office in California in anticipation of increased claim
activity as a result of the growth in California.
The personal lines expense ratio was 25.2% for the first
quarter of 1997, compared to 25.5% for the first quarter of
1996. The lower expense ratio is primarily due to spreading
fixed costs over our increased premium volume and a greater
concentration of one-month product business in the state of
California, which has a lower overall agent commission rate.
The personal lines overall GAAP combined ratio of 96.7%
improved 4.3 points over the first quarter of 1996
principally from the decrease in the loss ratio discussed
above.
Commercial lines gross premiums written decreased 19% for
the first quarter of 1997 compared to the first quarter of
1996, primarily as a result of a 26% decrease in premiums
from the commercial nonstandard division, partially offset
by a 16% increase in the commercial standard division. The
majority of the decrease is due to lower production in
<PAGE>
commercial auto, umbrella and other programs;
increased competition from large standard carriers entering
the nonstandard marketplace; and agent and program
cancellations during 1996. The commercial nonstandard
division plans to replace a portion of this premium loss by
appointing new agents, identifying new business
opportunities and more closely monitoring the production of
existing agents. The increase in gross premiums written for
the commercial standard division is primarily the result of
two new contract branch offices opened subsequent to the
first quarter of 1996, one in the state of Florida and the
other in the state of Missouri, and an overall increase in
premium production for 1997 in existing offices compared to
the first quarter of 1996.
The commercial lines loss ratio for the first quarter of
1997 was 70.1% compared to 71.3% for the same period last
year. The loss incurred component decreased by 1.3 points
and the loss adjustment expenses component increased by 0.1
point. The improvement in the loss incurred component was
principally caused by lower claim frequency and severity
within the commercial lines unit.
The commercial lines expense ratio increased 1.6 points to
34.7% for the first quarter of 1997 from 33.1% for 1996's
first quarter, due mainly to a decrease in net premiums
written, the effects of which were partially offset by lower
salary and benefit expenses resulting from the Company not
replacing vacancies created by normal attrition. The
commercial lines overall GAAP combined ratio of 104.8%
increased slightly by 0.4 points for the first quarter of
1997 compared to the first quarter of 1996.
The collateral protection unit's gross premiums written
increased 14% for the first quarter of 1997 compared to the
first quarter of 1996. The premium volume growth is
primarily due to continued increased writing in the
automobile financing GAP and mortgage fire programs as well
as the addition of a new warranty program. Gross premiums
written from the automobile financing GAP and mortgage fire
products for the first quarter of 1997 were $6,778,000, a
45% increase compared to gross premiums in the first quarter
of 1996 of $4,664,000. First quarter 1997 gross premiums
written from the warranty program were $1,194,000.
The GAAP combined ratio for the collateral protection unit
decreased to 97.1% for the first quarter of 1997 compared to
97.5% for the first quarter of 1996. The loss incurred
component decreased 11.0 points in the first quarter of 1997
compared to the first quarter of 1996. The loss incurred
component for the first quarter of 1996 was abnormally high
due to the Northeast blanket vendor single interest and
Puerto Rico business which experienced unfavorable results
in early 1996. During 1996, the unit implemented
underwriting and pricing adjustments and canceled
problematic accounts. The unit's expense ratio increased
11.8 points for the first quarter of 1997 compared to the
first quarter of 1996, primarily due to higher agency
contingent commissions, which were proportionately increased
as a result of the improved loss ratio.
The Company operates under a reinsurance contract that
provides both excess of loss and property catastrophe
coverage up to $6,000,000 per occurrence for all major lines
of business. This primary reinsurance contract serves to
limit the Company's maximum loss per occurrence on casualty
losses to $400,000, $300,000 on property losses and
$600,000 for catastrophe losses. The Company also has an
additional layer of catastrophe coverage up to 95% of
$14,000,000 per loss occurrence, for total catastrophe
protection of $20,000,000. The Company continues to utilize
facultative reinsurance for certain risks, primarily
umbrella and property coverages.
The Company's insurance operating units in total showed
$473,000 of adverse development in 1997 on 1996 and prior
loss reserves, net of reinsurance compared to $463,000 of
redundant development in the first quarter of 1996 on 1995
and prior loss reserves, net of reinsurance. This
development equates to 0.2% and (0.2%) of net loss reserves
carried at the end of the previous years 1996 and 1995,
respectively. The adverse development in the first quarter
of 1997 was caused primarily by incurred but not reported
losses being greater than expected for the collateral
protection unit.
For the first three months of 1997 and 1996, the Company's
catastrophe losses were minimal. In addition, during the
first quarter of 1997, the Company's known exposure to
environmental losses, such as asbestos and pollution
contamination, did not materially change from year end 1996.
<PAGE>
Overall, the Company reported net earnings for the first
quarter of 1997 of $8,418,000, or $0.56 per share, compared
to net earnings of $5,787,000, or $0.39 per share, for the
first quarter of 1996. Net earnings increased 45% primarily
as a result of the lower loss ratio and the growth of the
personal lines unit as discussed above.
