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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-16332
NATIONAL INSURANCE GROUP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
CALIFORNIA 94-3031790
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
395 OYSTER POINT BLVD., SUITE 500
SO. SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 872-6772
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock
(Title of Class)
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 twelve (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 ninety (90) days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant, based upon the average of the last closing bid and ask prices of the
Common Stock on March 25, 1997 on the NASDAQ National Market System was
approximately $9,039,417. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares outstanding of the registrant's Common Stock as of
March 25, 1997 was 3,896,937.
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are those documents incorporated by reference and the part of
the Form 10-K into which the document is incorporated: None
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<PAGE> 2
PART I
The Business section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. Such statements include, but
are not limited to, forward looking statements made in this Report which are
identified by the words "believe", "anticipates", "expects", "aware" or similar
expressions as they relate to the Company, as defined below, or its management.
The Company's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that may cause such a difference
include, but are not limited to, those discussed in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors Affecting Future Operating Results".
ITEM 1. BUSINESS
INTRODUCTION
National Insurance Group, a California corporation ("National"), and its
wholly-owned subsidiaries, Pinnacle Data Corporation, a California corporation
("Pinnacle"), Great Pacific Insurance Company, a California corporation (the
"Insurance Subsidiary") and Fastrac Systems, Inc. Insurance Agent & Broker, a
California corporation (the "Agency") (which together with Fastrac Systems,
Inc., a California corporation ("Fastrac") are referred to in this Report
collectively as the "Subsidiaries") provide specialized information services and
related insurance products to mortgage bankers, other financial institutions and
others located throughout the United States. National and its Subsidiaries are
referred to in this Report collectively as the "Company". Utilizing
sophisticated computer applications, the Company has developed special-purpose,
proprietary software and database systems which provide information services on
an outsourced, remote computer or manual access basis, enabling these
institutions and others to:
- determine if the residential or commercial real estate is located within
a federally-designated Special Flood Hazard Area ("SFHA"), which real
estate is collateral for loans being financed or serviced by such
institutions or for other purposes, (the "Flood Zone Determination
Services"); and
- monitor the insurance coverage on collateral securing residential
mortgages (predominantly one-to-four unit family dwellings), automobile
and other consumer loans and leases and, to a lesser extent, commercial
mortgages (collectively, the "Tracking Services").
When the Tracking Services indicate that insurance coverage has lapsed, the
financial institution may contract with the Company to provide specialized,
short-term fire, allied peril or physical damage insurance (generally referred
to as "force-place" insurance), which the Company provides through its
wholly-owned subsidiary, Great Pacific Insurance Company, a California
corporation (the "Insurance Subsidiary"), in 48 states and the District of
Columbia and through nonaffiliated insurance companies in the remainder of the
United States. In addition, the Company provides flood insurance, for which the
risk is assumed by the U. S. Government under the National Flood Insurance
Program ("NFIP"). The Insurance Subsidiary is rated "A+" ("Superior") by A.M.
Best, a nationally recognized insurance statistical and rating service.
The Company began operations in 1972 as an independent general insurance
agency (which is currently operating as a subsidiary of National under the name
Fastrac Systems, Inc. Insurance Agent & Broker, a California corporation (the
"Agency")) selling to financial institutions short-term fire and related
insurance products written by nonaffiliated companies. In 1977, the Company
formed the Insurance Subsidiary to underwrite the business being generated by
the Agency. During the mid-1980s, the Company developed computer software
systems to provide financial institutions with an economic and efficient
alternative to the time-consuming and labor-intensive processes traditionally
associated with monitoring and obtaining insurance coverage on collateral
securing mortgages, consumer loans and leases and foreclosed properties. In
1991, the Company acquired certain assets of Fastrac Systems, Inc., a California
corporation ("Fastrac"), which expanded the Company's Tracking Services to
provide outsourcing capabilities. Fastrac operates as a wholly owned subsidiary
of the Agency.
Beginning in the late 1980s, the Company developed and test-marketed its
Flood Zone Determination Services which assist a financial institution that is
financing improved real estate in meeting its obligation to advise potential
borrowers if such improvement is located within an SFHA. Federal law and certain
secondary
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markets require: (i) that regulated real estate lenders and users of such
markets determine and disclose to each mortgage loan applicant if the property
securing such loan is located in a federally-designated flood zone; and (ii)
that borrowers maintain flood insurance in force as long as the mortgaged
property is included within
an SFHA. To enhance its entry into and penetration of the flood zone
determination market, in 1990, the Company purchased certain assets of a flood
zone determination competitor.
The Company's information services and insurance products are marketed
nationwide by its direct sales force to mortgage bankers, other financial
institutions (including mortgage origination/servicing companies, commercial
banks, savings and loans, credit unions and automobile leasing firms and
others). Additional sales are made, on an indirect basis, through independent
sales representatives and insurance agents and brokers.
MARKET OVERVIEW
Flood Zone Determination Services Market
The Company markets its Flood Zone Determination Services and, in certain
cases, flood insurance, to mortgage lenders, including mortgage bankers,
commercial banks, savings and loans, insurance companies, credit bureaus and
others. In the late 1980s, the Company utilized its proprietary technology to
develop a database which enables it to determine whether or not a specific
property address is located in an SFHA as defined by the Federal Emergency
Management Agency ("FEMA"). The Company's database was developed by merging
about 65,000 of the approximately 90,000 flood maps which have been developed by
FEMA under the NFIP, which do not contain address-specific information, with a
geographic database which contains address-specific information. In addition,
for those addresses not in the Company's database, the Company makes these
determinations manually using the FEMA flood maps, census maps, parcel maps,
subdivision maps, tract maps, as well as aerial photographs and other available
information.
The National Flood Insurance Reform Act of 1994 ("Flood Reform Act")
affirmed existing requirements that borrowers must be informed prior to loan
closing whether or not their property is located in an SFHA and, if so located,
flood insurance must be purchased for all loans made by federally regulated
institutions and loans purchased by Federal agencies, such as Fannie Mae and
Freddie Mac. The Flood Reform Act expanded existing law by requiring borrowers
to place in force flood insurance if their property is determined to be located
in an SFHA. The Flood Reform Act further allows a lender to charge a borrower a
reasonable fee for such flood zone determination services and requires that the
provider of such services guarantee the accuracy of its flood zone
determinations.
Insurance Tracking Services Market
The Company markets its Tracking Services to mortgage bankers and financial
institutions that own or service loan and personal property lease portfolios
("Servicers"). In many cases, the Company also sells force-place insurance to
customers that use its insurance tracking services. See "Business -- Market
Overview -- Specialized Insurance Market".
Servicers generally have a need to monitor whether insurance is maintained
on the real property or collateral for the loan or lease. The Company has
developed special-purpose, proprietary systems which track insurance information
on all types of loan and personal property lease portfolios. The Company
primarily focuses its marketing efforts on Servicers with mortgage loan,
consumer loan (primarily automobile) or automobile lease portfolios.
Specialized Insurance Market
The Company markets its specialized insurance including force-place and, in
certain cases, flood insurance, to mortgage bankers and financial institutions
that own or service loan portfolios. Servicers generally monitor whether
insurance is maintained on the real property or collateral for the loan. In the
event a borrower allows insurance to lapse, Servicers may order force-place
insurance from the Company. The Company sells force-place insurance to customers
that use its Tracking Services and to customers which track their own loans and
manually order such insurance. The Company primarily sells flood insurance to
customers
2
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that also use its Flood Zone Determination Services. See "Business -- Market
Overview -- Flood Zone Determination Services Market" and "-- Insurance Tracking
Services Market".
INFORMATION SERVICES
Flood Zone Determination Services
The use of the Company's on-line computerized Flood Zone Determination
Services system is offered nationwide to financial institutions and others
through Pinnacle. The proprietary system is a database of digitized geographical
information which determines whether or not a particular property address is
located in an SFHA and enables users to access Pinnacle's database using
computer time share, batch processing or electronic data interface services.
Where it cannot be determined whether a particular property address is located
in an SFHA through the database, Pinnacle manually renders the determination. In
addition, customers may submit their determination requests by facsimile. The
Flood Zone Determination Services system also prints flood zone certificates,
certain disclosure notices, flood insurance policy rating information and, for
some customers, flood insurance policies which policies are placed through the
Agency and, in most cases, with the Insurance Subsidiary. In addition, Pinnacle
introduced life of loan service in 1991, whereby Pinnacle will automatically
notify financial institutions of changes in the SFHA status of properties in
their mortgage loan portfolios for the period during which their agreement with
Pinnacle is in effect, or throughout the term of the loan, depending upon the
fee paid for the life of loan service.
Tracking Services
The Company, through Fastrac, provides its Tracking Services to financial
institutions located throughout the United States. The system utilizes
Company-developed special-purpose, proprietary software and database systems to
provide multiple tracking features for mortgages, automobile and personal
property loan and automobile lease portfolios, as well as for portfolios of
properties which have been foreclosed upon by financial institutions ("Real
Estate Owned" or "REO"). The Tracking Services may be customized to meet the
specific needs of each customer and provide automated insurance tracking and
data processing services, such as tracking of whether or not insurance is in
force, processing correspondence, ordering and canceling insurance coverage,
receiving and placing telephone calls on behalf of its customers, and accounting
for multiple premium transactions. Where Fastrac processes a customer's
insurance transactions at Fastrac's facilities, the customer may access
Fastrac's database to determine the status of any particular matters. Such
services provided by Fastrac are commonly known as "Outsourcing." Customers who
process their own insurance transactions may access Fastrac's computer system to
order force-place insurance or REO insurance. See "Business -- Insurance
Products -- Force-Place Insurance". The Company believes its Tracking Services
enable financial institutions to track insurance coverage more efficiently and
accurately and to reduce their internal labor costs.
Competition
The flood zone determination business is highly competitive. The major
competitors known to management include Transamerica Flood Hazard Certification,
First American Flood Data Services, Inc., Geotrac, Palma-Lazar & Ulsh, Inc.,
Lereta Corporation, National Flood Certification Services, Inc., National Flood
Information Services, Flood Zones, Inc. and numerous other providers. Management
believes that the most significant factors affecting competition are speed and
responsiveness of service, accuracy, breadth of geographical area covered, price
and financial strength. The Company believes it competes favorably with respect
to these factors.
The insurance tracking industry is also highly competitive. The major
competitors in the tracking industry include American Security Insurance
Company, American Sterling Insurance Group, Balboa Life and Casualty, Insureco
Inc. and numerous other providers. Management believes that the most significant
factors affecting competition are speed, accuracy and responsiveness of service,
price and financial strength. The Company believes it competes favorably with
respect to these factors.
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INSURANCE PRODUCTS
The Company provides the following specialized insurance products to its
Tracking Services and Flood Zone Determination Services customers, other
financial institutions and insurance agents and brokers.
Force-Place Insurance
Force-place insurance is purchased by financial institutions when their
borrowers, whose loans are secured by real property, fail to provide the
financial institutions with adequate evidence of fire and certain allied perils
insurance covering improvements to real property. The financial institutions pay
insurance premiums directly to the Insurance Subsidiary and ordinarily are
entitled to reimbursement of the premiums paid to the Insurance Subsidiary from
their borrowers in accordance with the terms of their loans. In the Company's
experience, approximately 53% of force-place insurance coverage terminates or is
canceled within approximately sixty (60) days of the date the policy is issued,
but some policies remain in force for periods of up to one (1) year or more.
The Insurance Subsidiary also offers REO insurance to financial
institutions for properties on which they have foreclosed. REO insurance is
generally issued for thirty (30) day periods, and provides coverage similar to
the coverage provided under force-place policies. REO insurance premiums may be
higher than force-place premiums because of the higher risks involved in
insuring REO property, which is often vacant.
Financial institutions ordinarily require immediate coverage for
force-place and REO insurance, but generally do not have readily available
underwriting information. Due to the lack of underwriting information, the
Insurance Subsidiary usually calculates its premiums on flat rates, and covers
almost all improvements on real properties, vehicles or other personal property
submitted by financial institutions within predesignated limits and territories.
See "Business -- Insurance Operations -- Underwriting". This method, while
commonly used by force-place insurers, is unusual in the insurance industry
which traditionally underwrites each risk on an individual or class basis. The
Insurance Subsidiary may terminate relationships with financial institutions and
insurance agents and brokers which request coverage for properties, vehicles or
other personal property that have significantly higher-than-average risks or for
other reasons. When an insurance policy is canceled for any reason, the
Insurance Subsidiary is required to refund, at a minimum, an unearned premium
calculated pursuant to applicable statutes or regulations, unless a minimum
earned premium has been established.
The Insurance Subsidiary's primary customers for force-place and REO
insurance are mortgage bankers and financial institutions which provide
mortgages on one-to-four unit dwellings, apartment buildings and commercial
buildings. The net premiums earned by the Insurance Subsidiary on one-to-four
unit dwellings accounted for approximately 78% of the Insurance Subsidiary's
force-place and REO insurance for fiscal years 1992 through 1996.
The Insurance Subsidiary also offers force-place automobile and personal
property physical damage insurance products to financial institutions with loans
secured by automobiles or personal property. The insurance and service needs of
such financial institutions are similar to the needs of financial institutions
with loans secured by real property. These financial institutions are serviced
primarily on an outsourcing basis.
The Insurance Subsidiary recently began underwriting automobile physical
damage insurance through a general insurance agent. These policies are sold to
the general public through insurance agents and brokers. The rates charged for
this type of insurance are higher than usually charged in the standard insurance
market.
The Insurance Subsidiary writes force-place and REO insurance on a direct
basis in 48 states and the District of Columbia. The Insurance Subsidiary
assumes some of the risk and premium on force-place and REO insurance in the
other states by being the primary reinsurer on such business generated by the
Agency. See "Business -- Insurance Operations -- Agency Operations".
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Flood Insurance
In 1987, the Company entered into an agreement with the Federal Insurance
Administration of FEMA enabling the Insurance Subsidiary to issue flood
insurance polices in the Write Your Own Program ("WYO Program"). Under the WYO
Program, insurance companies are authorized by FEMA to write flood insurance,
and 100% of each risk is ceded to FEMA. The Insurance Subsidiary receives a
commission based upon a percentage of premium for each policy it writes under
the WYO Program. The Insurance Subsidiary provides its flood insurance policies
under the WYO Program to customers who utilize Pinnacle's Flood Zone
Determination Services and Fastrac's Tracking Services and through insurance
agents and brokers.
Competition
The Insurance Subsidiary's major competitors in the highly competitive
force-place insurance industry include the major competitors Fastrac confronts
in the insurance tracking industry. See "Business -- Information
Services -- Competition". The flood insurance business is also very competitive
and is serviced by approximately 100 WYO carriers and other carriers offering
flood insurance products that are underwritten by private carriers, many of
which competitors have greater financial, marketing and other resources than the
Insurance Subsidiary. Management believes that the most significant factors
affecting competition in the specialized insurance industry include speed and
responsiveness of service, breadth of insurance coverage and services offered,
amount of commissions paid, price and financial strength. The Company believes
it competes favorably with respect to these factors.
INSURANCE OPERATIONS
Agency Operations
The Agency is a general insurance agent for the Insurance Subsidiary and
other insurance companies. The Agency has entered into agency agreements to sell
force-place and REO insurance in the states where the Insurance Subsidiary does
not write insurance on a direct basis. These other insurance companies are not
affiliated with the Company. They are Empire Fire and Marine Insurance Company,
covering New Hampshire, and Universal Underwriters Insurance Company, covering
New York. Under the agency agreements, the unaffiliated insurance companies pay
the Agency commissions for policies sold. These agency agreements allow the
Agency to initiate and maintain relationships with customers and to continue
these relationships following termination of the agency agreements. The Agency
also markets flood insurance policies on behalf of the Insurance Subsidiary and
other WYO Program insurance companies.
The Agency is currently licensed and regulated as an insurance agent and
broker in California and as a nonresident insurance agent and/or broker in 32
other states and the District of Columbia. See "Business -- Regulation".
Underwriting
Insurance companies traditionally underwrite risks individually or by
class. Since financial institutions usually do not have the underwriting
information traditionally required by many insurance companies to issue fire or
personal property physical damage insurance at the time that financial
institutions require insurance coverage, the Insurance Subsidiary, like many of
its force-place insurance competitors, insures for a flat premium rate almost
all property within predesignated limits and territories without the application
of underwriting criteria to individual risks. The Insurance Subsidiary
determines its flat premium rate based on its underwriting experience and
knowledge of the industry in which it operates. The Insurance Subsidiary uses
actuaries to determine such premium rates, only where mandated by law,
regulations or by unaffiliated insurance companies it represents as an agent.
Accordingly, the Insurance Subsidiary may be insuring individual risks that it
might not have insured if it had information obtained in the traditional
underwriting process. The automobile physical damage insurance written through
an unaffiliated general agent is underwritten using more traditional methods of
underwriting.
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Policies and Endorsements
For its force-place insurance products, the Insurance Subsidiary uses its
own policy language, the policy language of companies it represents as an agent,
and the policy language required by applicable law or regulation, together with
forms extending coverage and lender loss-payable forms giving financial
institutions certain rights. The Insurance Subsidiary customizes its policy
language and forms to meet the specific needs of its customers. The Insurance
Subsidiary has also developed some special endorsements, including one which
provides that some force-place insurance is in excess of other insurance. In
many states the policy forms and rates charged must be filed with the insurance
regulatory agency of the state and such filing may be subject to approval or
disapproval by that regulator before the form or rate can be used. For flood
insurance, the Insurance Subsidiary uses policy language provided by FEMA.
The maximum limit of the Insurance Subsidiary's insurance coverage overall
is generally $3 million per property location for force-place insurance,
$500,000 per location for REO insurance, $100,000 per vehicle for force-place
physical damage insurance and $50,000 for the automobile physical damage written
through an unaffiliated general agent. In certain cases, the Insurance
Subsidiary grants customers a higher maximum limit and, additionally, the
Insurance Subsidiary may underwrite risks outside of predesignated limits and,
in some cases, may use underwriting information furnished by financial
institutions, but, to date, such underwritten risks have not represented a
material portion of the Insurance Subsidiary's net premiums earned. For flood
insurance, the Insurance Subsidiary uses coverage limits and rates provided by
FEMA.
Insurance Operating Ratios
The underwriting experience of insurance companies is traditionally
measured by the statutory "combined ratio". The combined ratio, calculated on a
SAP (Statutory Accounting Principles) basis, is the sum of: (i) the ratio of
losses and LAE (loss adjustment expenses) incurred to net premiums earned (the
"loss ratio"); and (ii) the ratio of the underwriting and operating expenses,
exclusive of deferred acquisition costs, to net premiums written (the "expense
ratio"). The approximate SAP underwriting profit (loss) is reflected by the
extent to which the combined ratio is less (indicating profit) or greater
(indicating loss) than 100%. The following table shows, for the periods
indicated, the Insurance Subsidiary's loss ratio, expense ratio and combined
ratio.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Loss ratio............................... 37.1% 38.5% 37.8% 35.5% 30.0%
Expense ratio............................ 50.5% 53.4% 55.7% 66.6% 61.2%
------ ------ ------ ------ ------
Combined ratio........................... 87.6% 91.9% 93.5% 102.1% 91.2%
====== ====== ====== ====== ======
Property and casualty industry combined
ratio(1)............................... 115.7% 106.9% 108.5% 106.5% 107.0%
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Based on property and casualty insurance industry statistics published by
A.M. Best as of December 31, 1995. Industry statistics for 1996 are
preliminary estimates available from A.M. Best as of the date of this
report. The Company does not currently write any casualty insurance.