The Company's interest expense decreased slightly for the
first quarter of 1997 compared to the first quarter of 1996,
due to a lower debt level.
Pretax net investment income increased $1,492,000 to
$10,745,000 in the first quarter of 1997 from $9,253,000 for
the first quarter of 1996, while after-tax net investment
income increased to $8,098,000 for the quarter ended March
31, 1997, from $7,201,000 for the same period in 1996.
These increases are due mainly to continuing positive cash
flow and increased earnings from limited partnership equity
interests.
The investment yield, on an after-tax basis, remained
constant at approximately five percent for the first
quarters of 1997 and 1996. After-tax realized investment
gains in the first quarters of 1997 and 1996 were $918,000
and $1,288,000, respectively, including other-than-
temporary investment impairments of $104,000 and $87,000,
after-tax, for the three-month periods ending March 31, 1997
and 1996, respectively. The realized investment gains were
primarily attributable to sales from the Company's equities
portfolio. The strong equity market has enabled the Company
to take the realized gains without reducing its total
investments in equities. The Company's overall investment
portfolio continues to be invested primarily in fixed
maturities and short-term investments which represented 84%
and 85% of the portfolio as of March 31, 1997 and
December 31, 1996, respectively.
Securities are classified as available for sale and
recorded at fair value, unless they meet the Company's
criteria for classification as held to maturity. Such
criteria include investment grade bonds with stated
maturities of less than 10 years. The unrealized investment
gains on fixed maturities available for sale and on equity
securities as of March 31, 1997, were $680,000 and
$17,223,000, respectively. This compares to unrealized
investment gains on fixed maturities available for sale and
on equity securities as of December 31, 1996, of $7,875,000
and $18,444,000, respectively. Higher interest rates in the
first quarter of 1997 had a negative impact on the market
value of the fixed investment portfolio. The market value
of the Company's fixed maturity investments generally varies
inversely with changes in the general level of interest
rates. The market value of Federal agency and other
mortgage pool securities of $46,988,000, as of March 31,
1997, is subject to additional market value volatility due
to the impact of changes in prepayment rates on the
mortgages which underlie such securities.
The Company's holdings in noninvestment grade bonds for
the first quarter of 1997 were approximately nine percent of
total invested assets, compared to approximately eight
percent of total invested assets at December 31, 1996.
Total investments held by the Company include highly rated
fixed maturities (rated AAA or AA) of 50% at both March 31,
1997, and December 31, 1996. The Company continues to
maintain a low level of real estate related investments,
consisting primarily of federal agency mortgage pools.
Liquidity and Capital Resources
Positive cash flow from operations of $7,208,000 was
generated for the first quarter of 1997 compared to
$7,858,000 for the first quarter of 1996. The operating
cash flow for the first quarter of 1997 was reduced by the
payout of the Company's bonus program. Payments made in
1996 under this program were substantially less due to
unsatisfactory 1995 operating results. In addition, there
are higher levels of loss and loss adjustment expense
payments and acquisition expenses related to premium
production. These higher payments were partially offset by
higher premiums collected and increased net investment
income in 1997 compared to 1996.
Net cash used in investing activities was $6,068,000 for
the first quarter of 1997. This compares to net cash from
investing activities for the first quarter of 1996 of
$5,930,000. The decrease in funds from investing activities
during the first three months of 1997, relates to increased
investments made in and decreased sales of both fixed
maturities and equity securities.
Cash used in financing activities was $2,060,000 and
$2,620,000 for the first quarters of 1997 and 1996,
respectively. During the first quarter of 1997, the Company
made a quarterly principal payment of $187,500 on its 6.5%
<PAGE>
term loan compared to the first quarter of 1996, when
the Company made its first principal payment of $750,000 on
this loan. As of March 31, 1997, the Company had funds
available of $10,000,000 under the Company's reducing,
revolving credit facility. The Company declared and paid a
regular quarterly dividend of $0.125 per share in both the
first quarters of 1997 and 1996.
The Company's level of short-term investments at March 31,
1997, and December 31, 1996, was 10.3% and 14.2%,
respectively, of total invested assets. The decrease
resulted from management's decision to reduce its cash
position and to shift its investment mix to securities of a
longer average duration to achieve a better yield on our
investment portfolio. Overall, the Company maintains
sufficient liquidity in its investment portfolio through its
short-term investment holdings to meet anticipated claim
payments and other insurance payment requirements.
Forward Looking Statements
Some of the statements made in this Form 10-Q Report, as
well as statements made by the Company in periodic press
releases, oral statements made by the Company's officials to
analysts and shareholders in the course of presentations
about the Company and conference calls following earnings
releases, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act"). Such forward-looking statements
involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or
achievements of the Company to be materially different from
any future results, performance or achievements expressed or
implied by the forward-looking statements. Such factors
include, among other things, (i) general economic and
business conditions; (ii) interest rate changes; (iii)
competition and regulatory environment in which the Company
operates; (iv) claims frequency; (v) claims severity; (vi)
severe adverse weather conditions; (vii) the cost of
automobile repair; (viii) the number of new and renewal
policy applications submitted by the Company's agents; (ix)
changes in the renewal rate on policies written in the state
of California; and (x) other factors over which the Company
has little or no control.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is routinely engaged in litigation incidental
to its business. At March 31, 1997, there were three
lawsuits outstanding , which were related to the Orion
Tender Offer. During the third quarter of 1996 the Company
signed a Memorandum of Understanding with respect to the
settlement and dismissal of the three complaints. In the
judgment of the Company's management, the costs incurred to
defend and settle these complaints will not have a
materially adverse effect on the results of the Company's
operations. The estimated settlement costs have been
accrued in the Company's consolidated financial statements.
See Note 17 to the Consolidated Financial Statements in the
Company's Annual Report to Shareholders and Form 10-K for
the year ended December 31, 1996, for further discussion of
these costs. In the judgment of the Company's management,
at March 31, 1997, the Company is not engaged in any such
litigation which it believes would have a material adverse
impact on its financial condition or results of operation,
taking into account the reserves established therefore and
giving effect to insurance.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On April 18, 1997, the Company announced that W.
Marston Becker, Chief Executive Officer and Chairman of the
Board of Orion Capital Corporation and a member of the
Company's Board of Directors, would assume the position of
Chairman of the Board of the Company upon the death of Alan
R. Gruber. Mr. Becker was scheduled to succeed Mr. Gruber
as Chairman of the Board on May 13, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Guaranty National Corporation Equity Incentive
Plan, approved by the Company's Board of
Directors on October 29, 1996 and subject to shareholder
approval on May 13, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the
Registrant during the quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Guaranty National Corporation
By: s/James R. Pouliot
James R. Pouliot, President
and Chief Executive Officer
(Principal Executive Officer)
By: s/Michael L. Pautler
Michael L. Pautler, Senior Vice
President-Finance and Treasurer
(Principal Financial Officer)
By: s/Shelly J. Hengsteler
Shelly J. Hengsteler
Controller and Assistant Treasurer
(Principal Accounting Officer)
DATE: May 9, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FINANCIAL SCHEDULE CONTAINS SUMMARY FINANACIAL
INFORMATION EXTRACTED FROM GUARANTY NATIONAL
CORPORATION'S FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 417,287
<DEBT-CARRYING-VALUE> 73,029
<DEBT-MARKET-VALUE> 73,015
<EQUITIES> 94,950
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 490,316
<CASH> 3,068
<RECOVER-REINSURE> 85,564
<DEFERRED-ACQUISITION> 45,558
<TOTAL-ASSETS> 928,186
<POLICY-LOSSES> 361,533
<UNEARNED-PREMIUMS> 162,037
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 101,500
0
0
<COMMON> 136,247
<OTHER-SE> 102,868
<TOTAL-LIABILITY-AND-EQUITY> 928,186
128,675
<INVESTMENT-INCOME> 10,745
<INVESTMENT-GAINS> 1,412
<OTHER-INCOME> 0
<BENEFITS> 88,862
<UNDERWRITING-AMORTIZATION> 35,970
<UNDERWRITING-OTHER> 2,580
<INCOME-PRETAX> 11,420
<INCOME-TAX> 3,002
<INCOME-CONTINUING> 8,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,418
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
<RESERVE-OPEN> 284,681
<PROVISION-CURRENT> 88,389
<PROVISION-PRIOR> 473
<PAYMENTS-CURRENT> 26,910
<PAYMENTS-PRIOR> 62,891
<RESERVE-CLOSE> 283,742
<CUMULATIVE-DEFICIENCY> 473
</TABLE>
Exhibit A
GUARANTY NATIONAL CORPORATION
EQUITY INCENTIVE PLAN
1
Section 1. Purpose of the Plan
The purpose of the Guaranty
National Corporation Equity Incentive Plan (the "Plan")
is to further the interests of Guaranty National
Corporation (the "Company") and its shareholders by
providing long-term performance incentives to those key
employees of the Company and its Subsidiaries who are
largely responsible for the management, growth and
protection of the business of the Company and its
Subsidiaries.
Section 2. Definitions
For purposes of the Plan, the
following terms shall be defined as set forth below:
(a) "Award" means any Option,
Performance Unit, Restricted Stock, Stock granted as a
bonus or in lieu of other awards, other Stock-Based
Award, Tax Bonus or other cash payments granted to a
Participant under the Plan.
(b) "Award Agreement" shall mean the written
agreement, instrument or document evidencing an Award.