The premium-to-surplus ratio of an insurance company measures the
relationship of net premiums written in a given period (direct premiums written
plus reinsurance assumed less returned premiums and reinsurance ceded to other
carriers) to surplus (admitted assets less liabilities), all determined on a SAP
basis. There are no regulations in California requiring maintenance of any
particular premium-to-surplus ratio. However, regulatory authorities regard this
ratio as an important indication of an insurance company's ability to withstand
abnormal loss experience and prefer to see a ratio of not more than a ratio of
3-to-1 of net written
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premium to surplus. The Insurance Subsidiary's premium-to-surplus ratio for the
periods indicated are shown in the following table.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net premiums written to surplus ratio............ 1.2 1.0 0.8 0.6 0.5
Property and casualty industry average(1)........ 1.4 1.3 1.3 1.1 1.0
</TABLE>
- ---------------
(1) Based on property and casualty insurance industry statistics published by
A.M. Best as of December 31, 1995. Industry statistics for 1996 are
preliminary estimates available from A.M. Best as of the date of this
report. The Company does not currently write any casualty insurance.
Loss and LAE Reserves
The Insurance Subsidiary is required to maintain adequate reserves for the
payment of anticipated eventual losses arising from claims which have been
reported to it and claims which have been incurred but not yet reported. A loss
and LAE reserve is established in an amount estimated by the Insurance
Subsidiary to be sufficient to cover its costs of settling claims. The amount of
this reserve is usually based upon management's experience with similar losses
and, when available, the report of an outside adjuster. In addition, a reserve
account is established to cover claims for losses that have been incurred but
are not yet reported in an amount estimated by the Insurance Subsidiary to be
sufficient to cover its costs of unreported losses. The amount of this reserve
is based upon statistical analyses and historical trends. Reserve amounts are
necessarily based on management's informed estimates and judgments using data
currently available to them. As additional experience and other data become
available and are reviewed, estimates and judgments may be changed which result
in adjustments in operating results for the period in which such changes are
made. Unlike many other types of losses, such as liability losses, losses
relating to force-place, REO, flood and automobile physical damage insurance are
usually known and reported to an insurance carrier promptly; the amount of the
loss is usually easier to determine promptly than other types of insurance
losses; and, claims are usually settled without prolonged litigation, meaning
that the risks are "short-tailed". As a result, more timely information is
usually available to calculate and evaluate the adequacy of reserves on known
and unreported claims than with many other lines of insurance.
The Insurance Subsidiary's loss and loss adjustment expense reserves are
reviewed on an annual basis by unaffiliated actuaries. The Insurance
Subsidiary's most recent actuarial review of such reserves as of December 31,
1996, concluded that the reserves (i) met the requirements of the insurance laws
of California, (ii) were computed in accordance with accepted loss reserving
standards and principles and (iii) made a reasonable provision for all unpaid
loss and loss expense obligations of the Company under the terms of its policies
and agreements.
There are no differences between reserves determined in accordance with
generally accepted accounting principles and the reserves established by the
Insurance Subsidiary based upon accounting principles and practices prescribed
or permitted by insurance regulatory authorities. The Insurance Subsidiary's
estimate of loss reserves includes an implicit provision for inflation. The
Insurance Subsidiary does not discount loss reserves. For the Insurance
Subsidiary's accounting policy see Note 2 of Notes to Consolidated Financial
Statements.
The Insurance Subsidiary's loss reserves include losses reinsured by other
companies. The estimated recoveries from reinsurers are included in net premiums
and accounts receivable. See "Business - Insurance Operations -Reinsurance" and
Note 10 of Notes to Consolidated Financial Statements.
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The following table provides the reconciliation of reserves for losses and
LAE for the periods indicated (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Reserves for losses and LAE at beginning of
year........................................... $5,628 $3,360 $3,055
------ ------ ------
Losses and LAE:
Provision for losses and LAE for claims
occurring in current year................... 7,627 6,378 3,971
Increase (decrease) in estimated losses and LAE
for claims occurring in prior years......... 246 (334) 31
------ ------ ------
7,873 6,044 4,002
------ ------ ------
Losses and LAE payments for claims occurring
during:
Current year................................... 4,664 4,329 2,487
Prior years.................................... 5,477 2,020 2,372
------ ------ ------
10,141 6,349 4,859
------ ------ ------
Reserves for losses and LAE at end of year....... $3,360 $3,055 $2,198
====== ====== ======
</TABLE>
The following table shows how reserves for losses and LAE may be
re-estimated based on experience in subsequent years. The first line presents
the reserves as originally reported at the end of the calendar year. Each
calendar year end reserve includes the estimated liabilities for losses and LAE
for that year and the re-estimated remaining liabilities for all prior years.
The second section sets forth, as of the end of successive years, the cumulative
amounts paid for those claims that as of the calendar year-end, were reported
but unpaid, or incurred but not reported. The last line, cumulative redundancy
(deficiency), compares the latest re-estimated reserve amount to the reserve
amount as originally established. A redundancy indicates the original estimate
was higher than the current estimate; a deficiency indicates the original
estimate was lower than the current estimate.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance sheet reserves for
losses and LAE........... $1,579 $1,942 $2,195 $1,776 $4,702 $3,731 $5,628 $3,360 $3,055 $2,198
Cumulative amount paid as
of:
One year later........... $1,117 $1,697 $1,634 $1,336 $4,391 $2,448 $5,477 $2,020 $2,372
Two years later.......... 1,307 1,916 1,923 1,837 4,551 2,645 5,822 2,234 --
Three years later.......... 1,323 2,061 2,104 1,917 4,763 2,679 5,890 -- --
Four years later......... 1,339 2,191 2,157 2,013 4,826 2,686 -- -- --
Five years later......... 1,376 2,213 2,183 2,013 4,849 -- -- -- --
Six years later.......... 1,386 2,222 2,183 2,018 -- -- -- --
Seven years later........ 1,386 2,222 2,183 -- -- -- -- -- --
Eight years later........ 1,386 2,222 -- -- -- -- -- -- --
Nine years later......... 1,386 -- -- -- -- -- -- -- --
Reserves reestimated as of:
One year later........... $1,482 $2,159 $1,807 $1,769 $4,817 $2,978 $5,781 $3,026 $3,086
Two years later.......... 1,447 2,033 2,060 1,897 4,660 2,652 5,844 3,390 --
Three years later........ 1,460 2,122 2,120 1,920 4,772 2,672 5,937 -- --
Four years later......... 1,352 2,191 2,158 2,013 4,838 2,705 -- -- --
Five years later......... 1,376 2,214 2,183 2,013 4,853 -- -- -- --
Six years later.......... 1,386 2,222 2,183 2,018 -- -- -- -- --
Seven years later........ 1,386 2,222 2,183 -- -- -- -- -- --
Eight years later........ 1,386 2,222 -- -- -- -- -- -- --
Nine years later......... 1,386 -- -- -- -- -- -- -- --
Cumulative redundancy
(deficiency)........... $ 193 $ (280) $ 12 $ (242) $ (151) $1,026 $ (309) $ (30) $ 31
</TABLE>
8
<PAGE> 10
The cumulative redundancies (deficiencies) noted in the above table are a
result of the reserving process which, as discussed above, is based upon
management judgment and estimates that are subject to adjustment as additional
information becomes known. The Company believes that the current reserves
adequately represent management's best estimate of liability for foreseeable
claims. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors Affecting Future Operating Results -- Reserve
Adequacy".
Investments
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, deposits
in regulated banks, savings and loans and other federally insured institutions,
real estate mortgages and real estate. As of December 31, 1996, the Company had
$33 million of investment assets. The Insurance Subsidiary held approximately
$29 million of those investments.
The Company's investment policy is determined by the Company's Board of
Directors and is reviewed on a quarterly basis. Pursuant to its investment
policy, the Company concentrates, for the most part, its investments in
certificates of deposit, treasury securities and state and municipal issued
securities. The Insurance Subsidiary also maintains a large portion of its
investments in short-term instruments in order to maintain the ability to fund
large losses of the Insurance Subsidiary's insureds, should they occur.
The following tables reflect the investments of the Company (dollars in
thousands). The table set forth below reflects the average amount of
investments, income earned and annualized yield thereon for the three (3) years
ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Average investment............................ $40,982 $38,080 $34,888
Net investment income......................... 1,836 2,042 1,975
Average annualized yield...................... 4.5% 5.4% 5.7%
</TABLE>
The following table summarizes by type, the investments of the Company as
of December 31, 1996 (dollars in thousands). The Company's investments are
either insured by the Federal Deposit Insurance Corporation or have one of the
top two designations from the National Association of Insurance Commissioners
("NAIC"), which correspond to an "investment grade" rating.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT TOTAL
------- ----------
<S> <C> <C>
Short-term investments.................................. $ 5,021 15.4%
Certificates of Deposit................................. 12,294 37.8%
U.S. Government-backed securities....................... 2,609 8.0%
Obligations of states and municipalities................ 10,517 32.3%
Equity securities....................................... 2,051 6.3%
Mortgage-backed securities.............................. 81 0.2%
------- -----
Total investments............................. $32,573 100.0%
======= =====
</TABLE>
9
<PAGE> 11
The table set forth below indicates the expected maturity distribution of
the Insurance Subsidiary's fixed income securities and short-term investments as
of December 31, 1996 (dollars in thousands).
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT PORTFOLIO
------- ----------
<S> <C> <C>
One year or less...................................... $14,675 48.0%
One year to five years................................ 10,523 34.4%
Six years to ten years................................ 4,885 16.1%
More than ten years................................... 439 1.5%
------- -----
Total fixed income securities and short-term
investments............................... $30,522 100.0%
======= =====
</TABLE>
Reinsurance
In order to limit the maximum losses for which it might otherwise be solely
responsible under its policies, the Insurance Subsidiary arranges for the
payment of a portion of the premiums it receives to other insurance companies
pursuant to a series of treaties of reinsurance in return for reinsurance to
protect against losses in excess of certain limits. The amount of potential
exposure which is not reinsured is referred to as the Insurance Subsidiary's
"retention". The Insurance Subsidiary pays treaty reinsurers a percentage of net
premiums written and/or earned to cover reinsurance costs.
The Insurance Subsidiary, subject to certain limitations, for 1996 retained
the first $750,000 of each risk and reinsured the rest up to a maximum $1.75
million per risk. This per risk excess reinsurance was provided in one layer and
was subject to a maximum reinsurer's liability arising out of any one event of
$3.5 million in the aggregate. The reinsurance contract had a one (1) year term.
The Insurance Subsidiary also purchased catastrophic reinsurance, under which
the Insurance Subsidiary was protected against an accumulation of losses arising
out of any one event up to $11.75 million in excess of the initial $1.75 million
of losses which the Insurance Subsidiary incurred. The first layer of
catastrophic reinsurance covered 95% of the first $2.5 million in excess of $2.5
million for each occurrence, with a maximum of 95% of $5.0 million for all
losses during the term of the contract. The second layer covered 95% of the next
$5.0 million over $5.0 million for each loss occurrence, subject to a maximum of
95% of $10.0 million for all losses during the term. The third layer of
catastrophic reinsurance covered 95% of the next $5.0 million in excess of $10.0
million for each loss occurrence, subject to a maximum of 95% of $10.0 million
for all losses during the term. Each of the catastrophic reinsurance agreements
has a one (1) year term.
The Insurance Subsidiary, subject to certain limitations, currently retains
the first $500,000 of each risk and reinsures the rest up to a maximum $2.0
million per risk. This per risk excess reinsurance is provided in one layer and
is subject to a maximum reinsurer's liability arising out of any one event of $4
million in the aggregate. The reinsurance contract has a one (1) year term. The
Insurance Subsidiary also purchases catastrophic reinsurance, under which the
Insurance Subsidiary is protected against an accumulation of losses arising out
of any one event up to $12.5 million in excess of the initial $2.5 million of
losses which the Insurance Subsidiary incurs. The first layer of catastrophic
reinsurance covers 95% of the first $2.5 million in excess of $2.5 million for
each occurrence, with a maximum of 95% of $5.0 million for all losses during the
term of the contract. The second layer covers 95% of the next $5.0 million over
$5.0 million for each loss occurrence, subject to a maximum of 95% of $10.0
million for all losses during the term. The third layer of catastrophic
reinsurance covers 95% of the next $5.0 million in excess of $10.0 million for
each loss occurrence, subject to a maximum of 95% of $10.0 million for all
losses during the term. Each of the catastrophic reinsurance agreements has a
one (1) year term. The Insurance Subsidiary from time to time purchases another
form of reinsurance called "facultative reinsurance" for an individual policy or
group of policies to protect the Insurance Subsidiary and its treaty reinsurers
from certain risks or when the amount of insurance exceeds the maximum amount
covered under various reinsurance treaties. The Insurance Subsidiary negotiates
the cost of facultative reinsurance on a case-by-case basis, and normally passes
on such costs to the insured.
10
<PAGE> 12
The purchase of reinsurance does not relieve the Insurance Subsidiary of
liability for the full amount of loss in the event the reinsurer fails or
refuses to pay the reinsured portion. To date, the Insurance Subsidiary has
collected full reinsurance reimbursement on all claims submitted to its
reinsurers. During 1992, 1993, 1994 and 1995, the Insurance Subsidiary ceded
losses of $1,267,000, $423,000, $213,000 and $6,600 respectively, to reinsurers.
In 1995 and 1996, the Insurance Subsidiary paid 5.3% and 4.9%, respectively, of
its premiums earned for its excess and catastrophic reinsurance treaties.
REGULATION
Regulation in General
Pinnacle's operations are generally not subject to regulation by any
government agency. Certain rules relating to issuing flood zone determination
certificates are contained in volume 44 of the Code of Federal Regulations. FEMA
generally oversees the enforcement of such regulations, however, neither FEMA
nor any other government agency directly regulates the activities of Pinnacle.
The Insurance Subsidiary is subject to regulation by government agencies in
California, its state of domicile, and in the remaining states in which it does
business. The nature and extent of such regulation may vary from jurisdiction to
jurisdiction, but typically, among other things, involves prior approval of the
acquisition of "control" of an insurance company or of any company controlling
an insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, the payment of dividends by an
insurance company, approval of premium rates for many lines of insurance,
standards of solvency and minimum amounts of capital and surplus which must be
maintained, limitations on types and amounts of investments, restrictions on the
size of risk which may be insured by a single company, licensing of insurers and
their agents, deposits of securities for the benefit of policyholders, approval
of policy forms, methods of accounting, establishing reserves for losses and
loss adjustment expenses and filing of annual report financial statements and
other reports with respect to the financial condition of the insurer and other
matters. In addition, state regulatory examiners perform periodic examinations
of insurance companies. Such regulation is generally intended for the protection
of policyholders rather than shareholders. The following represent the more
significant insurance regulatory requirements which are or will be imposed on
the Insurance Subsidiary and its affiliates.
Licensing in Other Jurisdictions
In order to issue policies on a direct basis in a state, the Insurance
Subsidiary either: (i) must be licensed by such state and usually must have its
rates and policy forms approved by such state's insurance regulator; or (ii)
under certain circumstances, such as dealings initiated directly by citizens or
placements through licensed surplus lines brokers, it may conduct business
without being admitted and without being subject to rate and/or policy forms
approval. The Insurance Subsidiary currently is licensed to write insurance in
the following 46 states and the District of Columbia:
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Indiana
Illinois
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Jersey
New Mexico
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Utah
Virginia
West Virginia*
Washington
Wisconsin
Wyoming
- ---------------
* Insurance Subsidiary has not had its rates and policy forms approved by the
West Virginia Insurance Commissioner, however, application for policy form and
rate approval has been made.
11
<PAGE> 13
In addition, the Insurance Subsidiary is authorized to write insurance in
Texas and Vermont on a surplus lines basis.
The Insurance Subsidiary is in the process of obtaining requisite approvals
to write insurance on a direct basis in New Hampshire. The Agency (or, as to
some states, at least one of the Agency's officers) must be licensed in any
state in which it operates. The Agency is currently licensed in California and
as a nonresident insurance agent and broker in 32 other states and the District
of Columbia. Timothy Dixon, Assistant Vice President and Assistant Secretary of
the Company, is licensed as a broker and/or agent in 49 states and the District
of Columbia.
Restrictions on Dividends Payable by the Insurance Subsidiary to the Company
As a nonoperating holding company, a principal source of National's
liquidity is the cash dividends received from its subsidiaries, principally the
Insurance Subsidiary. The Insurance Subsidiary is subject to laws and
regulations which restrict its ability to pay dividends. Effective January 1,
1994, the Insurance Subsidiary must report to the California Department of
Insurance (the "Department") all dividends and other distributions to
shareholders within five business days following declaration. No dividend or
other distribution to shareholders may be paid until at least ten business days
after receipt by the California Insurance Commissioner (the "Commissioner") of
such notice. Moreover, the Insurance Subsidiary may not pay any extraordinary
dividend or make any other extraordinary distribution to its shareholders until
thirty days after receipt by the Commissioner of a Notice of Declaration thereof
and, within such period, the Commissioner has not disapproved such payment. The
interim period will allow the Department to issue an order stopping payment of
the dividend if, in the Department's opinion, the payment would in any way
violate the California Insurance Code or be hazardous to the insurer's
policyholders, creditors or the public. An extraordinary dividend or
distribution, is any dividend or distribution which, together with other
dividends or distributions made within the preceding twelve months, exceeds the
greater of either:
(i) 10 percent of the Insurance Subsidiary's policy holder surplus as
of the previous December 31, or
(ii) The net income of the Insurance Subsidiary, for the twelve month
period ending the previous December 31.
California law further prohibits the payment of dividends without prior
approval of the Department unless the insurer has available "earned surplus".
The term "earned surplus" is defined as unassigned funds (surplus) as reported
on the insurer's annual statement. Dividends may not be declared out of: (i)
earned surplus derived from the mere net appreciation in the value of the assets
not yet realized; and (ii) an exchange of assets, unless such earned surplus has
been realized or the assets received in exchange are currently realizable in
cash. An exception to this prohibition is allowed where the insurer's surplus as
regards policyholders is: (i) reasonable in relation to its outstanding
liabilities; (ii) adequate to the insurer's financial needs; and (iii) the
Department's prior approval is obtained.
Restrictions on Transactions Among Affiliates of the Insurance Subsidiary
In addition to the dividend payment restrictions set forth above,
California law places further restrictions upon the ability of an insurance
company to enter into certain transactions with its affiliates. In particular,
insurers are generally required to disclose to the Department certain in force
agreements, relationships subsisting, and transactions which are deemed
"material". These include all sales, purchases, exchanges, loans, extensions of
credit, investments or other payments made by or to the insurance company within
the immediately preceding twelve (12) months provided such payments involve in
the net aggregate one-half of one percent or more of the insurer's admitted
assets or 5% or more of the insurer's surplus as to policyholders, determined by
whichever is greater, as of December 31 of the preceding year. In addition,
prior approval of the Department is necessary with respect to sales, purchases,
exchanges, loans or extensions of credit, or investments or other payments made
by or to the insurance company within the immediately preceding twelve (12)
months, provided such payments involve in the net aggregate more than 5% of the
insurer's admitted assets or 25% of the insurer's surplus as to policyholders,
determined by whichever is less, as of December 31
12
<PAGE> 14
of the preceding year. These restrictions will apply to all payments made by the
Insurance Subsidiary to any of its affiliates, including National and the
Agency, as well as all payments made by any of the affiliates to the Insurance
Subsidiary.
Risk-Based Capital Rules
The National Association of Insurance Commissioners ("NAIC") has adopted a
formula to calculate Risk Based Capital ("RBC") of property and casualty
insurance companies and adopted an RBC model for property and casualty insurance
companies.
Although the final RBC model for property and casualty insurance companies
cannot be predicted with certainty, such model can be expected to measure four
major areas of risk facing property and casualty insurers: underwriting, credit,
investment, and other off-balance sheet risks. Companies having statutory
surplus less than that determined necessary by the RBC model will likely be
required to adequately address these three risk factors and will be subject to
varying degrees of regulatory intervention, depending upon their level of
capital inadequacy. The RBC model for the 1996 annual statement did not indicate
an impairment of the Insurance Subsidiary's measurement of capital adequacy.
Rate Regulation Under Proposition 103
In November 1988, California voters approved Proposition 103. Proposition
103 requires, in part, a one (1) year 20% rate rollback for substantially all
property and casualty insurance written in California with the exception of
workers' compensation and reinsurance.
In May 1989, the California Supreme Court held that insurers would not be
obligated to pay the rate rollback mandated by Proposition 103 if they could
demonstrate that application of the rollback would produce confiscatory rates
which would deny a fair and reasonable rate of return. The California Supreme
Court's decision allowed insurers to file and use rates after November 8, 1989,
pending approval by the Department.
On February 26, 1993, the trial court in 20th Century Insurance Company v.
Garamendi, determined that the regulations which included the rollback formula
for rate determination were unlawful. The Department appealed the trial court's
determination and on August 25, 1994, the California Supreme Court unanimously
held that the California Insurance Commissioner's rollback formula which
includes a uniform rate of return was constitutional and complied with the
intent of Proposition 103. The Department, by letter dated June 13, 1995, denied
the Company's application for an adjustment to the Department's formula for
determining the amount of the Company's Proposition 103 rollback liability and
assessed the liability to be $4.5 million. In order to reserve for the $4.5
million, the Company accrued $4.1 million in the second quarter of 1995 in
addition to the 1994 accrual of $433,000. This amount is included on the balance
sheet as Reserve for Proposition 103 and on the income statement as
Non-recurring Expenses.
On October 25, 1995, the Insurance Subsidiary entered into a stipulation
and consent order with the Department to resolve the Insurance Subsidiary's
rollback obligation. Pursuant to that settlement, the Insurance Subsidiary
agreed to pay the sum of approximately $4.1 million as a rollback refund to its
policyholders for the rollback year. The Company made the refunds during the
first quarter of 1996. The rollback refund was paid to each eligible
policyholder in the proportion that the written premium for each policyholder
bears to the Insurance Subsidiary's total written premiums in California for
policies in Proposition 103 lines issued or renewed during the rollback year.
Pursuant to the settlement, the rollback refund constitutes the Insurance
Subsidiary's entire rollback obligation and fully discharges the Insurance
Subsidiary and extinguishes all of its obligations to rollback rates, make
rollback refunds to policyholders, or pay interest to rollback policyholders.
The Department has agreed to seek no further rollbacks or interest against the
Insurance Subsidiary for the rollback year. Also, the settlement approves all
rate filings which received interim approvals for current rate levels made since
1989, and all rates and rate levels charged by the Insurance Subsidiary from
time to time between November 8, 1989, and the date the settlements were
approved.
13
<PAGE> 15
The amount of any refund checks uncashed after a certain period will be
escheated to the State of California in accordance with its laws. Although the
Company will incur additional costs for processing the refunds, management
believes that its existing reserves are adequate.
Finally, Proposition 103 requires insurers to submit for prior approval all
proposed California rate changes to the Department prior to implementation. The
Department is authorized to assess the proposed rates to determine if they are
excessive, inadequate or unfairly discriminatory. Rates which violate any of
these standards cannot be implemented. These prior approval requirements could
limit the ability of the Insurance Subsidiary to implement California rate
changes on a going forward basis.
Membership in Insolvency Funds and Associations
Most states require property and casualty insurance companies to become
members of insolvency funds or associations which generally protect
policyholders against the insolvency of insurance companies writing business in
the state. Members of the fund or association must contribute to the payment of
certain claims made against insolvent insurance companies. The maximum
contributions required by law in any one (1) year have varied between 1% and 2%
of annual premiums written by a member in that state. Most of these payments are
recoverable through future policy surcharges and premium tax reductions. The
Insurance Subsidiary is required to participate in such insolvency funds and
associations and contributed $0 in 1995 and $23,056 in 1996 to such funds and
associations.
The Insurance Subsidiary is also required to participate in various
mandatory insurance facilities or to participate in funding mandatory pools.
These include individual state facilities such as the state FAIR Plan
Associations. The Insurance Subsidiary made certain significant contributions to
the California FAIR Plan Association in 1995 and 1996. See "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Insurance Regulation Concerning a Change in or the Acquisition of Control of
an Insurance Company
The Insurance Subsidiary is a property and casualty insurance company
organized under the laws of the State of California. The California Insurance
Code provides that any acquisition or change in "control" of a domestic insurer
or of any person that controls a domestic insurer cannot be consummated without
the prior approval of the Commissioner of Insurance. Control is defined to mean
the power to direct or cause the direction of the management and policies of the
insurer through the ownership of voting securities or by contract. A presumption
of "control" arises from the ownership, control, possession with the power to
vote or possession of proxies with respect to 10% or more of the voting
securities of a domestic insurer or of a person that controls a domestic
insurer. Any person who purchases shares of the common stock of the Company
which, when combined with all other voting securities owned or otherwise
controlled by that person, total 10% or more of the voting securities of the
Company, will be deemed to have become a controlling person of the Insurance
Subsidiary. Any purchase resulting in such an acquisition of control of the
Insurance Subsidiary would require prior action by the California Commissioner
of Insurance.
MARKETING
The Company's information services and insurance products are marketed
nationwide by its sales and marketing staff located in California, Florida,
Georgia, Kansas, Oregon, Pennsylvania, Texas and Virginia. Additional sales are
made, on an indirect basis, through independent sales representatives and
insurance agents and brokers.
Most of the Company's sales personnel sell and market the Company's full
line of services and products, although most of the Company's sales efforts in
recent years have focused on the marketing of the Flood Zone Determination
Services. In addition to a base salary, the direct sales personnel are
compensated by commissions based, for the most part, on a percentage of revenues
generated. Management works closely with its sales personnel to customize its
Tracking and Flood Zone Determination Services to meet the needs of its
financial institution customers. The Company uses direct mail and select
advertising to augment its sales efforts, and has recently established an
Internet web site.
14
<PAGE> 16
SIGNIFICANT CUSTOMERS
During the year ended December 31, 1996, no customer accounted for 10% or
more of the Company's consolidated revenues.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 384 persons on
a full-time basis, approximately 55 persons on a part-time basis and
approximately 37 persons on a temporary basis.
The Company has never experienced a work stoppage, and at present, no
employee is known by management to be represented by a labor organization. The
Company considers its employee relations to be good.
FINANCIAL INFORMATION
The principal industry segments in which the Company operates are Insurance
Products and Information Services. Information on revenue, identifiable assets,
capital expenditures, and depreciation and amortization by segment appears in
Note 23 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company leases its principal offices, located at 395 Oyster Point
Boulevard, South San Francisco, California 94080, pursuant to a lease agreement
entered into in November 1992. The lease is for approximately 45,600 rentable
square feet at lease payments ranging from approximately $49,400 per month in
the first year to $66,500 per month in the seventh year. The Company leases
approximately 22,000 square feet in Concord, California at approximately $25,500
per month. The Company relocated its loan tracking operations (excluding its
computer operations) from Bellevue, Washington, to South San Francisco,
California, during 1994. In order to accommodate the Company's computer-related
operations remaining in Bellevue, Washington, the Company entered into a new
3-year lease commencing approximately May 1, 1995, for approximately 5,060
square feet at a rental of approximately $7,600 per month. In connection with
the final move of the Bellevue, Washington, operations to South San Francisco,
California, the Company anticipates an early termination of such lease. The
Company also entered into a new lease for approximately 11,860 square feet of
office facilities in Springfield, Ohio, at lease payments of approximately
$9,920 per month for the period August 1, 1995, through April 30, 1999, which
lease may be terminated by the Company on July 31, 1998, upon three months prior
notice and payment of a $3,000 termination fee. Some of the leases require the
Company to pay certain operating expenses in addition to the lease payment.
ITEM 3. LEGAL PROCEEDINGS
The Company is routinely a party to litigation incidental to its business,
as well as other litigation. While the ultimate results of such litigation
cannot presently be determined on the date of this Report, management believes
that no individual item of litigation or group of similar items of litigation is
likely to have a material adverse effect on the consolidated financial position
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth fiscal quarter of 1996.
15
<PAGE> 17
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of March 25, 1997,
are set forth below. Except for Mr. Gauer and Mr. Padilla, the following hold
the indicated office with respect to National and each of the Subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH NATIONAL
- ---------------------- --- --------------------------------------------------------------
<S> <C> <C>
Mark A. Speizer 53 Chief Executive Officer
Bruce A. Cole 49 President
Robert P. Barbarowicz 50 Executive Vice President, General Counsel and Secretary
Gregory S. Saunders 34 Executive Vice President, Treasurer and Chief Financial
Officer
Tyron Yun 42 Executive Vice President and Chief Information Officer
C. Alan Paylor 51 Executive Vice President, Sales and Marketing
Robert J. Lelieur 54 Vice President and Controller
Gerry L. Gauer 32 Senior Vice President of Pinnacle Data Corporation
Larry Padilla 47 Senior Vice President of Fastrac Systems, Inc., and of Fastrac
Systems, Inc. Insurance Agent & Broker
</TABLE>
MR. SPEIZER, a co-founder of the Company, has served on the Board of
Directors of National since its inception. Since July 1996, Mr. Speizer has
served as Chairman of the Board and Chief Executive Officer of National. Between
November 1986 and October 1995, Mr. Speizer served as Chairman of the Board and
Chief Executive Officer of National, and between June 1995 and October 1995
served as President of National. Between 1972 and October 1995, Mr. Speizer also
served in various executive level capacities and as a director for National's
subsidiaries, and since July, 1996, Mr. Speizer again serves in such capacity
for National's subsidiaries.
MR. COLE was elected President of the Company in July 1996. From March 1994
through July 1996, Mr. Cole was general counsel and executive vice president of
JB Oxford Holdings, Inc. From January 1991 through March 1994, Mr. Cole was of
counsel to the law firm Rubinstein & Perry, A Professional Corporation, and
Rubinstein & Perry, LLP, with an emphasis on business and corporation law with
extensive involvement in corporate restructuring and securities industries
matters. Mr. Cole was a founding partner of the law firm of Hendrickson, Higbie
& Cole and served as a partner of the firm from 1981 to 1991.
MR. BARBAROWICZ was elected Executive Vice President, General Counsel and
Secretary of the Company in August 1996. From 1993 to 1996, Mr. Barbarowicz was
a shareholder in the law firm Rubinstein & Perry, A Professional Corporation.
Mr. Barbarowicz was of counsel to Rubinstein & Perry, LLP from 1991 to 1993.
From 1983 to 1990, Mr. Barbarowicz was First Vice President and Assistant
General Counsel of H.F. Ahmanson & Company and was General Counsel for The
Ahmanson Insurance Companies from 1982 to 1989. In 1995, Mr. Barbarowicz
commenced voluntary proceedings under the provisions of Chapter 13 of the
federal bankruptcy laws, which proceedings were voluntarily withdrawn by Mr.
Barbarowicz within sixty days thereafter without any action taken or any debts
discharged.
MR. SAUNDERS joined the Company in March 1997 as Executive Vice President,
Treasurer and Chief Financial Officer. From 1990 to 1997, Mr. Saunders held
several senior management positions at Transcisco Industries, Inc., including
Vice President and Chief Financial Officer. From 1985 through 1988, Mr. Saunders
served in various financial management capacities at PLM International, Inc.,
including Controller of PLM Transportation Equipment Management, Inc. Prior to
1985, Mr. Saunders held finance and system analytical positions at American
Express Company, Inc. and Control Data Business Advisors, Inc. Mr. Saunders
earned his Masters in Business Administration from the Graduate School of
Business at Harvard University.
MR. YUN joined the Company in August 1995 as Executive Vice President and
Chief Information Officer. He served, from 1991 to 1995, as Director of
Applications and Components Engineering of DHL Systems, Inc., and held executive
positions with Oracle Corporation from 1990 to 1991, and with Arthur Andersen &
Company from 1977 to 1990.
16
<PAGE> 18
MR. PAYLOR joined the Company in September 1996 as Executive Vice
President, Sales. From October 1993 to September 1996, Mr. Paylor was
Vice-President, Sales for First American Real Estate Information Services, Inc.
Mr. Paylor served as Vice President, Sales for Computer Power, Inc. from January
1992 until October 1993.
MR. LELIEUR joined the Company in November 1995 as Director of Finance and
Controller. Mr. Lelieur currently serves as Vice President and Controller. From
1991 through October 1995 Mr. Lelieur served as Director of Finance for Advanced
Computer Group Software where he was directly responsible for finance,
accounting and human resources functions.
MR. GAUER was elected Senior Vice President of Pinnacle Data Corporation in
July 1996. From August 1995 through July 1996, Mr. Gauer was a consultant and
temporary employee of Pinnacle Data Corporation. From 1994 through August 1995,
Mr. Gauer was self employed as a financial consultant. Mr. Gauer was Operations
Manager for Foster Ousley Conley, a nationwide appraisal firm, from 1992 until
1994, where he managed the sales, customer service, production and human
resources functions as well as facilities management. In such capacity he
managed a staff of approximately 120, including professional appraisers,
productions managers, supervisors and processors.
MR. PADILLA joined Fastrac Systems, Inc. and Fastrac Systems, Inc.
Insurance Agent & Broker in June 1996 as Senior Vice President. From May 1994
until May 1996, Mr. Padilla was Senior Vice President and Director of Loan
Administration at First Interstate Bank. Mr. Padilla was First Vice President at
Great Western Bank from May 1990 to May 1994.
The executive officers serve at the discretion of the Board of Directors of
the Company. Mr. Speizer and Mr. Cole have each entered into employment
agreements with the Company for a three year term commencing July 11, 1996. Mr.
Speizer's and Mr. Cole's employment agreements each provide, among other things,
that during the term of the employment agreements the Board of Directors may
terminate Mr. Speizer's or Mr. Cole's employment only upon written notice for
cause. Cause is defined as a conviction of a felony or a finding of liability
based on intentional tortuous conduct consisting of a breach of fiduciary duty
relating to his performance as an officer and/or director of the Company. In
addition, Mr. Cole's employment agreement provides that if the Company
terminates Mr. Cole for reasons other than for cause, the Company shall pay Mr.
Cole, in a single payment payable upon termination, an amount equal to (i) his
unpaid base salary for the remainder of the three year term, (ii) the
undiscounted remaining costs to provide the benefits provided in the employment
agreement for the remainder of the three year term, such as the cost of Mr.
Cole's membership and participation in professional associations, a $1,000 per
month automobile allowance and premiums for certain insurance, including a $1
million life insurance policy, and (iii) any unpaid bonus from the previous year
plus any bonus payable pursuant to any bonus plan then in effect.
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<PAGE> 19
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
National's Common Stock trades on the NASDAQ stock market under the symbol
"NAIG". The following table sets forth the high and low sale prices for the
Common Stock and cash dividends declared for the periods indicated.
<TABLE>
<CAPTION>
COMMON CASH
STOCK PRICE DIVIDENDS
-------------- DECLARED PER
HIGH LOW SHARES
---- --- ------------
<S> <C> <C> <C>
1995
First Quarter.............................. 5 1/2 4 3/4 $ 0.00
Second Quarter............................. 7 3/4 6 1/8 $ 0.00
Third Quarter.............................. 6 3/4 5 3/4 $ 0.00
Fourth Quarter............................. 6 1/8 4 5/8 $ 0.00
1996
First Quarter.............................. 7 1/8 5 1/2 $ 0.00
Second Quarter............................. 7 1/4 5 1/4 $ 0.00
Third Quarter.............................. 7 3/8 5 5/8 $ 0.00
Fourth Quarter............................. 6 7/8 4 3/8 $ 0.00
</TABLE>
The average of the last closing bid and ask prices of the Common Stock, as
reported on the NASDAQ National Market on March 25, 1997, was $6.9375 per share.
As of March 25, 1997, there were approximately 700 holders of the Common Stock.
The Companies' Boards of Directors meet quarterly to consider the payment
of cash dividends based upon, among other things, an analysis of each Companies'
financial performance.
As a non-operating holding company, a principal source of National's
liquidity is the cash dividends received from its subsidiaries, including the
Insurance Subsidiary. The Insurance Subsidiary, consistent with other insurance
companies, is subject to laws and regulations which restrict its ability to pay
dividends. Under California law, the maximum amount of dividends that the
Insurance Subsidiary may pay National in any twelve (12) month period without
prior regulatory approval is the greater of either: (i) the net income
(excluding capital gains and losses) for the preceding calendar year; or (ii)
10% of policyholder surplus as of the previous December 31. For the year ended
December 31, 1996, the maximum dividend permitted to be paid in 1997 by the
Insurance Subsidiary to National is limited to approximately $2.7 million
without prior consent of the Commissioner. See "Business -- Restrictions on
Dividends by Insurance Subsidiary". In addition, insurers are required to report
dividends within five (5) days of declaration and at least ten (10) days prior
to payment. The interim period will allow the Commissioner to issue an order
stopping payment of the dividend if, in the Commissioner's opinion, the payment
would in any way violate the California Insurance Code or be hazardous to the
insurer's policyholders, creditors or the public.
California law further prohibits the payment of dividends without prior
approval of the Commissioner unless the insurer has available "earned surplus".
The term "earned surplus" is defined as unassigned funds (surplus) as reported
on the insurer's annual statement, excluding earned surplus derived from: (i)
unrealized net appreciation of assets; and (ii) an exchange of assets, unless
such earned surplus has been realized or the assets received in exchange are
currently realizable in cash. An exception to this prohibition is allowed where
the insurer's surplus as regards policyholders: (i) is reasonable in relation to
its outstanding liabilities; (ii) is adequate to the insurer's financial needs;
and (iii) the prior approval of the Commissioner is obtained.
The Company believes that the implementation of the modified restrictions
on the payment of dividends in California will not significantly affect the
Company's ability to pay dividends in accordance with its current dividend
policy. In addition, the Company believes that the implementation of the
restrictions will not have any significant effect on National's liquidity.
18
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical selected consolidated
financial data of the Company which has been derived from the audited
consolidated statements of the Company for and as of the end of each of the
years ended December 31, 1992, 1993, 1994, 1995 and 1996.