(c) "Change of Control" means and
includes each of the following: (i) the acquisition,
in one or more transactions, of beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange
Act) by any person or entity or any group of persons or
entities who constitute a group (within the meaning of
Section 13(d)(3) of the Exchange Act), other than (x)
Orion Capital Corporation or a direct or indirect
subsidiary thereof or (y) a trustee or other fiduciary
holding securities under an employee benefit plan of
the Company or a Subsidiary, of any securities of the
Company such that, as a result of such acquisition,
such person, entity or group either (A) beneficially
owns (within the meaning of Rule l3d-3 under the Ex
change Act), directly or indirectly, more than 20% of
the Company's outstanding voting securities entitled to
vote on a regular basis for a majority of the members
of the Board of Directors of the Company or (B)
otherwise has the ability to elect, directly or indi
rectly, a majority of the members of the Board; (ii) a
change in the composition of the Board of Directors of
the Company such that a majority of the members of the
Board of Directors of the Company are not Continuing
Directors; or
<PAGE>
(iii) the stockholders of the Company approve a merger
or consolidation of the Company with any other
corporation, other than a merger or consolidation which
would result in the voting securities of the Company
outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving
entity) at least 80% of the total voting power rep
resented by the voting securities of the Company or
such surviving entity outstanding immediately after
such merger or consolidation, or the stockholders of
the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition
by the Company of (in one or more transactions) all or
substantially all of the Company's assets.
Notwithstanding the foregoing, the preceding
events shall not be deemed to be a Change of Control if,
prior to any transaction or transactions causing such
change, a majority of the Continuing Directors shall have
voted not to treat such transaction or transactions as
resulting in a Change of Control.
(d) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(e) A "Continuing Director" means, as of any date of
determination, any member of the Board of Directors of the
Company who (i) was a member of such Board on the effective
date of the Plan or (ii) was nominated for election or
elected to such Board with the affirmative vote of a
majority of either the Continuing Directors who were members
of such Board at the time of such nomination or election, or
the shares beneficially owned by Orion Capital Corporation
and its subsidiaries.
(f) "Exchange Act" means the Securities Exchange Act
of 1934, as amended from time to time.
(g) "Fair Market Value" means, with respect to Stock,
Awards, or other property, the fair market value of such
Stock, Awards, or other property determined by such methods
or procedures as shall be established from time to time by
the Committee in good faith and in accordance with
applicable law. Unless otherwise determined by the
Committee, the Fair Market Value of Stock shall mean the
mean of the high and low sales prices of Stock on the
relevant date as reported on the stock exchange or market on
which the Stock is primarily traded, or if no sale is made
on such date, then the Fair Market Value is the weighted
average of the mean of the high and low sales prices of the
Stock on the next preceding day and the next succeeding day
on which such sales were made, as reported on the stock
<PAGE>
exchange or market on which the Stock is primarily traded.
(h) "ISO" means any Option designated as an incentive
stock option within the meaning of Section 422 of the Code.
(i) "Option" means a right granted to a Participant
pursuant to Section 6(b) to purchase Stock at a specified
price during specified time periods. An Option may be
either an ISO or a nonstatutory Option (an Option not
designated as an ISO).
(j) "Performance Unit" means a right granted to a
Participant pursuant to Section 6(c) to receive a payment in
cash and or stock equal to the increase in the book value of
the Company during specified time periods if specified
performance goals are met.
(k) "Stock-Based Award" means a right that may be de
nominated or payable in, or valued in whole or in part by
reference to the market value of, Stock, including, but not
limited to, any Option, Stock granted as a bonus or Awards
in lieu of cash obligations.
(l) "Subsidiary" shall mean any corporation,
partnership, joint venture or other business entity of which
50% or more of the outstanding voting power is beneficially
owned, directly or indirectly, by the Company.
(m) "Tax Bonus" means a payment in cash in the year in
which an amount is included in the gross income of a Partici
pant in respect of an Award of an amount equal to the fed
eral, foreign, if any, and applicable state and local income
and employment tax liabilities payable by the Participant as
a result of (i) the amount included in gross income in re
spect of the Award and (ii) the payment of the amount in
clause (i) and the amount in this clause (ii). For purposes
of determining the amount to be paid to the Participant pur
suant to the preceding sentence, the Participant shall be
deemed to pay federal, foreign, if any, and state and local
income taxes at the highest marginal rate of tax imposed
upon ordinary income for the year in which an amount in
respect of the Award is included in gross income, after
giving effect to any deductions therefrom or credits
available with respect to the payment of any such taxes.
Section 3. Administration of the Plan
The Plan shall be administered by the Compensation
Committee of the Board of Directors of the Company (the "Com
mittee"). No member of the Committee while serving as such
shall be eligible for participation in the Plan. Any action
of the Committee in administering the Plan shall be final,
conclusive and binding on all persons, including the
Company, its Subsidiaries, employees, Participants, persons
<PAGE>
claiming rights from or through Participants and
stockholders of the Company.