The following information should be read in conjunction with the financial
statements and related notes and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Report.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net premiums written................... $21,317 $22,549 $20,036 $14,956 $12,636
======= ======= ======= ======= =======
Net premiums earned.................... $24,100 $23,265 $20,858 $17,020 13,585
Flood inquiry fees..................... 6,767 11,693 7,978 10,593 18,499
Tracking fees.......................... 2,594 2,477 3,012 4,786 5,479
Net commission income.................. 1,526 462 1,103 1,502 1,145
Net investment income.................. 1,811 1,797 1,836 2,042 1,975
------- ------- ------- ------- -------
Total revenues................. 36,798 39,694 34,787 35,943 40,683
------- ------- ------- ------- -------
Loss and LAE........................... 8,951 8,952 7,873 6,044 4,002
Commissions paid to nonaffiliates...... 5,862 4,989 4,739 4,079 1,954
Personnel expenses..................... 10,069 12,890 13,677 16,891 18,948
All other expenses..................... 7,236 7,532 9,096 12,252 14,221
Non-recurring expense.................. 0 0 1,020 4,100 0
------- ------- ------- ------- -------
Total expenses................. 32,118 34,363 36,405 43,366 39,125
------- ------- ------- ------- -------
Income (loss) before provision for
income taxes........................ 4,680 5,331 (1,618) (7,423) 1,558
Provision for (benefit from) income
taxes............................... 1,514 1,687 (534) (2,559) 284
------- ------- ------- ------- -------
Net income (loss)...................... $ 3,166 $ 3,644 $(1,084) $(4,864) 1,274
======= ======= ======= ======= =======
Net income (loss) per share............ $ 0.75 $ 0.85 $ (0.23) $ (1.04) $ 0.33
Weighted average common and common
equivalent shares outstanding....... 4,198 4,270 4,679 4,679 3,917
Dividends per share.................... $ 0.32 $ 0.32 $ 0.20 $ 0.00 $ 0.00
BALANCE SHEET DATA
Total investments...................... $31,395 $43,008 $38,957 $37,202 $32,573
Total assets........................... $50,718 $63,699 $55,092 $52,096 $47,112
Total shareholders' equity............. $28,893 $41,949 $37,290 $32,881 $28,552
</TABLE>
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
National Insurance Group provides specialized information services and
related insurance products to mortgage bankers and financial institutions
located throughout the United States.
The Company's primary sources of revenues are premiums and commissions
earned from its specialized insurance products, fees billed to customers who use
Flood Zone Determination or Tracking Services and investment income. Net
premiums written represent direct and assumed premiums generated by the
Insurance Subsidiary, less premiums canceled or ceded to other insurers, and
adjusted for changes in the reserve for return premiums. Net premiums earned
represent net premiums written adjusted for changes in unearned premium
reserves. Flood inquiry fees are generated by Flood Zone Determination Services
and are based on the number of flood inquiries rendered. The Company provides
either one-time flood determinations
19
<PAGE> 21
or higher fee, life-of-loan services where the Company updates the flood
determinations over the periods in which the loans are outstanding or over the
term of the agreement with the particular customer. Revenues from flood zone
determinations are generally related to the volume of mortgage loan
originations, both new and refinanced. Tracking fees are generated by Tracking
Services and are usually based on the number of loans and leases tracked. Net
commission income represents commissions received from nonaffiliated insurance
companies for force-place insurance produced by the Agency and from the Federal
Emergency Management Agency ("FEMA") for flood insurance written by the
Insurance Subsidiary.
The Company's insurance products include force-place insurance policies
which have stated terms of either up to ninety (90) days ("short-term policies")
or six (6) months to one (1) year ("longer-term policies"), most of which are
longer-term policies. Premiums for longer-term policies are recorded as revenues
when earned. The Company's policies are canceled at a relatively high rate
because they generally remain in effect only until financial institutions
receive proof that borrowers have obtained their own insurance. At the time the
policies are issued, a reserve is established to provide for return of premiums
for anticipated cancellations, which has the effect of decreasing net premiums
written. Since 1993, the reserve has been established at approximately 64% to
68% of premiums. Premiums are written directly by the Insurance Subsidiary or by
third party insurance companies in certain states where the Insurance Subsidiary
is not licensed or where its products are not approved. The following table
summarizes premiums written net of cancellations during the periods indicated
(in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Direct Premiums Written....................... $23,984 $17,324 $15,623
Assumed Premiums.............................. (1,259) (197) (29)
------- ------- -------
Gross Premiums Written........................ 22,725 17,127 15,594
Gross Premiums Ceded.......................... (2,689) (2,171) (2,958)
------- ------- -------
Net Premiums Written.......................... $20,036 $14,956 $12,636
======= ======= =======
</TABLE>
The Company's strategy includes expanding its authorization to write
premiums on a direct basis and to reduce premium ceded to reinsurers. At the
present, the Company generally retains the first $500,000 of each risk and
reinsures the rest up to a maximum of $2.0 million per risk, pursuant to
reinsurance arrangements. The Company also purchases catastrophic reinsurance,
under which the Company is protected against an accumulation of losses arising
out of any one event up to 95% of $12.5 million in excess of the initial $2.5
million of losses which the Company incurs. See
"Business -- Regulation -- Reinsurance" and Note 10 of Notes to Consolidated
Financial Statements for a description of the Company's reinsurance
arrangements. The Company remains primarily liable to its policyholders in the
event any reinsurer is unable or will not fulfill the obligations assumed under
reinsurance. As a result of the cost and availability of reinsurance, in the
future the Company may elect to retain a higher portion of the risk historically
ceded to reinsurers. If the Company were to retain a higher proportion of
insured risks, it would increase its exposure to significant losses relating to
properties insured by the Company. This increased exposure could have a material
adverse effect on the Company's results of operations.
During 1992, 1993, 1994 and 1995, the Company ceded losses of $1,267,000,
$423,000, $213,000 and $6,600, respectively, to reinsurers, and for which it has
been fully reimbursed. The Company seeks to limit its exposure with respect to
any failure by a reinsurer to fulfill its obligations by evaluating the
financial condition and rating of members of its reinsurance pool (the Company's
policy is to only purchase reinsurance with U.S. insurers rated "A" or better by
A.M. Best) at the time of such purchase and by diversifying the reinsurance
pool.
Loss and loss adjustment expenses ("LAE") represent losses paid related to
force-place insurance underwritten or reinsured by the Insurance Subsidiary,
adjusted for changes in reserves for losses that are in the course of settlement
and losses that have been incurred but not yet reported. Commissions paid to
nonaffiliates represent amounts paid to third party agents and brokers, and
other producers related to sales of the Company's services and products.
Personnel expenses represent salaries, wages, sales commissions and
20
<PAGE> 22
bonuses paid to Company employees and related employee benefits. All other
expenses primarily consist of occupancy costs, including office rent and
utilities, equipment maintenance and depreciation, amortization of acquisition
costs, sales and marketing expenses, professional services and expenses related
to the delivery of products and services such as postage and printing.
The Company has considered the potential impact of the year 2000 to its
computer systems. Through normal, planned enhancements of existing systems,
future development of new systems, and upgrades to operation systems and
databases already covered by maintenance agreements, the Company believes that
year 2000 compliance will be achieved over approximately the next 18 months. The
Company does not anticipate any purchases of specific software or hardware, nor
does it anticipate the need to engage outside consultants, to achieve
compliance. While management expects some costs associated with compliance, it
is anticipated that those costs will not be material. The accounting treatment
of costs incurred in connection with year 2000 compliance will be treated as
period costs and will be expensed as incurred.
The Company's effective income tax rate was 33%, 34% and 18% for 1994, 1995
and 1996, respectively, reflecting the 35% federal statutory income tax rate and
the net effect of state taxes, less the beneficial effect of tax-exempt
investment income earned during the periods. See Note 7 of Notes to Consolidated
Financial Statements.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128. SFAS No. 128 is designed to
improve the earnings per share (EPS) information provided in the financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements, and increasing the comparability of EPS data on an
international basis. SFAS No. 128 is effective for financial statements issued
for periods ending after December 31, 1997, including interim periods. The
Company will implement SFAS No. 128 in 1997. Management has not determined the
impact that SFAS No. 128 may have on the financial statements.
RESULTS OF OPERATIONS
The following table sets forth certain items as a percentage of total
revenues for the periods indicated.
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER
31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net premiums earned................................. 60.0% 47.4% 33.4%
Flood inquiry fees.................................. 22.9 29.5 45.4
Tracking fees....................................... 8.7 13.3 13.5
Net commission income............................... 3.2 4.2 2.8
Net investment income............................... 5.2 5.6 4.9
----- ----- -----
Total revenue............................. 100.0 100.0 100.0
----- ----- -----
Loss and LAE........................................ 22.6 16.8 9.8
Commissions paid to nonaffiliates................... 13.6 11.3 4.8
Personnel expenses.................................. 39.3 49.3 46.6
All other expenses.................................. 26.1 25.7 34.7
Restructuring charge................................ 2.9 17.5 0.3
----- ----- -----
Total expenses............................ 104.5 120.6 96.2
----- ----- -----
Income (loss) before provision for income taxes..... (4.5) (20.6) 3.8
Provision for income taxes.......................... (1 .5) (7.1) 0.7
----- ----- -----
Net income (loss)................................... (3.0)% (13.5)% 3.1%
===== ===== =====
</TABLE>
21
<PAGE> 23
YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1996
Revenue
Total revenue increased from $35.9 million in 1995 to $40.7 million in
1996, an increase of $4.8 million or 13.4%. Net premiums written decreased from
$15.0 million in 1995 to $12.6 million in 1996, a decrease of $2.4 million or
16.0%. The decrease in net premiums was principally due to an increase in
reserves to provide for return of premiums for anticipated policy cancellations
and the run-off of certain accounts.
Net premiums earned decreased from $17.0 million in 1995 to $13.6 million
in 1996, a decrease of $3.4 million or 20.0%. The decrease was partially due to
the increase in reserve for return premiums and also partially due to a decline
in written premiums.
Flood inquiry fees increased from $10.6 million in 1995 to $18.5 million in
1996, an increase of $7.9 million or 74.5%. The addition of new customers
contributed approximately $6 million of the increase. A change in estimate of
deferred revenue related to Pinnacle's future servicing obligations for its life
of loan services contributed approximately $900,000 of the increase. Interest
rates have remained generally favorable for real estate borrowers with loan
origination volumes increasing with Pinnacle's existing customers.
Tracking fees increased from $4.8 million in 1995 to $5.5 million in 1996,
an increase of $700,000 or 14.6%. The increase was primarily due to new business
from two new customers.
Expenses
Loss and LAE was $6.0 million in 1995 (35.5% of net premiums earned) and
$4.0 million in 1996 (29.5% of net premiums earned), a decrease of $2.0 million
or 33.3%. The decline in losses and LAE was a direct result of fewer losses and
loss adjustment expenses incurred during 1996. The loss ratio for the fourth
quarter of 1996 was very favorable and contributed approximately one-half of the
decrease when compared to 1995. The average loss per new claim reported
decreased from $6,316 in 1995 to $5,513 in 1996. The number of new claims
decreased from 957 reported in 1995 to 726 reported in 1996.
Commissions paid to nonaffiliates decreased from $4.1 million (24.1% of
premiums earned) in 1995 to $2.0 million (14.4% of premiums earned) in 1996, a
decrease of $2.1 million, or 51.2%, due primarily to the fact that a larger
percentage of the insurance business has transferred to customers with lower
commission rates.
Personnel expenses increased from $16.9 million in 1995 to $18.9 million in
1996, an increase of $2.0 million or 11.8%. The increase in personnel expenses
was due to staff additions and increased outside labor in response to the volume
increases in the Flood Zone Determinations Services business. Personnel expenses
as a percent of total revenue decreased from 47.0% in 1995 to 46.6% in 1996.
All other expenses increased from $12.2 million in 1995 to $14.2 million in
1996, an increase of $2 million or 16.4%. In June 1996, the Company accrued $1.4
million of expense as a result of retention agreements entered into with certain
executives. The purpose of the agreements was to ensure the availability and
employment of those executives through the transition following the change of
control of the Company which occurred in July 1996.
As a result of the above factors, income before provision for income taxes
increased from a loss of $7.4 million in 1995 to a profit of $1.6 million in
1996, an increase of $9.0 million.
YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31, 1995
Revenue
Total revenue increased from $34.8 million in 1994 to $35.9 million in
1995, an increase of $1.1 million or 3.2%. Net premiums written decreased from
$20.0 million in 1994 to $15.0 million in 1995, a decrease of $5.0 million or
25.0%. The decrease in net premiums was principally due to two factors: (1)
approximately $4.3 million less business in 1995 from one customer which ceased
writing premiums with the Company in early 1995, and; (2) 1994 premiums written
included $1.4 million from a significant customer whose loan
22
<PAGE> 24
servicing portfolio was sold by the Resolution Trust Corporation in late 1994
and therefore, the customer did not contribute to premiums in 1995. These
decreases were partially offset by additional business from new customers.
Net premiums earned decreased from $20.9 million in 1994 to $17.0 million
in 1995, a decrease of $3.9 million or 18.7%. The decrease was primarily related
to the same factors which caused the decline in net premiums written during the
period.
Flood inquiry fees increased from $8.0 million in 1994 to $10.6 million in
1995, an increase of $2.6 million or 32.5%. Flood determinations are performed
as part of the mortgage loan origination process and the increase in flood
inquiry fee revenues is primarily due to the decline in mortgage interest rates
and the addition of new customers. Interest rates began to decline during the
first quarter of 1995 contributing to increases in loan origination volumes. In
addition, Pinnacle added new customers and converted many of its existing
customers to the higher priced life-of-loan product as the industry complies
with recent federal regulations.
Tracking fees for the period increased from $3.0 million in 1994 to $4.8
million in 1995, an increase of $1.8 million or 60.0%. The increase was due to
the addition of several new customers.
Net investment income for the period increased from $1.8 million in 1994 to
$2.0 million in 1995, an increase of $200,000 or 11.1%. The increase is due to a
rise in interest rates during 1995 which increased the Company's rate of return
on investments.
Expenses
Loss and LAE was $7.9 million in 1994 (37.7% of net premiums earned) and
$6.0 million in 1995 (35.5% of net premiums earned), a decrease of $1.9 million
or 24.1%. The decrease was due in part to fewer occurrences of catastrophic
events in 1995 as compared to 1994.
Commissions paid to nonaffiliates decreased from $4.7 million (22.7% of
premiums earned) in 1994 to $4.1 million (24.1% of premiums earned) in 1995, a
decrease of $600,000, or 12.8%, due primarily to lower commission rates and the
loss of premiums from customers who did not renew with the Company.
Personnel expenses increased from $13.7 million in 1994 to $16.9 million in
1995, an increase of $3.2 million or 23.4%. The increase in personnel expenses
is due to staff additions in response to the volume increases in the Flood
inquiry and Tracking fee based business and staff additions in the information
systems departments in an effort to enhance the new systems technology.
All other expenses increased from $9.1 million in 1994 to $12.3 million in
1995, an increase of $3.2 million or 35.2%. The Company incurred charges of $1.6
million in connection with the employment termination of Mark Speizer who was
the Company's Chief Executive Officer and Howard L. Herman who was the Company's
President. The Company also recorded $600,000 for the write-off of software used
to provide its information services products.
The Company incurred expenses of a non-recurring nature in the amount of
$4.1 million during 1995. On June 13, 1995, the California Department of
Insurance notified the Company that its application for adjustment of its
Proposition 103 return premium liability had been denied and the Company accrued
an additional $4.1 million for the constitutionally mandated roll-back of
insurance premiums under the Proposition. This amount is included on the balance
sheet as Reserve for Prop 103 and on the income statement as Non-recurring
Expense.
As a result of the above factors, loss before provision for income taxes
increased from $1.6 million in 1994 to $7.4 million in 1995, an increase of $5.8
million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of a company's ability to secure sufficient cash to
meet its contractual obligations and operating needs. National is a holding
company with no operations and no sources of income itself except
23
<PAGE> 25
interest or investment income. The principal assets of National are the stock of
its Subsidiaries. National is, and for the foreseeable future will continue to
be, dependent on the dividends from its Subsidiaries to meet its liquidity
requirements, including debt service obligations. Dividends payable to National
by the Insurance Subsidiary are subject to certain regulatory restrictions which
are described below.
The Insurance Subsidiary collects and invests premiums written in advance
of the payments for associated claims. In the absence of a catastrophic loss,
this timing difference between premium collection and claims payment, combined
with investment income, normally provides short-term funds in excess of normal
operating demands for cash. As of December 31, 1996, the Company had cash and
short-term investments aggregating $13.2 million.
Of the Company's cash and short-term investments, $8.3 million is held by
the Insurance Subsidiary. Insurance companies, including the Insurance
Subsidiary, are subject to laws and regulations which restrict their ability to
pay dividends to parent companies or other shareholders. Under California law,
the maximum amount of dividends that the Insurance Subsidiary may pay the
Company in any twelve (12) month period without prior regulatory approval is the
greater of (i) net income for the preceding calendar year, or (ii) 10% of
policyholders' surplus (shareholders' equity adjusted to a statutory basis) as
of the previous December 31. For the year ended December 31, 1996, the Insurance
Subsidiary had net income of $2.8 million and as of December 31, 1996, statutory
policyholders' surplus of $26.8 million. For the year ended December 31, 1996,
the maximum dividend permitted to be paid by the Insurance Subsidiary to
National was approximately $2.8 million. See "Market for Registrant's Common
Equity and Related Stockholder Matters" and Note 14 of Notes to Consolidated
Financial Statements.
In September 1996, the Company concluded a note agreement providing $2.0
million for the purpose of partially financing the repurchase of 705,300 shares
of its common stock. The total purchase price of the stock was approximately
$5.0 million. See Note 20 of Notes to Consolidated Financial Statements.
A second repurchase of 100,000 shares was made on October 22, 1996. The
shares were acquired through a private transaction at a price of $6.95 per
share. The total purchase price of that stock was approximately $700,000.
Consolidated stockholders' equity at December 31, 1996, totaled $28.6
million or $7.33 per share compared to $32.9 million or $7.03 per share at
December 31, 1995. As a result of the repurchase of the Company's common shares
of stock, stockholders' equity decreased approximately $5.0 million; however,
the equity per share increased approximately $.30. See Note 22 to Notes to
Consolidated Financial Statements.
Industry and regulatory guidelines suggest that a property and casualty
insurers' annual statutory net written premium should not exceed approximately
three times its policyholders' surplus. The Company's surplus ratio is
significantly lower than such guidelines. For the year ended December 31, 1996,
the Company's net written premium to policyholder surplus ratio was .50 to 1.
See "Business -- Insurance Operations -- Insurance Operating Ratios".
The Company is not aware of any trends, requirements, commitments, or
events that will or are reasonably likely to have a negative impact on the
Company's liquidity during 1997. This paragraph contains forward-looking
statements reflecting the Company's current expectations. There can be no
assurance that the Company's actual future performance will meet the Company's
current expectations. Investors should review the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -- Factors Affecting Future Operating Results" for a discussion of factors that
could affect future performance.
Inflation generally affects the rate of investment return in the securities
and financial markets, and increases and decreases in such investment return
rates have a corresponding effect on the Company's investment income.
24
<PAGE> 26
FACTORS AFFECTING FUTURE OPERATING RESULTS
These factors, together with statements regarding certain risks and
uncertainties contained in other parts of this Report, may affect the Company's
operating results. Investors should read this section in connection with any
forward-looking statement made in this Report, including statements preceded or
followed by the words "believes", "anticipates", "expects", "aware" or similar
expressions as they relate to the Company or its management.
Flood Zone Determinations
The Company derives a substantial portion of its total revenues from fees
for Flood Zone Determination Services. These services are primarily provided to
assist lenders in complying with federal laws which in many instances require
lenders to determine whether property being financed is located in a
federally-designated Special Flood Hazard Area ("SFHA") and require borrowers to
obtain flood insurance. Any significant change in federal legislation or
secondary market requirements limiting these requirements on lenders or
borrowers, or the development by competitors of significantly enhanced service
or delivery systems or an increase in interest rates or a reduction in real
estate loan fundings could have a material adverse effect on the Company's
business or operating results.
Earnings Volatility
The Company's financial results can be significantly affected by a number
of factors, including, but not limited to, the volume of force-place insurance
and the rate of cancellation of insurance policies, the addition or loss of
significant customers, significant changes in the number of loans or personal
property leases being tracked for major customers, increases or decreases in
interest rates, and catastrophic loss events. For example, in 1992 the Insurance
Subsidiary incurred net losses relating to the Los Angeles riots and Hurricane
Andrew of $612,000 and $527,000, respectively. In November 1993, the Insurance
Subsidiary received claims of approximately $650,000 from policyholders for
losses arising out of the October and November 1993 series of fires in Southern
California. The Company also received an assessment of $725,000 from the
California Fair Plan Association, a mandatory insurance pool for certain
California real estate, relating to losses from those fires. In addition,
revenues from the Company's Flood Zone Determination Services are directly
related to the volume of mortgage loan originations, both new and refinanced,
and any change in the level of such activity could have a material impact on the
Company's performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors Affecting Operating
Results -- The Insurance Industry", and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The Insurance Industry
The Company derives a significant amount of its revenues from insurance
premiums and investment income. In the event that, for whatever reason, the
Insurance Subsidiary experiences abnormally high losses, purchases reinsurance
from reinsurers who will not or cannot pay losses submitted, or other adverse
developments occur, then any such event or combination of events could have a
material adverse impact on the Company. In addition, insurance companies and
others have often been sued under certain legal theories, such as bad faith
handling or settlement of claims, which could subject the Insurance Subsidiary
to liability in excess of policy limits. An adverse outcome of any such lawsuit
could have a material negative impact on the Company.
Reserve Adequacy
The Insurance Subsidiary is required to maintain reserves to cover its
estimated ultimate liability for loss and loss adjustment expenses with respect
to reported losses and incurred but not reported claims. These reserves are
estimates of what the Insurance Subsidiary expects the ultimate settlement and
administration of claims will cost, and are based on known facts and
circumstances, predictions of future events, estimates of future trends in
claims severity and other variable, subjective factors. No assurances can be
given that such estimates will be adequate to cover actual losses incurred by
the Insurance Subsidiary. Any significant changes
25
<PAGE> 27
in the Insurance Subsidiary's estimate of ultimate losses on reported claims may
materially adversely affect the results of the Insurance Subsidiary's operations
in the period reported. The Insurance Subsidiary has in the past experienced
adverse developments in its loss reserves. The Insurance Subsidiary's loss and
loss adjustment expense reserves are reviewed on an annual basis by unaffiliated
actuaries. The Insurance Subsidiary's most recent actuarial review of such
reserves as of December 31, 1996 concluded that the reserves (i) met the
requirements of the insurance laws of California; (ii) were computed in
accordance with accepted loss reserving standards and principles and (iii) make
a reasonable provision for all unpaid loss and loss expense obligations of the
Insurance Subsidiary under the terms of its policies and agreements.
The Insurance Subsidiary also maintains a reserve for return premiums which
is based upon the Insurance Subsidiary's historical experience. As is prevalent
in the force-place insurance industry, a substantial amount of the Insurance
Subsidiary's net premiums written are refunded to policyholders. The amount of
such refunds can be affected by, among other things, inaccurate or untimely data
submitted by customers, which the Insurance Subsidiary uses as a basis for
recording written premiums or the loss of a significant customer. No assurance
can be given that the reserve for return premiums will be adequate to cover
actual refunded premiums paid by the Insurance Subsidiary in the future. See,
"Business - Insurance Operations", and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Underwriting Risks
Traditional insurance companies underwrite risks individually or by class,
following an in-depth analysis of such risks. Although the Insurance Subsidiary
applies underwriting techniques to a small portion of insured risks, the
immediate coverage required by purchasers of force-place insurance generally
requires the Insurance Subsidiary to write specialized insurance within
predesignated limits and geographic area, at a flat rate, without the
application of traditional underwriting criteria to individual risks.
Accordingly, the Insurance Subsidiary may be insuring individual risks that it
might not have insured had it applied traditional analysis to such risks. In
addition, the Insurance Subsidiary may not have adequate spread of risk in a
particular geographic area. See "Insurance Operations -Underwriting".
Reinsurance Considerations
The Insurance Subsidiary's business is partially dependent upon its ability
to cede to reinsurers risks insured by the Insurance Subsidiary. The amount,
availability and cost of reinsurance are subject to prevailing market
conditions, beyond the control of the Insurance Subsidiary, which can affect the
Insurance Subsidiary's level of business and profitability. The Insurance
Subsidiary is ultimately liable for the reinsured risk if for any reason the
reinsurers do not cover or will not pay the Insurance Subsidiary for the losses
of the insureds. As a result of the anticipated increased cost and more limited
availability of reinsurance, in the future, the Insurance Subsidiary may elect
to retain a higher portion of the risk historically ceded to reinsurers. If the
Insurance Subsidiary were to retain a higher proportion of insured risks, it
would increase its exposure to significant losses relating to properties insured
by the Insurance Subsidiary. This increased exposure could have a material
adverse effect on the Company's results of operation. See "Regulation -
Reinsurance".
Pinnacle and/or the Company also indemnifies its customers for certain
losses resulting from erroneous flood inquiry determinations, where a borrower
was not properly advised whether the collateral was located in or out of an
SFHA. While to date Pinnacle has experienced no significant losses in this
regard and maintains reserves equal to its estimate of incurred but unreported
indemnification losses, there can be no assurance such reserves will prove
adequate in the future. The Company does not maintain errors and omissions
insurance coverage against losses.
Rapid Technological Change and New Products; Product Delays
The markets for the Company's information services are highly competitive
and characterized by rapidly changing technology. The Company believes that its
future success will depend, in part, on its ability to identify, develop,
install and support new services in a timely fashion, and on market acceptance
of such
26
<PAGE> 28
services. No assurance can be given that the introduction of new technologies
will enable the Company to gain market share, realize cost savings or increase
revenues.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information is incorporated hereby by reference to the financial
statements listed in Item 14 of Part IV of this Report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
<TABLE>
<CAPTION>
NAME AGE(1) PRINCIPAL OCCUPATION
- ------------------------- ------ ---------------------------------------------------------
<S> <C> <C>
Nuno Brandolini d'Adda 43 Chairman of the Board and Chief Executive Officer of
Scorpion Holdings, Inc.
Bruce A. Cole 49 President of National, the Agency, Fastrac, the Insurance
Subsidiary, and Pinnacle.
Saul B. Jodel 46 President and Chairman of the Board of The Original San
Francisco Toymakers, Inc.
Kevin R. McCarthy 36 President of Scorpion Holdings, Inc.
Mark A. Speizer 53 Chief Executive Officer and Chairman of the Board of
National, the Agency, Fastrac, the Insurance Subsidiary,
and Pinnacle.
</TABLE>
- ---------------
(1) As of March 25, 1997.
Except as set forth below, each of the directors has been engaged in his
principal occupation set forth above during the past five years. There is no
family relationship between any director or executive officer of the Company,
except that Mr. Speizer and Mr. Cole are second cousins.
MR. BRANDOLINI has been Chairman of the Board and Chief Executive Officer
of Scorpion Holdings, Inc., a merchant bank, since May 1995. Prior to that he
was affiliated with various merchant banks, serving as Managing Director of
Rosecliff, Inc. from November 1993 to May 1995, as Vice President of Salomon
Inc. from June 1992 to November 1993, and as President of Baltheus Group from
May 1988 to June 1991. Mr. Brandolini serves on the Board of Directors of Sonex
Research, a technology based company which has developed a product to favorably
alter the internal combustion process; Arabella S.A., a holding company based in
Luxembourg which invests in public and private securities; and Hariston
Corporation, a Canadian holding corporation with interests in a Polish specialty
retailer and a CD Rom based educational software developer.
MR. COLE has served as President of the Company since July 1996. From March
1994 through July 1996, Mr. Cole was general counsel and executive vice
president of JB Oxford Holdings, Inc. From 1991 through March 1994 Mr. Cole was
of counsel to the law firm Rubinstein & Perry, A Professional Corporation, and
Rubinstein & Perry, LLP, with an emphasis on business and corporation law with
extensive involvement in corporate restructuring and securities industries
matters. Mr. Cole was a founding partner of the law firm of Hendrickson, Higbie
& Cole and served as a partner of the firm from 1981 to 1991.
MR. JODEL has been President and Chairman of the Board of The Original San
Francisco Toymakers, Inc., since January 1992. From 1984 to October 1991, he
served in various executive capacities with Lewis Galoob Toys, most recently as
President.
27
<PAGE> 29
MR. MCCARTHY has been President of Scorpion Holdings, Inc., since November
1995. From October 1993 to October 1995, he was Chief Financial Officer of
Rosecliff, Inc. From May 1988 to October 1993, he was with the accounting firm
Ernst & Young, most recently as a partner. Mr. McCarthy serves on the Board of
Directors of Hariston
Corporation, a Canadian holding corporation with interests in a Polish specialty
retailer and a CD Rom based educational software developer.
MR. SPEIZER, a co-founder of the Company, has served on the Board of
Directors of National since its inception. Since July 1996, Mr. Speizer has
served as Chairman of the Board and Chief Executive Officer of National. Between
November 1986 and October 1995, Mr. Speizer served as Chairman of the Board and
Chief Executive Officer of National, and between June 1995 and October 1995,
served as President of National. Between 1972 and October 1995, Mr. Speizer also
served in various executive level capacities and as a director for National's
subsidiaries, and since July 1996 Mr. Speizer again serves in such capacity for
National's subsidiaries.
COMPENSATION OF DIRECTORS
Each non-employee director of the Company is paid at the rate of $1,000 per
month. Employee directors are not compensated for their services on the Board of
Directors or on committees of the Board. Non-employee directors also participate
in the 1991 Director Option Plan (the "Director Plan"). The Director Plan
provides for the automatic grant of a nonstatutory stock option to purchase
50,000 shares of Common Stock of the Company on the date such person first
becomes a director (which number was increased from 25,000 shares at the May
1995 Annual Meeting of Shareholders). All options granted under the Director
Plan vest at the rate of one-fourth of the shares subject to the option on the
first anniversary of the date of grant, with one-forty-eighth of such shares
vesting at the end of each month thereafter. The Director Plan further provides
that if Mr. Speizer and Howard L. Herman, the Company's former President, shall
sell or otherwise transfer beneficial ownership of more than 75% of the
aggregate number of shares controlled by them as of May 23, 1995, the optionee
(except for options granted under the Director Plan to Mr. Speizer and/or Mr.
Herman) shall thereafter have the right to exercise such option as to all of the
optioned stock, including shares as to which such option would not otherwise be
exercisable. As of May 23, 1995, Mr. Speizer and Mr. Herman controlled an
aggregate of 1,772,329 shares which number is subject to adjustment in
accordance with the provision of the Directors Plan regarding adjustments upon
changes in capitalization or merger. On May 31, 1996, Mr. Speizer purchased
788,795 shares from Mr. Herman and certain Herman family members and trusts. On
June 18, 1996, Mr. Speizer purchased 35,500 shares from Mr. Herman and his
spouse. Such purchases constituted the purchase of all shares owned and
beneficially owned by Mr. Herman. During the fiscal year ended December 31,
1996, directors Brandolini, Jodel and McCarthy were each automatically granted
an option to purchase 50,000 shares each at a per share exercise price of
$5.875.
EXECUTIVE OFFICERS
Information regarding executive officers is included in Item 1 hereof under
the caption "Executive Officers of the Company" and is hereby incorporated by
reference into this Item 10.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires National's officers and directors and persons who own
more than ten percent (10%) of a registered class of National's equity
securities, to file certain reports regarding ownership of, and transactions in,
National's securities with the SEC. Such officers, directors and ten percent
(10%) shareholders are also required by SEC rules to furnish National with
copies of all Section 16(a) forms that they file.
Based solely on its review of such forms received by it, or written
representations from certain reporting persons, National believes that during
fiscal 1996 all Section 16(a) filing requirements applicable to its officers,
directors and ten percent (10%) shareholders were complied with.
28
<PAGE> 30
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation received in the last three
fiscal years by (i) each individual who served as National's Chief Executive
Officer during the last fiscal year, (ii) each of the four other most highly
compensated executive officers whose salary plus bonus exceeded $100,000 during
the last fiscal year who served as executive officers at the end of the fiscal
year ended December 31, 1996, and (iii) Paulette J. Taylor and Kevin C. Eichler,
who would have qualified as executive officers pursuant to item (ii) but for the
fact that they were not serving as executive officers as of the end of the
fiscal year ended December 31, 1996 (collectively, the "Named Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL
COMPENSATION AWARDS ALL OTHER
---------------- ------------ COMPENSATION
SALARY BONUS OPTIONS ------------
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- ---------------------------------------------- ----- ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Mark A. Speizer............................... 1996 134,601 60,000 75,000 23,828(1)
Chairman of the Board and CEO 1995 565,212(2) 0 50,000 602,000(3)
1994 297,711 0 50,000(4) 0
John R. Gaulding(5)........................... 1996 104,319 0 50,000 743,200(6)
Former President and CEO 1995 -- -- -- --
1994 -- -- -- --
Melvyn D. Croner(7)........................... 1996 120,000 0 -- 3,000(8)
Former Acting President, Acting 1995 75,000 0 50,000 6,000(9)
CEO and Acting Chairman of the Board 1994 -- -- -- --
Bruce A. Cole(10)............................. 1996 124,923 40,000 75,000 23,490(11)
President 1995 -- -- -- --
1994 -- -- -- --
Tyron Yun..................................... 1996 129,288 20,000 0 0
Executive Vice President, Chief 1995 47,500 0 25,000 0
Information Officer 1994 -- -- -- --
Robert J. Lelieur............................. 1996 89,288 15,000 0 0
Vice President and Controller 1995 12,750 0 5,000 0
1994 -- -- -- --
Gerry L. Gauer................................ 1996 153,000 23,000 25,000 0
Senior Vice President, Pinnacle 1995 27,333 0 0 0
Data Corporation 1994 -- -- -- --
Paulette J. Taylor(12)........................ 1996 105,384 0 50,000 195,000(13)
Former Executive Vice President, 1995 144,231 0 5,000 0
General Counsel and Secretary 1994 121,635 0 16,000(14) 0
Kevin C. Eichler(15).......................... 1996 96,154 0 50,000 195,000(16)
Former Executive Vice President, 1995 62,308 0 25,000 0
Chief Financial Officer and Treasurer 1994 -- -- -- --
</TABLE>
- ---------------
(1) Represents $12,458 of premiums on a term life insurance policy paid by the
Company for Mr. Speizer's benefit, an automobile allowance of $5,370 and
$6,000 payable to non-employee directors of National.
(2) Includes severance payment of $285,000 attributable to salary relating to
Mr. Speizer's termination of employment with National in October 1995.
(3) Represents severance payment of $600,000 and $2,000 payable to non-employee
director of National.
(4) Pursuant to National's February 1994 option repricing program (the
"February Repricing"), this option was granted upon the simultaneous
cancellation of an option to purchase a like number of shares granted in
fiscal 1993.
(5) Mr. Gaulding served as a consultant to the Company in February and March
1996. He served as President, Chief Executive Officer and Chairman of the
Board from April 1996 until July 1996.
29
<PAGE> 31
(6) Represents payments made upon a change of control of the Company pursuant
to the terms of a the Second Amendment of John R. Gaulding At-Will
Employment Agreement dated July 10, 1996.
(7) Mr. Croner served as Acting President, Acting Chief Executive Officer and
Acting Chairman of the Board until John R. Gaulding assumed such positions
in April 1996.
(8) Represents compensation payable to non-employee director of National.
(9) Represents compensation payable to non-employee director of National.
(10) Mr. Cole assumed the position of President in July, 1996.
(11) Represents $18,120 of premiums on a term life insurance policy paid by the
Company for Mr. Cole's benefit and an automobile allowance of $5,370.
(12) Ms. Taylor terminated her employment with the Company effective July, 1996.
(13) Represents payment made upon a change of control of the Company pursuant to
the terms of that certain Change of Control Severance Agreement and Mutual
Release dated July 10, 1996 between Ms. Taylor and National.
(14) Pursuant to the National's November 1994 option repricing program (the
"November Repricing"), options to purchase an aggregate of 11,000 shares
were granted upon the simultaneous cancellation of options to purchase an
aggregate of 11,000 shares granted in prior fiscal years. In addition, an
option to purchase 5,000 shares was granted pursuant to the November
Repricing upon the simultaneous cancellation of an option to purchase 5,000
shares granted pursuant to the February Repricing.
(15) Mr. Eichler terminated his employment with the Company effective July,
1996.
(16) Represents payment made upon a change of control of the Company pursuant to
the terms of that certain Change of Control Severance Agreement and Mutual
Release dated June 26, 1996 between Mr. Eichler and National.
OPTION GRANTS IN LAST FISCAL YEAR
The following tables set forth, as to the Named Officers, certain
information relating to stock options granted during fiscal 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT ANNUAL RATES OF
SECURITIES OF TOTAL STOCK PRICE
UNDERLYING OPTIONS APPRECIATION
OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM(3)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME (#) FISCAL YEAR(1) ($/SH) DATE(2) 5% ($) 10% ($)
- --------------------- ---------- -------------- ----------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Speizer...... 75,000 18.0% 5.875 07/11/06 277,125 702,375
John R. Gaulding..... 50,000 12.0% 6.500 02/25/06 204,500 518,000
Melvyn D. Croner..... 0 -- -- -- -- --
Bruce A. Cole........ 75,000 18.0% 5.875 07/11/06 277,125 702,375
Tyron Yun............ 0 -- -- -- -- --
Robert J. Lelieur.... 0 -- -- -- -- --
Gerry L. Gauer....... 25,000 6.0% 5.875 07/11/06 92,375 234,125
Paulette J. Taylor... 50,000 12.0% 7.000 07/11/98(4) 36,000 73,500
Kevin C. Eichler..... 50,000 12.0% 6.750 07/11/98(4) 34,500 83,500
</TABLE>
- ---------------
(1) The total number of shares subject to options granted to employees in fiscal
1996 was 416,000.
(2) Options may terminate before their expiration upon the termination of
optionee's status as an employee or consultant, the optionee's death or an
acquisition of National.
30
<PAGE> 32
(3) Potential realizable value assumes that the stock price increases from the
date of grant until the end of the option term (10 years except in the cases
of Ms. Taylor and Mr. Eichler whose option term ends effective July 11,
1998) at the annual rate specified (5% and 10%). Annual compounding results
in total appreciation of 63% (at 5% per year) and 159% (at 10% per year). If
the price of National's Common Stock were to increase at such rates from the
price at 1996 fiscal year end ($4.375 per share) over the next 10 years, the
resulting stock price at 5% and 10% appreciation would be $7.13 and $11.35,
respectively. The assumed annual rates of appreciation are specified in SEC
rules and do not represent National's estimate or projection of future stock
price growth. National does not necessarily agree that this method can
properly determine the value of an option.