Subject to the provisions of the Plan, the Commit
tee shall have full and final authority in its discretion
(a) to select the key employees who will receive Awards
pursuant to the Plan ("Participants"), (b) to determine the
type or types of Awards to be granted to each Participant,
(c) to determine the number of shares of Stock to which an
Award will relate, the terms and conditions of any Award
granted under the Plan (including, but not limited to, re
strictions as to transferability or forfeiture,
exercisability or settlement of an Award and waivers or
accelerations thereof, and waivers of or modifications to
performance conditions relating to an Award, based in each
case on such considerations as the Committee shall deter
mine) and all other matters to be determined in connection
with an Award; (d) to determine whether, to what extent, and
under what circumstances an Award may be settled, or the ex
ercise price of an Award may be paid, in cash, Stock, other
Awards or other property, or an Award may be cancelled, for
feited, or surrendered; (e) to determine whether, and to
certify that, performance goals to which the settlement of
an Award is subject are satisfied; (f) to correct any defect
or supply any omission or reconcile any inconsistency in the
Plan, and to adopt, amend and rescind such rules and regu
lations as, in its opinion, may be advisable in the adminis
tration of the Plan; and (g) to make all other
determinations as it may deem necessary or advisable for the
administration of the Plan. The Committee may delegate to
officers or managers of the Company or any Subsidiary or to
unaffiliated service providers the authority, subject to
such terms as the Committee shall determine, to perform
administrative functions and to perform such other functions
as the Committee may determine, to the extent permitted
under Rule 16b-3, Section 162(m) of the Code and applicable
law.
Section 4. Participation in the Plan
Participants in the Plan shall be selected by the
Committee from among the key employees of the Company and
its Subsidiaries.
Section 5. Plan Limitations; Shares Subject to the Plan
(a) Subject to the provisions of Section 8(a) hereof,
the aggregate number of shares of common stock, $1.00 par
value, of the Company (the "Stock") available for issuance
as Awards under the Plan shall not exceed 700,000 shares.
No Award may be granted if the number of shares to
which such Award relates, when added to the number of shares
previously issued under the Plan and the number of shares
which may then be acquired pursuant to other outstanding,
unexercised Awards, exceeds the number of shares available
<PAGE>
for issuance pursuant to the Plan. If any shares subject to
an Award are forfeited or such Award is settled in cash or
otherwise terminates for any reason whatsoever without an
actual distribution of shares to the Participant, any shares
counted against the number of shares available for issuance
pursuant to the Plan with respect to such Award shall, to
the extent of any such forfeiture, settlement, or
termination, again be available for Awards under the Plan;
provided, however, that the Committee may adopt procedures
for the counting of shares relating to any Award to ensure
appropriate counting, avoid double counting, and provide for
adjustments in any case in which the number of shares
actually distributed differs from the number of shares
previously counted in connection with such Award.
(b) Subject to the provisions of Section 8(a) hereof,
the aggregate number of Performance Units which may be
awarded under the Plan shall not exceed 350,000. If any
Performance Units awarded under the Plan shall be forfeited
or cancelled, such Performance Units shall thereafter be
available for award under the Plan.
Section 6. Awards
(a) General. Awards may be granted on the terms and
conditions set forth in this Section 6. In addition, the
Committee may impose on any Award or the exercise thereof,
at the date of grant or thereafter (subject to Section
8(a)), such additional terms and conditions, not
inconsistent with the provisions of the Plan, as the
Committee shall determine, including terms requiring
forfeiture of Awards in the event of termination of
employment by the Participant; provided, however, that the
Committee shall retain full power to accelerate or waive any
such additional term or condition as it may have previously
imposed. All Awards shall be evidenced by an Award
Agreement.
(b) Options. The Committee may grant Options to
Participants on the following terms and conditions:
(i) Exercise Price. The exercise price of each
Option shall be determined by the Committee at the time the
Option is granted, but (except as provided in Section 7(a))
the exercise price of any Option shall not be less than the
Fair Market Value of the shares covered thereby at the time
the Option is granted.
(ii) Time and Method of Exercise. The Committee
shall determine the time or times at which an Option may be
exercised in whole or in part, whether the exercise price
shall be paid in cash or by the surrender at Fair Market
Value of Stock, or by any combination of cash and shares of
Stock, including, without limitation, cash, Stock, other
Awards, or other property (including notes or other contrac
tual obligations of Participants to make payment on a de
<PAGE>
ferred basis, such as through "cashless exercise" arrange
ments, to the extent permitted by applicable law), and the
methods by which Stock will be delivered or deemed to be de
livered to Participants.
(iii) Incentive Stock Options. The terms of any
Option granted under the Plan as an ISO shall comply in all
respects with the provisions of Section 422 of the Code, in
cluding, but not limited to, the requirement that no ISO
shall be granted more than ten years after the effective
date of the Plan.
(c) Performance Units. The Committee is authorized to
grant Performance Units to Participants on the following
terms and conditions:
(i) Performance Criteria and Period. At the time
it makes an award of Performance Units, the Committee shall
establish both the performance goal or goals and the
performance period or periods applicable to the Performance
Units so awarded. A performance goal shall be a goal,
expressed in terms of growth in book value, earnings per
share, return on equity or any other financial or other mea
surement deemed appropriate by the Committee, or may relate
to the results of operations or other measurable progress of
either the Company as a whole or the Participant's
Subsidiary, division or department. The performance period
will be the period of time over which one or more of the
performance goals must be achieved, which may be of such
length as the Committee, in its discretion, shall select.
Neither the performance goals nor the performance periods
need be identical for all Performance Units awarded at any
time or from time to time. The Committee shall have the
authority, in its discretion, to accelerate the time at
which any performance period will expire or waive or modify
the performance goals of any Participant or Participants.