(4) The option term of the options granted to Ms. Taylor and to Mr. Eichler will
end July 11, 1998 pursuant to the terms of their respective severance
agreements with the company. See "Certain Relationships and Related
Transactions" regarding the terms of such severance agreements.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
There were no option exercises in fiscal 1996 by the Named Officers. The
following table provides information with respect to the value of unexercised
options held by the Named Officers at the close of business on December 31,
1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END (#) AT FISCAL YEAR END ($)(2)
---------------------------------- -----------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark A. Speizer....................... 70,000(3) 125,000(4) -- --
John R. Gaulding...................... 50,000(5) 0 -- --
Melvyn D. Croner...................... 13,542 0 -- --
Bruce A. Cole......................... 0 75,000 -- --
Tyron Yun............................. 8,333 16,667 -- --
Robert J. Lelieur..................... 1,354 3,646 -- --
Gerry L. Gauer........................ 0 25,000 -- --
Paulette J. Taylor.................... 72,250(5) 0 -- --
Kevin C. Eichler...................... 75,000(5) 0 -- --
</TABLE>
- ---------------
(1) Options granted under National's 1986 Stock Option Plan are fully
exercisable from their date of grant, whether or not vested. Unvested shares
purchased upon exercise of an option are subject to a repurchase option in
favor of National, which repurchase option lapses over time. The options
listed as Exercisable are those which could be exercised without being
subject to a repurchase option in favor of National.
(2) Market value of underlying securities based on the closing price of $4.375
of National's Common Stock on the NASDAQ National Market on December 31,
1996, minus the exercise price. None of the options held by the Named
Officers were exercisable at a price of $4.375 or less.
(3) Represents 55,417 under the 1986 Stock Option Plan and 14,583 under the 1991
Director Option Plan.
(4) Represents 89,583 under the 1986 Stock Option Plan and 35,417 under the 1991
Director Option Plan.
(5) At December 31, 1996 all of such shares were vested.
COMPENSATION OF DIRECTORS
See Part III, Item 10, "Directors and Executive Officers of the
Registrant -- Compensation of Directors".
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
See Part III, Item 13, "Certain Relationships and Related Transactions",
for a discussion of employment contracts and severance agreements with certain
of the Named Officers.
31
<PAGE> 33
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors is composed
of two non-employee directors, Saul B. Jodel and Nuno Brandolini d'Adda. No
interlocking relationship exists between the Company's Board of Directors and
the compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
Mr. Brandolini is the sole shareholder, a director and chief executive
officer of Scorpion Holdings, Inc., a Delaware corporation ("Scorpion"). In
September 1996, National entered into a one year consulting agreement with
Scorpion pursuant to which Scorpion would render services relating to
investments, acquisitions and other potential transactions in exchange for an
annual fee of $300,000 plus reimbursement for costs and expenses. Mr. Brandolini
is a director of National. For a more detailed description of such consulting
agreement, see "Item 13 -- Certain Relationships and Related Transactions".
Mr. Brandolini is a shareholder, director and officer of Hydrodynamics
Corporation ("Hydrodynamics"). In October 1996, National entered into a bridge
loan agreement with Hydrodynamics, pursuant to which National loaned to
Hydrodynamics $300,000. In December 1996, Hydrodynamics commenced voluntary
proceedings under Chapter 11 of the federal bankruptcy laws. In February 1997,
Arabella, S.A. purchased from National the Convertible Promissory Note of
Hydrodynamics issued to National for a purchase price of $300,000. National
assigned its rights under the Convertible Promissory Note and the Stock Purchase
Warrant to Arabella, S.A. Mr. Brandolini is also a director of Arabella, S.A.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee establishes the general compensation plans of
the Company, including the Company's 1986 Stock Option Plan. The Committee
reviews compensation, evaluates performance, and determines base salary levels
for the Company's executives.
The Chief Executive Officer ("CEO") of the Company is invited to attend and
participate in Committee meetings, except when CEO compensation is being
discussed. The CEO may designate the President, General Counsel, another
Executive Vice President or the head of the Human Resources function to attend
and participate in the CEO's stead.
Final decisions regarding executive compensation (excluding stock options)
are made by the full Board of Directors based on recommendations of the
Committee and decisions regarding stock option grants to executives are made by
the Committee.
The Company's executive compensation programs are designed to attract and
retain executives who will contribute to the Company's long-term success, to
reward the achievement of both short-term and long-term strategic goals, and to
link executive and shareholder interests through equity-based plans.
The three components of the Company's executive compensation program for
fiscal 1996 were base salary, short-term incentives in the form of a target
bonus and long-term incentives represented by stock option grants. The
Committee's policies in these areas are as follows:
Base Salary
The Committee reviews compensation surveys and the reports of compensation
consultants to determine the recommended levels of basic salary. Salaries are
established at levels that are competitive for the Company's size, type of
industry, and the nature of the function to be performed.
Incentive Bonus
The payment of incentive bonuses is dependent on the performance of the
Company and the achievement of objectives developed for each individual
executive. Incentive bonuses were paid to certain executive officers of the
Company during 1996. See "Executive Officer Compensation -- Summary Compensation
Table" which is set forth in Item 11.
32
<PAGE> 34
Stock Option Grants
Under the Company's 1986 Stock Option Plan, stock options may be granted to
officers, other employees and consultants of the Company. The size of the stock
option awards is based primarily on the individual's responsibilities and
performance, as well as on an assessment of competitive equity compensation
structures. Options are designed to match the interests of officers, employees
and consultants with those of the shareholders. Stock options are generally
granted with an exercise price equal to the fair market value of the Company's
Common Stock on the date of grant. Current grants generally vest over a period
of four years. This approach is designed to encourage the growth and
preservation of shareholder value and to secure the long-term commitment of
officers, employees and consultants.
COMPARATIVE STOCK PERFORMANCE
The graph below compares the total shareholder return on the Common Stock
of the Company for the last five fiscal years with the cumulative total return
on the Index for NASDAQ Stock Market (U.S. Companies) and the Index for the
NASDAQ Fire, Marine, and Casualty Insurance Group over the same period (assuming
the investment of $100 in the Company's Company Stock, the Index for NASDAQ
Stock Market (U.S. Companies) and the Index for NASDAQ Fire, Marine, and
Casualty Insurance Group on January 1, 1992 and reinvestment of all dividends.)
CUMULATIVE SHAREHOLDER RETURN:
NATIONAL INSURANCE GROUP VS. INDICES FOR NASDAQ STOCK MARKET (U.S. COMPANIES)
AND THE NASDAQ FIRE, MARINE, AND CASUALTY INSURANCE GROUP
<TABLE>
<CAPTION>
'INDEX FOR THE
NASDAQ FIRE,
INDEX FOR NASDAQ MARINE, AND
MEASUREMENT PERIOD NATIONAL STOCK MARKET CASUALTY
(FISCAL YEAR COVERED) INSURANCE GROUP (U.S. COMPANIES) INSURANCE GROUP'
<S> <C> <C> <C>
1991 100 100 100
1992 122.5 116.4 134.8
1993 132.6 133.6 138.8
1994 55.2 130.6 133.6
1995 59.1 184.7 187.4
1996 46 227.2 203.1
</TABLE>
33
<PAGE> 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock of
National as of March 25, 1997, by (i) each person or entity who is known by
National to beneficially own more than 5% of National's Common Stock, (ii) the
Named Officers, (iii) each of National's current directors, and (iv) all current
directors and executive officers as a group. A total of 3,896,937 shares of
National's Common Stock were issued and outstanding as of March 25, 1997. For
the purposes of the following information any securities not outstanding which
are subject to options or other right to acquire within 60 days of March 25,
1997 are deemed to be outstanding for the purposes of computing the percentage
of outstanding securities owned by such individual, but are not deemed to be
outstanding for the purpose of computing the percentage of outstanding
securities owned by any other person.
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME AND ADDRESS OF SHARES(1) OF TOTAL
- --------------------------------------------------------------------- ------------ --------
<S> <C> <C>
Mark A. Speizer(2)................................................... 1,962,126 49.3%
395 Oyster Point Blvd., Suite 500
South San Francisco, CA 94080
Brinson Partners, Inc.(3) and its affiliated entities................ 509,399 13.1%
209 South LaSalle Street
Chicago, IL 60604-1295
Bankers Insurance Company(4)......................................... 200,500 5.1%
360 Central Avenue
St. Petersburg, FL 33701
Bruce A. Cole........................................................ 2,000 *
Tyron Yun(5)......................................................... 11,288 *
Robert J. Lelieur.................................................... 1,875 *
Gerry L. Gauer....................................................... -- --
Nuno Brandolini d'Adda............................................... -- --
Kevin R. McCarthy.................................................... -- --
Saul B. Jodel........................................................ -- --
John R. Gaulding(6).................................................. 50,000 1.3%
Melvyn D. Croner(7).................................................. 13,542 *
Paulette J. Taylor(8)................................................ 72,250 1.8%
Kevin C. Eichler(9).................................................. 75,000 1.9%
All current directors and executive officers as a group (11
persons)(10)....................................................... 1,979,997 49.6%
</TABLE>
- ---------------
* Less than 1%
(1) The number and percentage of shares beneficially owned is determined under
rules of the Securities and Exchange Commission (the "SEC"), and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment
power and also any shares which the individual has the right to acquire
within 60 days of March 25, 1997 through the exercise of any stock option
or other right. Unless otherwise indicated in the footnotes, each person
has sole voting and investment power (or shares such powers with his or her
spouse) with respect to the shares shown as beneficially owned.
(2) Includes: (i) 80,417 shares of Common Stock issuable upon exercise of
outstanding options exercisable within 60 days of March 25, 1997, (ii)
2,400 shares held by Mr. Speizer's spouse, Linda Speizer and (iii) 4,800
shares held by Mr. Speizer and his wife for the benefit of each of Mr.
Speizer's two daughters (2,400 shares for the benefit of each daughter).
(3) Based on Amendment No. 7 to Schedule 13G dated February 12, 1997, filed by
Brinson Partners, Inc. ("BPI") with the SEC on behalf of itself, Brinson
Trust Company ("BTC"), Brinson Holdings, Inc. ("BHI"), SBC Holding (USA),
Inc. ("SBCUSA") and Swiss Bank Corporation ("SBC"). BTC is a wholly-owned
subsidiary of BPI. BPI is a wholly-owned subsidiary of BHI. BHI is a
wholly-owned
34
<PAGE> 36
subsidiary of SBCUSA. SBCUSA is a wholly-owned subsidiary of SBC. BPI, BHI,
SBCUSA and SBC share voting and dispositive power with respect to 509,399
shares, of which shares BTC shares voting and dispositive power with
respect to 150,364 shares.
(4) Based on Schedule 13D dated June 12, 1996, filed by Bankers Insurance
Company with the SEC pursuant to which Bankers Insurance Company disclosed
the acquisition of 300,500 shares. Based on information provided to
National in connection with National's preparation of this Form 10-K,
Bankers Insurance Company disposed of 100,000 shares.
(5) Includes 10,938 shares of Common Stock issuable upon exercise of
outstanding options exercisable within 60 days of March 25, 1997.
(6) Represents 50,000 shares of Common Stock issuable upon exercise of
outstanding options exercisable within 60 days of March 25, 1997.
(7) Represents 13,542 shares of Common Stock issuable upon exercise of
outstanding options exercisable within 60 days of March 25, 1997.
(8) Represents 72,250 shares of Common Stock issuable upon exercise of
outstanding options exercisable within 60 days of March 25, 1997.
(9) Represents 75,000 shares of Common Stock issuable upon exercise of
outstanding options exercisable within 60 days of March 25, 1997.
(10) Includes an aggregate of 95,938 shares issuable upon exercise of
outstanding options exercisable within 60 days of March 25, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an Option and Stock Purchase Agreement entered into on May 1,
1996, as amended (the "Stock Purchase Agreement"), between Howard L. Herman and
Marcia Herman, Bradley Herman, Barbara Herman, and the Joel Franklin Herman
Trust (collectively, the "Sellers"), and Mr. Speizer, Mr. Speizer agreed to
purchase from the Sellers a total of 824,295 shares of Common Stock of National
(the "Herman Shares") for a purchase price of $10.50 per share. 788,795 of the
Herman Shares were purchased on May 31, 1996 and the remaining 35,500 Herman
Shares were purchased on June 18, 1996. The Herman Shares represent
approximately 17.5% of the then outstanding stock of the Company.
Mr. Speizer's agreement to purchase the Herman Shares pursuant to the Stock
Purchase Agreement was expressly conditioned upon receipt of an approval from
the Commissioner, or an exemption granted by the Commissioner from the full
filing and prior approval requirements set by the Commissioner. On May 23, 1996,
the Commissioner granted such exemption.
Pursuant to the Stock Purchase Agreement, the purchase price for the Herman
Shares was $8,655,098, of which $3,074,805 was paid in cash, and $5,580,293 was
paid by promissory notes payable by Mr. Speizer to the Sellers (the "Speizer
Notes"). The Speizer Notes were payable over fifteen years, shall bear interest
at 9% per annum and are payable in monthly installments of principal and
interest in the aggregate amount of $56,599 per month. As collateral for the
Speizer Notes, Mr. Speizer pledged to the Sellers, pursuant to Security
Agreements and Stock Pledges, the Herman Shares and 400,000 additional shares of
the Company's Common Stock currently owned by Mr. Speizer (together the "Pledged
Shares"). The Pledged Shares are to be held in escrow by City National Bank (of
Beverly Hills, California) pursuant to the terms of an Escrow Agreement dated
May 31, 1996 between Mr. Speizer, the Sellers and City National Bank as escrow
agent.
Mr. Speizer obtained from Arabella S.A. ("Arabella"), a Luxembourg company,
a line of credit for up to $4.2 million. Advances under the line of credit from
Arabella are evidenced by a one-year term note bearing interest at 10% per annum
(the "Arabella Note"). The Arabella Note is unsecured and no principal or
accrued interest is due and payable by Mr. Speizer until May 31, 1997, the end
of the term. Such line of credit was available to fund the purchase of the
Herman Shares and remains available to fund amounts necessary for Mr. Speizer to
make any regularly scheduled payments of principal and interest on the Speizer
Notes during the term of the Arabella Note and certain other expenses.
35
<PAGE> 37
In February 1996, John R. Gaulding entered into a Consulting Agreement with
the Company, pursuant to which he agreed to provide consulting services to the
Company for the months of February and March 1996 at a rate of $25,000 per
month. In February 1996, the Company entered into an At-Will Employment
Agreement (the "Agreement") with Mr. Gaulding, pursuant to which Mr. Gaulding
agreed to serve, commencing April 1, 1996, as Chief Executive Officer and
President of National and each of its subsidiaries, and the Company agreed to
pay Mr. Gaulding a signing bonus of $100,000, payable in installments of $50,000
on April 1, 1996 and $25,000 on each of October 1, 1996 and January 1, 1997 (the
"Signing Bonus"), and an annual salary of $300,000. Pursuant to an incentive
performance program recommended by the Compensation Committee of the Board of
Directors and approved by the Board of Directors, which program was to set
specific goals and performance criteria and targets for fiscal years 1996 and
1997 ("Incentive Plan Criteria and Targets"), Mr. Gaulding would have been
eligible to receive an annual incentive award of (i) up to $150,000 for
achieving the at target goal of the Incentive Plan Criteria and Targets, (ii) up
to $90,000 for achieving an acceptable but not at target goal, and (iii)
$300,000 for achieving an exceptional above target goal, provided that the
incentive compensation for 1996 would have been pro rated based upon the months
Mr. Gaulding was a full time employee and officer of the Company. New goals and
incentives for calendar years subsequent to 1997 were to be defined by the Board
of Directors; however, the at target incentive award was not to be less than
$100,000, prorated for the year. Pursuant to the Agreement, Mr. Gaulding was
granted an option to purchase 250,000 shares of Common Stock of National, all of
which shares were to vest on March 31, 1998, subject to acceleration of vesting
in the event of Mr. Gaulding's termination of employment in connection with a
"change in control of the Company" or in the event of an "adverse change in the
board of directors," as such terms were to be defined by June 30, 1996. The
Company also agreed to provide Mr. Gaulding with a monthly automobile allowance
of $1,000 and provided for participation by Mr. Gaulding and his immediate
family in such group insurance plans and other employee benefits as the Company
maintained. In addition, the Company agreed to reimburse the premium cost of
$1.3 million life insurance policy for the period April 1, 1996 through March
31, 1998, up to a maximum premium amount of $10,000 per year. In addition, the
Agreement provided that in the event of termination of employment by the Company
without cause, Mr. Gaulding was to receive any installment of the Signing Bonus
not yet paid and a severance payment ranging from (i) $150,000, in the event his
employment was terminated more than 18 months but less than twenty-four months
following the date of the Agreement, to (ii) $300,000, in the event his
employment was terminated within nine months following the date of the
Agreement. Minor modifications of the foregoing were made in a First Amendment
to the foregoing Agreement.
In July 1996, National entered into the Second Amendment of John R.
Gaulding At-Will Employment Agreement with John R. Gaulding. The Second
Amendment provided that upon a change of control (as defined therein) that Mr.
Gaulding would receive a change of control payment of $350,000. For a period of
twenty-four (24) months after a change of control, Gaulding would make himself
available to provide consulting services to the Company. As compensation
Gaulding was to receive a payment of $14,300 per month for such twenty four
month period with the full amount which would be payable over such period to be
paid upon a change of control into a rabbi trust. As additional compensation Mr.
Gaulding was to receive a payment of up to $10,000 for life insurance, a payment
of up to $25,000 for office rental and related expenses, and reimbursement of
reasonable expenses incurred by Gaulding in providing such consulting services
to National. The Second Amendment also provided that the option to purchase
250,000 shares of Common Stock of National, which Gaulding received in the
Agreement, would be amended as of the date of a change of control so that it
covered only 50,000 shares, which option would be fully exercisable and one
hundred percent (100%) vested and would remain exercisable for a period of ten
years following the date of grant. The grant with respect to the remaining
200,000 shares would become void upon a change of control. In July 1996, Mr.
Gaulding resigned following a change of control thereby causing National to pay
the foregoing amounts and his receipt of the indicated benefits. See "Item
11 -- Executive Compensation -- Summary Compensation Table".
In order to provide an incentive for continued employment during any change
of control, in July 1996 National entered into a Change of Control Severance
Agreement and Mutual Release with each of (i) Paulette J. Taylor, then Executive
Vice President, General Counsel and Secretary of National, (ii) Roger A. Conley,
then Executive Vice President, Sales of National, and (iii) Kevin C. Eichler,
then
36
<PAGE> 38
Executive Vice President and Chief Financial Officer of National. Pursuant to
such Agreements, National agreed that if the particular individual terminated
employment at any time within twelve (12) months following a change of control
of National, as defined in the Agreement, then National would provide the
following benefits to such individual: (i) a cash payment equal to one year's
salary, (ii) a cash payment of $10,000, in lieu of twelve (12) months of
employer-paid COBRA benefits, (iii) a cash payment of $35,000, in lieu of
outplacement counseling and assistance benefits, (iv) one hundred percent (100%)
vesting of the unvested portion of any stock option held by the individual, and
(v) stock options held by the individual would remain exercisable for a period
of two years following the date of such individual's termination of employment
with National. In July 1996, Ms. Taylor, Mr. Eichler and Mr. Conley resigned
their positions with National following a change of control thereby causing
National to pay the foregoing amounts to each of them and their receipt of the
indicated benefits. See "Item 11 -- Executive Compensation -- Summary
Compensation Table".