The Committee may also make such adjustments, to the extent
it deems appropriate, to the performance goals for any
Performance Units awarded to compensate for, or to reflect,
any material changes which may have occurred in accounting
practices, tax laws, other laws or regulations, the
financial structure of the Company, acquisitions or
dispositions of business or Subsidiaries or any unusual
circumstances outside of management's control which, in the
sole judgment of the Committee, alters or affects the
computation of such performance goals or the performance of
the Company or any relevant Subsidiary, division or
department.
(ii) Value of Performance Units. The value of
each Performance Unit at any time shall equal the book value
per share of the Company's Stock, as such value appears on
the consolidated balance sheet of the Company as of the end
of the fiscal quarter immediately preceding the date of valu
ation.
<PAGE>
(d) Bonus Stock and Awards in Lieu of Cash
Obligations. The Committee is authorized to grant Stock as
a bonus, or to grant Stock or other Awards in lieu of
Company or Subsidiary obligations to pay cash or deliver
other property under other plans or compensatory
arrangements; provided that, in the case of Participants
subject to Section 16 of the Exchange Act, such cash amounts
are determined under such other plans in a manner that
complies with applicable requirements of Rule 16b-3 so that
the acquisition of Stock or Awards hereunder shall be exempt
from Section 16(b) liability. Stock or Awards granted
hereunder shall be subject to such other terms as shall be
determined by the Committee.
(e) Other Stock-Based Awards. The Committee is autho
rized, subject to limitations under applicable law, to grant
to Participants such other Stock-Based Awards in addition to
those provided in Section 6(b) hereof, as deemed by the
Committee to be consistent with the purposes of the Plan.
The Committee shall determine the terms and conditions of
such Awards. Stock delivered pursuant to an Award in the
nature of a purchase right granted under this Section 6(f)
shall be purchased for such consideration and paid for at
such times, by such methods, and in such forms, including,
without limitation, cash, Stock, other Awards, or other prop
erty, as the Committee shall determine.
(f) Cash Payments. The Committee is authorized, sub
ject to limitations under applicable law, to grant to Par
ticipants Tax Bonuses and other cash payments, whether
awarded separately or as a supplement to any Stock-Based
Award. The Committee shall determine the terms and condi
tions of such Awards.
Section 7. Additional Provisions Applicable to Awards
(a) Stand-Alone, Additional, Tandem, and Substitute
Awards. Awards granted under the Plan may, in the
discretion of the Committee, be granted either alone or in
addition to, in tandem with, or in substitution for, any
other Award granted under the Plan or any award granted
under any other plan of the Company or any Subsidiary, or
any business entity acquired by the Company or any
Subsidiary, or any other right of a Participant to receive
payment from the Company or any Subsidiary. If an Award is
granted in substitution for another Award or award, the
Committee shall require the surrender of such other Award or
award in consideration for the grant of the new Award.
Awards granted in addition to, or in tandem with other
Awards or awards may be granted either as of the same time
as, or a different time from, the grant of such other Awards
or awards. The per share exercise price of any Option, or
purchase price of any other Award conferring a right to
purchase Stock:
(i) granted in substitution for an outstanding
<PAGE>
Award or award, shall be not less than the lesser of (A) the
Fair Market Value of a share of Stock at the date such
substitute Award is granted or (B) such Fair Market Value at
that date, reduced to reflect the Fair Market Value at that
date of the Award or award required to be surrendered by the
Participant as a condition to receipt of the substitute
Award; or
(ii) retroactively granted in tandem with an out
standing Award or award, shall not be less than the lesser
of the Fair Market Value of a share of Stock at the date of
grant of the later Award or at the date of grant of the ear
lier Award or award.
(b) Exchange and Buy Out Provisions. The Committee
may at any time offer to exchange or buy out any previously
granted Award for a payment in cash, Stock, other Awards
(subject to Section 7(a)), or other property based on such
terms and conditions as the Committee shall determine and
communicate to a Participant at the time that such offer is
made.
(c) Performance Conditions. The right of a
Participant to exercise or receive a grant or settlement of
any Award, and the timing thereof, may be subject to such
performance conditions as may be specified by the Committee.
(d) Term of Awards. The term of each Award shall, ex
cept as provided herein, be for such period as may be deter
mined by the Committee; provided, however, that in no event
shall the term of any ISO exceed a period of ten years from
the date of its grant (or such shorter period as may be
applicable under Section 422 of the Code).
(e) Form of Payment. Subject to the terms of the Plan
and any applicable Award Agreement, payments or transfers to
be made by the Company or a Subsidiary upon the grant or ex
ercise of an Award may be made in such forms as the
Committee shall determine, including, without limitation,
cash, Stock, other Awards, or other property (and may be
made in a single payment or transfer, in installments, or on
a deferred basis), in each case determined in accordance
with rules adopted by, and at the discretion of, the
Committee. (Such payments may include, without limitation,
provisions for the payment or crediting of reasonable
interest on installments or deferred payments.) The
Committee, in its discretion, may accelerate any payment or
transfer upon a change in control as defined by the
Committee. The Committee may also authorize payment upon
the exercise of an Option by net issuance or other cashless
exercise methods.