In July 1996, National entered into an employment agreement with Mark A.
Speizer pursuant to which Mr. Speizer was engaged as National's Chairman of the
Board and Chief Executive Officer. The term of such employment agreement is
three years. Mr. Speizer is paid a salary of $300,000 per year. Mr. Speizer was
granted an option to purchase 75,000 shares of Common Stock of National,
one-third of which options shall vest after one (1) year with the balance
vesting monthly over the next 24 months. The employment agreement further
provided for a waiver of the limitation of employment provisions contained in
the Severance Agreement and Release of Claims entered into by Mr. Speizer and
National on October 19, 1995 (the "Severance Agreement"). The Severance
Agreement was entered into in connection with the termination of Mr. Speizer's
employment in 1995. Pursuant to that agreement, Mr. Speizer was paid
approximately $885,000. Section 7.3 of the Severance Agreement provided that
"Speizer agrees that he will not seek nor accept employment with the Company in
the future and that the Company is entitled to reject without cause any
application for employment with the Company made by him, and not hire him, and
that Speizer shall have no cause of action against the Company arising out of
any such rejection. *** If Speizer in any other manner becomes an employee of
the Company, Speizer shall be obligated to return all amounts paid to him
pursuant to this Severance Agreement and Release unless otherwise agreed in
writing by the parties hereto."
The employment agreement provided that the provisions of the Severance
Agreement limiting Mr. Speizer's right to accept future employment with National
are null and void and that the obligation to repay any amounts paid to Mr.
Speizer under the Severance Agreement are waived provided that Mr. Speizer
remains employed by National for the three year term of his employment
agreement. Section 8 of the employment agreement provides: "WAIVER OF LIMITATION
ON REEMPLOYMENT. The parties agree that Section 7.3 of the Severance Agreement
and Release of Claims entered into between Speizer and the Company on October
19, 1995, limiting Speizer's right to accept future employment with the Company
shall be null and void, and the Company waives any right it may have or may have
had under that provision to require Speizer to forfeit sums paid under the
Severance and Release Agreement provided that Speizer remains employed by the
Company during the Term of this Agreement. Notwithstanding the foregoing, in the
event of Speizer's death or disability, Speizer or his estate will not be
obligated to forfeit said sums."
In July 1996 National entered into an employment agreement with Bruce A.
Cole pursuant to which Mr. Cole was engaged as National's President. The term of
such employment agreement is three years. Mr. Cole is paid a salary of $290,000
per year. Mr. Cole was granted an option to purchase 75,000 shares of Common
Stock of National one-third of which options shall vest after one (1) year with
the balance vesting monthly over the next 24 months. Mr. Cole's employment
agreement provides, among other things, that during the term of the employment
agreement the Board of Directors may terminate Mr. Cole's employment only upon
written notice for cause. Cause is defined as a conviction of a felony or a
finding of liability based on intentional tortuous conduct consisting of a
breach of fiduciary duty relating to his performance as an officer and/or
director of the Company. In addition, Mr. Cole's employment agreement provides
that if the Company terminates Mr. Cole for reasons other than for cause, the
Company shall pay Mr. Cole, in a single payment payable upon termination, an
amount equal to (i) his unpaid base salary for the remainder of the three year
term, (ii) the undiscounted remaining costs to provide the benefits provided in
the employment agreement for the remainder of the three year term, such as the
cost of Mr. Cole's membership and participation in
37
<PAGE> 39
professional associations, a $1,000 per month automobile allowance and premiums
for certain insurance, including a $1 million life insurance policy, and (iii)
any unpaid bonus from the previous year plus any bonus payable pursuant to any
bonus plan then in effect.
In August 1996, National entered into an employment agreement with C. Alan
Paylor pursuant to which Mr. Paylor was engaged as National's Executive Vice
President, Sales. The agreement is an at-will employment agreement. Mr. Paylor
is paid a salary of $130,000 per year plus certain incentive compensation
calculated based on the performance of the Company.
In September 1996 National entered into a consulting agreement with
Scorpion Holdings, Inc., a Delaware corporation ("Scorpion") pursuant to which
Scorpion agreed to provide certain consulting services in connection with (i)
management and strategic planning, (ii) the identification of financing,
acquisitions and divestiture opportunities for National, and (iii) other matters
relating to the day-to-day business and operation of National or any of its
subsidiaries or affiliated companies, as the Board of Directors of National may
from time to time reasonably request. In addition, if National engages in any
(i) merger, consolidation or sale of any of its assets (other than in the
ordinary course of its business) or outstanding securities or (ii) acquisition
of assets or stock of another company, Scorpion has the right to act as a
financial advisor to National pursuant to an engagement agreement, the terms and
conditions of which shall be mutually agreed upon by National and Scorpion. The
term of the consulting agreement is for one year; provided, however, the term is
extended for an additional period of one year unless written notice of
termination is given by either party not less than sixty (60) days prior to the
first anniversary date of the consulting agreement. Pursuant to the consulting
agreement, Scorpion receives an annual fee of $300,000 plus reimbursement for
reasonable out-of-pocket costs and expenses. Mr. Brandolini is the sole
shareholder, a director and chief executive officer of Scorpion. Mr. McCarthy is
a director and president of Scorpion. Mr. Brandolini and Mr. McCarthy are
directors of National.
In October 1996, National entered into a bridge loan agreement with
Hydrodynamics Corporation ("Hydrodynamics"), pursuant to which National loaned
to Hydrodynamics $300,000. The bridge loan is evidenced by a Convertible
Promissory Note, in the principal amount of $300,000, which note bears interest
at the rate of 10% per annum and matures on October 28, 1997. Mr. Brandolini and
Mr. McCarthy, who are directors of National are also directors, officers and
shareholders of Hydrodynamics. In December 1996, Hydrodynamics commenced
voluntary proceedings under Chapter 11 of the federal bankruptcy laws. In
February 1997, Arabella, S.A. purchased from National the Convertible Promissory
Note of Hydrodynamics issued to National for a purchase price of $300,000.
National assigned its rights under the Convertible Promissory Note and the Stock
Purchase Warrant to Arabella, S.A. Mr. Brandolini is also a director of Arabella
S.A.
In March 1997 National entered into an employment agreement with Gregory S.
Saunders pursuant to which Mr. Saunders was engaged as National's Executive Vice
President, Treasurer and Chief Financial Officer. The agreement is an at-will
employment agreement. Mr. Saunders is paid a salary of $150,000 per year.
National entered into an employment agreement with Robert P. Barbarowicz,
effective as of August 1996, pursuant to which Mr. Barbarowicz was engaged as
National's Executive Vice President, General Counsel and Secretary. The
agreement is an at-will employment agreement. Mr. Barbarowicz is paid a salary
of $150,000 per year of which, for the first year, $25,000 was paid upon
commencement of employment.
38
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
ITEM(S) PAGE(S)
---- -------
<S> <C> <C>
(1) FINANCIAL STATEMENTS:
Report of Independent Accountants....................................... 40
Consolidated Balance Sheets, December 31, 1996 and 1995................. 41
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994..................................................... 42
Consolidated Statement of Changes in Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994.................................. 43
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994..................................................... 44
Notes to Consolidated Financial Statements.............................. 45
(2) FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement Schedules...... 59
I Summary of Investments Other than Investments in Related Parties..... 60
II Condensed Financial Information of Registrant (Parent Company)...... 61
III Supplementary Insurance Information Concerning Property Casualty
Operations......................................................... 64
VI Reinsurance......................................................... 65
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) EXHIBITS
The Exhibits listed on the accompanying index immediately following the
signature page are filed as part of this Report.
</TABLE>
(b) REPORTS ON FORM 8-K
National filed a Form 8-K on October 23, 1996 which filed as Exhibits, an
Employment Contract with C. Alan Paylor dated August 26, 1996, a Consulting
Agreement with Scorpion Holdings, Inc. dated September 11, 1996, and a press
release dated October 22, 1996.
(c) EXHIBITS
See Item 14 (a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14 (a)(2) above.
39
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
National Insurance Group:
We have audited the accompanying consolidated balance sheets of National
Insurance Group and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, retained earnings, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of National
Insurance Group and Subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
February 7, 1997
40
<PAGE> 42
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities for 1995 at market (amortized cost: $20,718) and 1996
at market (amortized cost: $18,293)................................. $21,130 $18,538
Equity securities at market............................................ 2,271 2,051
Short-term investments, at cost (which approximates market)............ 13,801 11,984
------- -------
Total investments.............................................. 37,202 32,573
Cash..................................................................... 133 1,204
Net premiums and accounts receivable..................................... 4,875 5,181
Accrued interest receivable.............................................. 344 377
Net property and equipment............................................... 4,068 3,484
Deferred acquisition costs............................................... 2,624 2,186
Deferred federal income taxes............................................ 1,590 421
Other assets............................................................. 1,260 1,686
------- -------
Total assets................................................... $52,096 $47,112
======= =======
LIABILITIES
Reserve for losses and LAE............................................... $ 3,055 $ 2,198
Unearned premiums........................................................ 5,703 4,753
Commissions payable...................................................... 742 584
Accrued expenses and other liabilities................................... 2,442 4,247
Drafts payable........................................................... 421 295
Notes payable............................................................ 0 1,333
Reserve for return premiums.............................................. 1,216 2,382
Reserve for Proposition 103.............................................. 4,534 2,268
Deferred Revenue......................................................... 1,102 500
------- -------
Total liabilities.............................................. $19,215 $18,560
======= =======
Commitments (Note 8)
SHAREHOLDERS' EQUITY
Preferred Stock, 5,000,000 shares authorized with no par value; none
issued and outstanding................................................. -- --
Common stock:
15,000,000 shares authorized with no par value; issued and outstanding,
4,679,697 and 3,896,937 in 1995 and 1996, respectively.............. $23,071 $17,592
Retained earnings........................................................ 9,810 10,960
------- -------
Total shareholders' equity..................................... 32,881 28,552
------- -------
Total liabilities and shareholders' equity............................... $52,096 $47,112
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE> 43
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net premiums written...................................... $ 20,036 $ 14,956 $ 12,636
Change in unearned premiums............................... 822 2,064 949
--------- --------- ---------
Net premiums earned....................................... 20,858 17,020 13,585
Flood inquiry fees........................................ 7,978 10,593 18,499
Tracking fees............................................. 3,012 4,786 5,479
Net commissions income.................................... 1,103 1,502 1,145
Net investment income..................................... 1,836 2,042 1,975
--------- --------- ---------
Total revenues.................................. 34,787 35,943 40,683
--------- --------- ---------
Loss and LAE.............................................. 7,873 6,044 4,002
Commissions paid to nonaffiliates......................... 4,739 4,079 1,954
Personnel expenses........................................ 13,677 16,891 18,948
All other expenses........................................ 9,096 12,252 14,221
Non-recurring expenses.................................... 1,020 4,100 0
--------- --------- ---------
Total expenses.................................. 36,405 43,366 39,125
--------- --------- ---------
Income (loss) before provision for (benefit from) income
taxes................................................... (1,618) (7,423) 1,558
Provision for (benefit from) income taxes................. (534) (2,559) 284
--------- --------- ---------
Net income (loss)......................................... $ (1,084) $ (4,864) $ 1,274
========= ========= =========
Weighted average common and common equivalent shares
outstanding............................................. 4,679,000 4,679,000 3,917,000
========= ========= =========
Net income (loss) per share..................... $ (0.23) $ (1.04) $ 0.33
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE> 44
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994................................. 5,064 $25,267 $ 16,682 $41,949
Shares issued under public offering...................... 115 1,408 -- 1,408
Shares repurchased....................................... (500) (3,610) -- (3,610)
Net unrealized loss on fixed maturities and equity
securities, net of deferred tax........................ -- -- (171) (171)
Dividend paid............................................ -- -- (1,202) (1,202)
Net loss................................................. -- -- (1,084) (1,084)
----- ------- ------- -------
Balance, December 31, 1994............................... 4,679 23,065 14,225 37,290
Net unrealized gain on fixed maturities and equity
securities, net of deferred tax........................ -- -- 449 449
Options exercised........................................ 1 6 -- 6
Net loss................................................. -- -- (4,864) (4,864)
----- ------- ------- -------
Balance, December 31, 1995............................... 4,680 23,071 9,810 32,881
Net unrealized loss on fixed maturities and equity
securities, net of deferred tax........................ -- -- (124) (124)
Options exercised........................................ 22 188 -- 188
Shares repurchased....................................... (805) (5,667) -- (5,667)
Net income............................................... -- -- 1,274 1,274
----- ------- ------- -------
Balance, December 31, 1996............................... 3,897 $17,592 $ 10,960 $28,552
===== ======= ======= =======
</TABLE>
Dividends declared per share were $0.20 for the year ended December 31,
1994. There were no dividends declared for the years ended December 31, 1995 and
1996.
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE> 45
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ (1,084) $ (4,864) $ 1,274
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 2,099 2,193 1,758
Loss on sale of equipment............................ -- 1,040 288
Change in assets and liabilities:
(Increase) decrease in net premiums and accounts
receivable, and accrued interest receivable..... 4,015 (89) 339
Decrease in deferred acquisition costs............. 378 949 438
Increase in insurance liabilities.................. (4,573) (3,179) (767)
Increase (decrease) in reserve for Prop. 103....... 434 4,100 (2,266)
(Increase) decrease in tax assets.................. (160) (1,292) 1,169
Other, net......................................... 317 709 (200)
-------- -------- ---------
Net cash provided (used) by operating
activities.................................... 1,426 (433) 2,033
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments................................. (88,947) (43,518) (123,509)
Maturity of investments................................. 92,998 45,273 128,138
Purchase of equipment................................... (2,620) (1,350) (1,445)
-------- -------- ---------
Net cash provided by investing activities....... 1,431 405 3,184
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes......................... -- -- 2,000
Principal payments on notes payable..................... -- -- (667)
Issuance of common stock................................ 1,408 -- --
Repurchase of common stock.............................. (3,610) -- (5,667)
Stock options exercised................................. -- 6 188
Dividends to shareholders............................... (1,202) --
-------- -------- ---------
Net cash provided (used) by financing
activities.................................... (3,404) 6 (4,146)
-------- -------- ---------
Net increase (decrease) in cash........................... (547) (22) 1,071
Cash at beginning of year................................. 702 155 133
-------- -------- ---------
Cash at end of year....................................... $ 155 $ 133 $ 1,204
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE> 46
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying consolidated financial statements of the Company include
the accounts of National Insurance Group ("National") and its subsidiaries
("Subsidiaries"), Great Pacific Insurance Company (the "Insurance Subsidiary"),
Pinnacle Data Corporation ("Pinnacle"), and Fastrac Systems, Inc. Insurance
Agent & Broker (the "Agency"). The Agency has a wholly-owned subsidiary, Fastrac
Systems, Inc. ("Fastrac").
The Subsidiaries have transactions with each other in the ordinary course
of business. The Agency receives a commission for business it writes which is
insured or reinsured by the Insurance Subsidiary. Certain expenses are shared
between the Subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
The Company provides specialized information services and related insurance
products to mortgage bankers, other financial institutions and others located
throughout the United States. Utilizing sophisticated computer applications, the
Company has developed special-purpose, proprietary software and database systems
which provide information services on an outsourced, remote computer or manual
access basis, enabling these institutions to:
- determine if the residential or commercial real estate, which is
collateral for loans being financed or serviced by such institutions and
for other purposes, is located within a federally-designated Special
Flood Hazard Area ("SFHA"), and
- monitor the insurance coverage on collateral securing residential
mortgages (predominantly one-to-four unit family dwellings), automobile
and other consumer loans and leases and, to a lesser extent, commercial
mortgages.
When the Tracking Services indicate that insurance coverage has lapsed, the
financial institution may contract with the Company to provide specialized,
short-term fire, allied peril or physical damage insurance (generally referred
to as "force-place" insurance), which the Company provides through its
wholly-owned subsidiary, Great Pacific Insurance Company (the "Insurance
Subsidiary") in 48 states and through nonaffiliated insurance companies in the
remainder of the United States. In addition, the Company provides flood
insurance, for which the risk is assumed by the U.S. Government under the
National Flood Insurance Program ("NFIP") and underwrites automobile physical
damage insurance.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies
adopted by National and Subsidiaries in the accompanying financial statements:
Data processing equipment and purchased software and office furniture
and equipment are depreciated over five (5) years, and automobiles are
depreciated over three (3) to five (5) years, all using a modified
straight-line method. Upon retirement or sale of an asset, the cost and
accumulated depreciation are removed from the accounts and any resulting
gain or loss is included in operations. Maintenance and repairs are charged
to income as incurred.
Goodwill is the excess of cost over fair market value of the Company's
acquired entities. It is amortized on a straight-line basis over a period
of twenty years.
Costs associated with the research and development of the Company's
flood determination products have been expensed as incurred.
Commission income is recorded when earned, net of an estimated reserve
for cancellation.
45
<PAGE> 47
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Premiums written are earned on a pro rata basis over the periods
covered by the policies. Policyholders have the right to cancel a policy at
any time and receive a minimum refund as defined by law or regulation. In
certain circumstances, the Company grants refunds in excess of the minimum
amounts required by regulation. The Company received acceptance from the
California Department of Insurance to establish a reserve for return
premiums, based upon historical experience, to provide for anticipated
cancellations net of written premiums. Actual cancellations could differ
from management's estimates. Changes in estimates of cancellations
resulting from the continuous review process and differences between
estimates and actual cancellations are included in income of the period in
which the estimates are changed or cancellations occur.
Fee income is recognized when earned. Certain contractual agreements
for Flood Zone Determination Services provide for some future services by
the Company. In these cases the majority of the revenue is recognized at
the inception of the service and the balance of the revenue is recognized
over the estimated period the services are performed.
Policy acquisition costs, principally commissions, premium taxes, and
variable underwriting and policy issuance expenses, have been deferred.
Such costs are recognized on a pro rata basis over the periods covered by
the policies. Costs are deferred to the extent that they are recoverable
from premium income after providing for all loss-related and maintenance
expenses. Anticipated investment income is not considered in the
determination of recoverability of this asset.
The reserve for unpaid losses and LAE is based on the estimated
ultimate cost of settling claims, using past experience adjusted for
current trends and any other factors which, in management's judgment, would
modify this experience. Changes in estimates of losses resulting from the
continuous review process and differences between estimates and payments
for claims are included in income of the period in which the estimates are
changed or payments are made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of certain
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of certain
revenues and certain expenses during the reporting period. Actual results
could differ from those estimates.
Investments in fixed maturities include bonds, U.S. Treasury notes,
federal discount notes, mortgage-backed securities and certificates of
deposit. Investments in equity securities are preferred stock. Short-term
investments consist of certificates of deposits, commercial paper and money
market accounts at certain financial institutions and are carried at cost
which approximates market. Investment income is recognized as earned.
Realized gains or losses on sale of investments are determined on the basis
of specific identification and are included in income.
The Company's fixed maturity and equity security investments are
categorized as available-for-sale and as a result are carried at market
value. Market value is determined using published quotes as of the close of
business. Unrealized gains and losses are excluded from earnings and
reported net of tax as a separate component of stockholders' equity until
realized.
On December 29, 1995, the Company transferred securities with an
amortized cost basis of $20,718,000 and net unrealized gains of $412,000
from its held-to-maturity portfolio to the available-for-sale portfolio in
accordance with the special report issued by the Financial Accounting
Standards Board ("FASB") titled "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities." The
FASB special report included special transition provisions for the one-time
reassessment and reclassification of securities from the held-to-maturity
portfolio during the period from November 15, 1995 to December 31, 1995.