(f) Loan Provisions. With the consent of the Commit
tee, and subject at all times to laws and regulations and
other binding obligations or provisions applicable to the
Company, the Company may make, guarantee, or arrange for a
<PAGE>
loan or loans to a Participant with respect to the exercise
of any Option or other payment in connection with any Award,
including the payment by a Participant of any or all
federal, state, or local income or other taxes due in
connection with any Award. Subject to such limitations, the
Committee shall have full authority to decide whether to
make a loan or loans hereunder and to determine the amount,
terms, and provisions of any such loan or loans, including
the interest rate to be charged in respect of any such loan
or loans, whether the loan or loans are to be with or
without recourse against the borrower, the terms on which
the loan is to be repaid and the conditions, if any, under
which the loan or loans may be forgiven.
(g) Awards to Comply with Section 162(m). The Commit
tee may (but is not required to) grant an Award pursuant to
the Plan to a Participant who, in the year of grant, may be
a "Covered Employee," within the meaning of Section 162(m)
of the Code, which is intended to qualify as "performance-
based compensation" under Section 162(m) of the Code (a
"Performance-Based Award"). The right to receive a
Performance-Based Award, other than Options granted at not
less than Fair Market Value, shall be conditional upon the
achievement of performance goals established by the
Committee in writing at the time such Performance-Based
Award is granted. Such performance goals, which may vary
from Participant to Participant and Performance-Based Award
to Performance-Based Award, shall be based upon the
attainment by the Company or any Subsidiary, division or
department of specific amounts of, or increases in, one or
more of the following, any of which may be measured either
in absolute terms or as compared to another company or
companies: revenues, earnings, cash flow, net worth, book
value, stockholders' equity, financial return ratios, market
performance or total stockholder return, and/or the
completion of certain business or capital transactions.
Before any compensation pursuant to a Performance-Based
Award is paid, the Committee shall certify in writing that
the performance goals applicable to the Performance-Based
Award were in fact satisfied.
The maximum amount which may be granted as
Performance-Based Awards to any Participant in any calendar
year shall not exceed (i) Stock-Based Awards for 100,000
shares of Stock (whether payable in cash or stock), subject
to adjustment as provided in Section 8(a) hereof, (ii)
100,000 Performance Units, (iii) a Tax bonus payable with
respect to the Stock-Based Awards described in clause (i)
and Performance Units described in clause (ii), and (iv)
cash payments (other than Tax Bonuses) of $1,000,000.
(h) Change of Control. In the event of a Change
of Control of the Company, all Awards granted under the Plan
(including Performance-Based Awards) that are still
outstanding and not yet vested or exercisable or which are
subject to restrictions shall become immediately 100% vested
<PAGE>
in each Participant or shall be free of any restrictions, as
of the first date that the definition of Change of Control
has been fulfilled, and shall be exercisable for the
remaining duration of the Award. All Awards that are
exercisable as of the effective date of the Change of
Control will remain exercisable for the remaining duration
of the Award.
Section 8. Adjustments upon Changes in Capitalization;
Acceleration in Certain Events
(a) In the event that the Committee shall determine
that any stock dividend, recapitalization, forward split or
reverse split, reorganization, merger, consolidation, spin-
off, combination, repurchase or share exchange, or other
similar corporate transaction or event, affects the Stock or
the book value of the Company such that an adjustment is
appropriate in order to prevent dilution or enlargement of
the rights of Participants under the Plan, then the
Committee shall, in such manner as it may deem equitable,
adjust any or all of (i) the number and kind of shares of
Stock which may thereafter be issued in connection with
Awards, (ii) the number and kind of shares of Stock issuable
in respect of outstanding Awards, (iii) the aggregate number
and kind of shares of Stock available under the Plan, (iv)
the number of Performance Units which may thereafter be
granted and the book value of the Company with respect to
outstanding Performance Units, and (v) the exercise price,
grant price, or purchase price relating to any Award or, if
deemed appropriate, make provision for a cash payment with
respect to any outstanding Award; provided, however, in each
case, that no adjustment shall be made which would cause the
Plan to violate Section 422(b)(1) of the Code with respect
to ISOs or would adversely affect the status of a
Performance-Based Award as "performance-based compensation"
under Section 162(m) of the Code.
(b) In addition, the Committee is authorized to make
adjustments in the terms and conditions of, and the criteria
included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, events
described in the preceding paragraph) affecting the Company
or any Subsidiary, or in response to changes in applicable
laws, regulations, or accounting principles. Not
withstanding the foregoing, no adjustment shall be made in
any outstanding Performance-Based Awards to the extent that
such adjustment would adversely affect the status of that
Performance-Based Award as "performance-based compensation"
under Section 162(m) of the Code.
Section 9. General Provisions
(a) Changes to the Plan and Awards. The Board of
Directors of the Company may amend, alter, suspend,
discontinue, or terminate the Plan or the Committee's
authority to grant Awards under the Plan without the consent
<PAGE>
of the Company's stockholders or Participants, except that
any such amendment, alteration, suspension, discontinuation,
or termination shall be subject to the approval of the
Company's stockholders within one year after such Board
action if such stockholder approval is required by any
federal or state law or regulation or the rules of any stock
exchange or automated quotation system on which the Stock
may then be listed or quoted, and the Board may otherwise,
in its discretion, determine to submit other such changes to
the Plan to the stockholders for approval; provided,
however, that without the consent of an affected Par
ticipant, no amendment, alteration, suspension, discontinua
tion, or termination of the Plan may materially and
adversely affect the rights of such Participant under any
Award theretofore granted and any Award Agreement relating
thereto. The Committee may waive any conditions or rights
under, or amend, alter, suspend, discontinue, or terminate,
any Award theretofore granted and any Award Agreement
relating thereto; provided, however, that without the
consent of an affected Participant, no such amendment,
alteration, suspension, discontinuation, or termination of
any Award may materially and adversely affect the rights of
such Participant under such Award.
The foregoing notwithstanding, any performance
condition specified in connection with an Award shall not be
deemed a fixed contractual term, but shall remain subject to
adjustment by the Committee, in its discretion at any time
in view of the Committee's assessment of the Company's
strategy, performance of comparable companies, and other
circumstances, except to the extent that any such adjustment
to a performance condition would adversely affect the status
of a Performance-Based Award as "performance-based compensa
tion" under Section 162(m) of the Code.
Notwithstanding the foregoing, if the Plan is
ratified by the stockholders of the Company at the Company's
1997 Annual Meeting of Stockholders, then unless approved by
the stockholders of the Company, no amendment will: (i)
change the class of persons eligible to receive Awards; (ii)
materially increase the benefits accruing to Participants
under the Plan, or (iii) increase the number of shares of
Stock or the number of Performance Units subject to the
Plan.
(b) No Right to Award or Employment. No employee or
other person shall have any claim or right to receive an
Award under the Plan. Neither the Plan nor any action taken
hereunder shall be construed as giving any employee any
right to be retained in the employ of the Company or any
Subsidiary.
(c) Taxes. The Company or any Subsidiary is
authorized to withhold from any Award granted, any payment
relating to an Award under the Plan, including from a
distribution of Stock or any payroll or other payment to a
<PAGE>
Participant amounts of withholding and other taxes due in
connection with any transaction involving an Award, and to
take such other action as the Committee may deem advisable
to enable the Company and Participants to satisfy
obligations for the payment of withholding taxes and other
tax obligations relating to any Award. This authority shall
include authority to withhold or receive Stock or other
property and to make cash payments in respect thereof in
satisfaction of a Participant's tax obligations.
(d) Limits on Transferability; Beneficiaries. No
Award or other right or interest of a Participant under the
Plan shall be pledged, encumbered, or hypothecated to, or in
favor of, or subject to any lien, obligation, or liability
of such Participants to, any party, other than the Company
or any Subsidiary, or assigned or transferred by such
Participant otherwise than by will or the laws of descent
and distribution, and such Awards and rights shall be
exercisable during the lifetime of the Participant only by
the Participant or his or her guardian or legal
representative. Notwithstanding the foregoing, the Committee
may, in its discretion, provide that Awards or other rights
or interests of a Participant granted pursuant to the Plan
(other than an ISO) be transferable, without consideration,
to immediate family members (i.e., children, grandchildren
or spouse), to trusts for the benefit of such immediate
family members and to partnerships in which such family
members are the only partners. The Committee may attach to
such transferability feature such terms and conditions as it
deems advisable. In addition, a Participant may, in the
manner established by the Committee, designate a beneficiary
(which may be a person or a trust) to exercise the rights of
the Participant, and to receive any distribution, with
respect to any Award upon the death of the Participant. A
beneficiary, guardian, legal representative or other person
claiming any rights under the Plan from or through any
Participant shall be subject to all terms and conditions of
the Plan and any Award Agreement applicable to such
Participant, except as otherwise determined by the
Committee, and to any additional restrictions deemed
necessary or appropriate by the Committee.
(e) No Rights to Awards; No Stockholder Rights. No
Participant shall have any claim to be granted any Award un
der the Plan, and there is no obligation for uniformity of
treatment of Participants. No Award shall confer on any Par
ticipant any of the rights of a stockholder of the Company
unless and until Stock is duly issued or transferred to the
Participant in accordance with the terms of the Award.
(f) Discretion. In exercising, or declining to
exercise, any grant of authority or discretion hereunder,
the Committee may consider or ignore such factors or
circumstances and may accord such weight to such factors and
circumstances as the Committee alone and in its sole
<PAGE>
judgment deems appropriate and without regard to the affect
such exercise, or declining to exercise such grant of
authority or discretion, would have upon the affected
Participant, any other Participant, any employee, the
Company, any Subsidiary, any stockholder or any other
person.
(g) Effective Date. The effective date of the Plan is
October 29, 1996.
(h) Shareholder Approval. Unless and until the Plan
is approved by the stockholders of the Company at the
Company's 1997 Annual Meeting of Stockholders, no Stock-
Based Award may be granted to any officer of the Company.