Prior to December 29, 1995, the Company
46
<PAGE> 48
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
classified its fixed maturity and equity security investments as
held-to-maturity. Held-to-maturity investments were carried at amortized
costs.
The Company's investment policies limit concentration of credit risk
by diversifying its investment portfolio and by, among other things,
limiting its investments in certificates of deposit to balances insured by
the Federal Deposit Insurance Corporation. The Company maintains deposit
balances, other than certificates of deposit, with some financial
institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. A significant portion of the Company's receivables
are from mortgage bankers and financial institutions.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128. SFAS No. 128 is
designed to improve the earnings per share (EPS) information provided in
the financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and increasing the
comparability of EPS data on an international basis. SFAS No. 128 is
effective for financial statements issued for periods ending after December
31, 1997, including interim periods. The Company will implement SFAS No.
128 in 1997. Management has not determined the impact that SFAS No. 128 may
have on the financial statements.
For comparative purposes, certain prior year amounts have been
reclassified to conform to the current year presentation. Such
reclassifications had no impact on net income (loss) or Shareholder's
equity.
3. INVESTMENTS
(a) Fixed-maturity investments available for sale (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 AS OF DECEMBER 31, 1996
----------------------------------------------- -----------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities........ $ 4,886 $ 57 $ -- $ 4,943 $ 2,599 $ 10 $ -- $ 2,609
State and municipal
bonds............. 12,380 365 10 12,735 10,282 235 -- 10,517
Certificates of
deposit........... 3,362 -- -- 3,362 5,331 -- -- 5,331
Mortgage-backed
securities........ 90 -- -- 90 81 -- -- 81
--
------- ---- --- ------- ------- ---- -------
Total...... $20,718 $422 $ 10 $21,130 $18,293 $245 $ 0 $18,538
======= ==== === ======= ======= ==== == =======
</TABLE>
At December 31, 1996, investment securities, at amortized cost and
estimated market value, have contractual maturities as presented in the table
below; however, other contract terms may allow actual maturities to differ from
contractual maturities.
<TABLE>
<CAPTION>
AMORTIZED COST ESTIMATED MARKET VALUE
------------------------------------------- -------------------------------------------
STATE AND CERTIFICATES U.S. GOVT. STATE AND CERTIFICATES U.S. GOVT.
MUNICIPAL BONDS OF DEPOSIT SECURITIES MUNICIPAL BONDS OF DEPOSIT SECURITIES
--------------- ------------ ---------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Within one year................ $ 645 $ -- $1,900 $ 646 $ -- $ 1,905
One through five years......... 5,848 5,331 699 5,951 5,331 704
Six through ten years.......... 3,695 -- -- 3,817 -- --
More than ten years............ 94 -- -- 103 -- --
Mortgage-backed securities..... -- -- 81 -- -- 81
------- ------ ------ ------- ------ ------
Total................. $10,282 $5,331 $2,680 $10,517 $5,331 $ 2,690
======= ====== ====== ======= ====== ======
</TABLE>
47
<PAGE> 49
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There were no sales of fixed-maturity investments in 1995 or 1996.
(b) Equity Securities Available for Sale:
At December 31, 1995 the Company had market rate preferred stock with a
cost of $2,210,000, an unrealized gain of $61,000 and a market value of
$2,271,000.
At December 31, 1996 the Company had market rate preferred stock with a
cost of $2,010,000 an unrealized gain of $41,000, and a market value of
$2,051,000.
4. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Office furniture and equipment......................... $ 3,237 $ 3,240
Data processing equipment.............................. 6,273 6,618
Software............................................... 4,172 4,579
Leasehold improvements................................. 998 1,023
------ ------
14,680 15,460
Less accumulated depreciation and amortization......... (10,612) (11,976)
------ ------
Total........................................ $ 4,068 $ 3,484
====== ======
</TABLE>
Depreciation and amortization expense was $2,042,000, $2,160,000 and
$1,758,000, in 1994, 1995 and 1996, respectively.
5. DEFERRED ACQUISITION COSTS
Changes in deferred acquisition costs are summarized as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Deferred acquisition costs, beginning of
period.................................... $ 3,951 $ 3,573 $ 2,624
Additions................................... 10,669 8,648 5,859
Amortization expense........................ (11,047) (9,597) (6,297)
------- ------ ------
Deferred acquisition costs, end of period... $ 3,573 $ 2,624 $ 2,186
======= ====== ======
</TABLE>
The net change in deferred acquisition costs is included in the
consolidated statements of income as a component of commissions paid to
nonaffiliates, personnel expenses and all other expenses.
48
<PAGE> 50
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSE (LAE)
Activity in the reserve for loss and loss adjustment expenses is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Reserves for losses and LAE at beginning of year......... $5,628 $3,360 $3,055
------ ------ ------
Losses and LAE:
Provision for losses and LAE for claims occurring in
current year........................................ 7,627 6,378 3,971
Increase (decrease) in estimated losses and LAE for
claims occurring in prior years..................... 246 (334) 31
------ ------ ------
7,873 6,044 4,002
------ ------ ------
Losses and LAE payments for claims occurring during:
Current year........................................... 4,664 4,329 2,487
Prior years............................................ 5,477 2,020 2,372
------ ------ ------
10,141 6,349 4,859
------ ------ ------
Reserves for losses and LAE at end of year............... $3,360 $3,055 $2,198
====== ====== ======
</TABLE>
During 1994, and 1995, the Company ceded losses of $213,000, and $6,600
respectively, to reinsurers for losses occurring in 1992. There were no losses
ceded to reinsurers in 1996.
7. INCOME TAX
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1994 1995 1996
----- ------- -----
<S> <C> <C> <C>
Federal
Current...................................... $ (87) $(1,508) $(829)
Deferred..................................... (447) (1,142) 1,091
----- ------- -----
(534) (2,650) 262
State
Current...................................... -- 91 22
----- ------- -----
Total........................................ $(534) $(2,559) $ 284
===== ======= =====
</TABLE>
The actual tax expense differs from expected tax expense computed by
applying the federal statutory tax rate to operating income before provision for
income taxes as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Tax at federal statutory rate................ 34% 35% 35%
Tax-Exempt investment income................. (7) (9) (13)
Other........................................ 6 8 (4)
-- -
--- ---
Total.............................. 33% 34% 18%
=== === ===
</TABLE>
49
<PAGE> 51
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred tax balance as of December 31, 1994,
1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
ASSET (LIABILITY)
-----------------------------
1994 1995 1996
------- ------- -----
<S> <C> <C> <C>
Unearned premium reserve........................ $ 528 $ 388 $ 323
Deferred acquisition costs...................... (1,215) (892) (743)
Write-down of carrying value of equity
securities.................................... 78 0 0
Loss reserve discounting........................ 62 39 90
Prepaid expenses................................ 45 (95) (134)
Deferred revenue................................ 201 335 170
Proposition 103 reserve......................... 147 1,541 0
Accrued liabilities............................. 338 181 613
Other........................................... 114 93 102
------ ------ ----
Total................................. $ 298 $ 1,590 $ 421
====== ====== ====
</TABLE>
The Company has not established a valuation reserve at December 31, 1996.
Realization of deferred tax assets is dependent on the ability to carry back
losses to previous years, the likelihood of future income, and the timing of
realization of deferred tax assets. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
assets will be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced or the timing of realization of deferred tax assets
changes.
Deferred income taxes were provided on temporary differences in the
recognition of income for income tax and financial statement purposes. The
source and tax effect of these temporary differences in the provision are as
follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
----- ------- ------
<S> <C> <C> <C>
Unearned premium reserve..................... $ 56 $ 140 $ 65
Deferred acquisition costs................... (128) (323) (149)
Write-down of carrying value of equity
securities................................. (19) 78 0
Loss reserve discounting..................... 54 23 (51)
Prepaid expenses............................. 73 140 39
Deferred revenue............................. (81) (134) 165
Prop. 103 reserve............................ -- (1,394) 1,541
Accrued liabilities.......................... (478) 307 (432)
Other........................................ 76 21 (87)
------ -------- ------
Total...................................... $(447) $(1,142) $1,091
====== ======== ======
</TABLE>
Taxes paid in 1994, 1995 and 1996 were $195,000, $91,000 and $22,000
respectively. Tax refunds received for 1994, 1995 and 1996 were $675,000,
$627,000 and $798,000 respectively.
8. COMMITMENTS
National's subsidiaries have entered into operating leases. The operating
leases are for office space for National and Subsidiaries' home office, Fastrac
branch offices in Bellevue, Washington and Springfield, Ohio and Pinnacle
offices in Concord, California. Rental expense under operating leases was
$1,222,000, $1,134,000 and $1,175,000 in 1994, 1995 and 1996, respectively.
National has entered into employment contracts with some key employees.
Base compensation expense (not including bonus or commission) under employment
contracts was $425,000, $264,108 and $259,254 in
50
<PAGE> 52
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1994, 1995 and 1996, respectively. In addition, in 1996 National paid $1,328,200
to certain individuals upon a change of control of the Company. As of December
31, 1996, National had commitments for such future compensation with respect to
employment contracts with Mark Speizer and Bruce Cole, and future commissions
payable for amounts that cannot now be determined for 1997 pursuant to the
Employment contract with C. Alan Paylor and pursuant to the Agreement of
Employment Termination between National and Douglas H. Helm.
The future minimum payments due under commitments at December 31, 1996 are
as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING EMPLOYMENT
LEASES AGREEMENTS
--------- ----------
<S> <C> <C>
For the Year Ending December 31,
1997............................................. $ 1,242 $ 590
1998............................................. $ 1,158 590
1999............................................. $ 838 306
2000............................................. $ 0 0
--------- ----------
Total minimum payments............................. $ 3,238 $1,486
</TABLE>
9. PROPOSITION 103
On October 25, 1995, the Insurance Subsidiary entered into a stipulation
and consent order with the California Insurance Department to resolve the
Insurance Subsidiary's rollback obligation related to California Proposition
103. Pursuant to that settlement, the Insurance Subsidiary agreed to pay the sum
of approximately $4.1 million as a rollback refund to its policyholders for the
rollback year. The Company issued the refund checks during the first quarter of
1996. The rollback refund was paid to each eligible policyholder in the
proportion that the written premium for each policyholder bears to the Insurance
Subsidiary's total written premiums in California for policies in Proposition
103 lines issued or renewed during the rollback year. Pursuant to the
settlement, the rollback refund constitutes the Insurance Subsidiary's entire
rollback obligation and fully discharges the Insurance Subsidiary and
extinguishes all of its obligations to rollback rates, make refunds to
policyholders, or pay interest to policyholders. The Department has agreed to
seek no further rollbacks or interest against the Insurance Subsidiary for the
rollback year. Also, the settlement approves all rate filings which received
interim approvals for current rate levels made since 1989, and all rates and
rate levels charged by the Insurance Subsidiary from time to time between
November 8, 1989 and the date the settlements were approved.
The amount of any refund checks uncashed after a certain period will be
escheated to the State of California in accordance with its laws. Although the
Company will incur additional costs for processing the refunds, management
believes that its existing reserves are adequate.
10. REINSURANCE
The Insurance Subsidiary, in the ordinary course of its business, seeks to
reduce the loss that may arise from catastrophes or other events that may cause
unfavorable underwriting results by reinsuring certain levels of risk with other
insurance companies. Recoverables under the reinsurance agreements are estimated
in a manner consistent with the claim liability associated with the reinsured
policy.
Risks reinsured would become a liability of the Insurance Subsidiary in the
event any reinsurer is unable or will not fulfill the obligations assumed under
the agreements. The Insurance Subsidiary limits its credit risk associated with
reinsurance recoverables by evaluating the financial condition of members of the
reinsurance pool, and diversifying the pool participants. As of December 31,
1994, $11,000, was recorded as a receivable under reinsurance treaties. For the
years ended December 31, 1995 and 1996, there were no receivables recorded under
reinsurance treaties.
51
<PAGE> 53
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1994, 1995, and 1996, ceded reinsurance
premiums were $1,170,000, $933,000 and $691,000, respectively, and there were no
ceded reinsurance losses for the respective years.
The Insurance Subsidiary is also a "Write Your Own" ("WYO") carrier under
the National Flood Insurance Program. The premiums written and the insurance
risks under the WYO program are ceded to the Federal Emergency Management Agency
("FEMA"). The form of this treaty is the actual assumption of liability by FEMA
and, accordingly, amounts are excluded from net premiums and accounts receivable
and reserve for losses and LAE. For the years ended December 31, 1994, 1995, and
1996, ceded reinsurance premiums for this program were $1,520,000, $1,234,000
and $2,268,000, respectively.
The Insurance Subsidiary assumes a proportional share of the premiums
written and the insurance risks from other insurance companies for force-place
insurance policies produced through the Agency. In accordance with industry
practice, reinsurance assumed is presented as an addition to net premiums
written in the financial statements. The Insurance Subsidiary assumed net
written premiums of $(1,259,000), $(197,000)and $(29,511) in 1994, 1995, and
1996, respectively. As of December 31, 1994, 1995 and 1996, assumed unearned
premiums were $39,000, $0, and $0 respectively.
11. INVESTMENT INCOME
The components of investment income are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Fixed maturities................................. $1,165 $1,181 $1,246
Short-term investments........................... 802 947 739
Net realized gains (losses)...................... -- (3) 17
Investment expenses.............................. (131) (83) (27)
------ ------ ------
Net investment income............................ $1,836 $2,042 $1,975
====== ====== ======
</TABLE>
12. MAJOR CUSTOMERS
During 1994, National and Subsidiaries derived 22% of total revenues from
one customer, of which 20% was for insurance services and 2% for fee-based
services. During 1995, National and Subsidiaries derived 13% of total revenues
from one customer, of which all was for insurance services. During 1996,
National and Subsidiaries derived 9% of total revenues from one customer, of
which all was for insurance services. In the same year another customer
represented 9% of total revenues, of which 7% was for insurance services and 2%
for fee-based services.
13. EARNINGS PER SHARE
The number of shares used in the earnings per share computation is
calculated as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares......................... 4,678,729 4,679,697 3,885,740
Common shares issuable under outstanding stock
options.............................................. -- -- 31,686
---------- ---------- ----------
Total........................................ 4,678,729 4,679,697 3,917,426
========== ========== ==========
Net income (loss) (in thousands)....................... $ (1,084) $ (4,864) $ 1,274
Per share results:
Net income (loss)............................ $ (0.23) $ (1.04) $ 0.33
</TABLE>
52
<PAGE> 54
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The number of shares issuable upon exercise of outstanding options has been
calculated using the treasury stock method based on the average market price
during the year. In 1994 and 1995, the Company had a loss per share which is
calculated based upon the number of common shares outstanding.
There are no differences between primary and fully diluted earnings per
share.
14. DIVIDEND RESTRICTION
California law limits the payment of dividends to National by the Insurance
Subsidiary. The maximum dividend that may be paid without prior approval of the
Insurance Commissioner is limited to the greater of 10% of policyholders'
surplus (shareholders' equity adjusted to a statutory basis) as of the preceding
December 31, or the net income of the preceding calendar year. In 1997, the
maximum dividend would be limited to the net income of the Insurance Subsidiary
at December 31, 1996. Statutory policyholders' surplus and net income of the
Insurance Subsidiary is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Statutory policyholders' surplus.............. $25,209 $23,687 $26,765
Net income (loss)............................. $ 2,575 $(1,892) $ 2,758
</TABLE>
California law further prohibits the payment of dividends without prior
approval of the California Department of Insurance unless the insurer has
available "earned surplus". The term "earned surplus" is defined as unassigned
funds (surplus) as reported on the insurer's annual statement, excluding earned
surplus derived from: (i) unrealized net appreciation of assets; and (ii) an
exchange of assets, unless such earned surplus has been realized or the assets
received in exchange are currently realizable in cash. An exception to this
prohibition is allowed where the insurer's surplus as regards policyholders is:
(i) reasonable in relation to its outstanding liabilities; (ii) adequate to the
insurer's financial needs; and (iii) the Department's prior approval is
obtained.
There were no cash dividends paid by the Insurance Subsidiary in 1994, 1995
or 1996.
15. STOCK OPTION PLANS
Under the 1986 Stock Option Plan, as amended, participants may be awarded
options for shares of National's common stock subject to various restrictions
which limit the sale or other transfer of the shares until the expiration of a
specified time period. A maximum of 1,006,820 shares may be issued under the
plan. The exercise price of options granted under the plan may not be less than
100% of the fair value on the date of the grant. In 1992 and prior years, the
exercise price was limited to 110% of the fair value on the date of the grant
for shareholders owning more than 10% of the voting power of all shares of
stock.
Under the 1991 Director Option Plan, as amended, participants may be
awarded options for shares of National's common stock subject to various
restrictions which limit the sale or other transfer of the shares until the
expiration of a specified time period. A maximum of 325,000 shares may be issued
under the plan. The exercise price of options granted under the plan may not be
less than 100% of the fair value on the date of the grant.
For both stock option plans, the shares subject to option vest 25% at the
end of the first twelve (12) calendar months following the date of grant, and
the remainder vest ratably in each month over the next three (3) years. The
maximum term of options granted is ten (10) years from the date of grant.
Options issued to date have not resulted in any material compensation expense to
the Company. However, the Company did receive tax deductions related to the
exercise of stock options which reduced taxes payable by $0, $1,000 and $14,235
during 1994, 1995, and 1996, respectively. This amount has been credited
directly to common stock.
53
<PAGE> 55
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Director Plan provides that if Mr. Speizer and Howard L. Herman, the
Company's former President, shall sell or otherwise transfer beneficial
ownership of more than 75% of the aggregate number of shares controlled by them
as of May 23, 1995, the optionee (except for options granted under the Director
Plan to Mr. Speizer and/or Mr. Herman) shall thereafter have the right to
exercise such option as to all of the optioned stock, including shares as to
which such option would not otherwise be exercisable. As of May 23, 1995, Mr.
Speizer and Mr. Herman controlled an aggregate of 1,772,329 shares which number
is subject to adjustment in accordance with the provision of the Directors Plan
regarding adjustments upon changes in capitalization or merger. On May 31, 1996,
Mr. Speizer purchased 788,795 shares from Mr. Herman and certain Herman family
members and trusts. On June 18, 1996, Mr. Speizer purchased 35,500 shares from
Mr. Herman and his spouse. Such purchases constituted the purchase of all shares
owned and beneficially owned by Mr. Herman.
The Company applies Accounting Principals Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock
option plans.
Had compensation expense for the Company's stock options plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the optional expense measurement method described in SFAS
No. 123 "Accounting for Stock-Based Compensation", the Company's net income
would have been reduced by approximately $584,000 for 1996 and $0 for 1995, and
earnings per share would have decreased to $0.23 for 1996 with no effect for the
1995 year. The pro forma effect on net income for 1996 and 1995 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
The weighted average fair value on the date of the grant, of options
granted during 1996 and 1995, is estimated at $2.88 and $2.79, respectively.
Fair value is determined using the modified Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1996 and
1995:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Dividend yield.......................... 0% 0%
Expected volatility..................... 42.41% 42.41%
Risk-free interest rates................ 5.66%-7.74% 5.11%-6.77%
Expected life........................... 5 years 5 years
</TABLE>
The following table summarizes option activity during 1995 and 1996 for the
1986 Stock Option Plan, as amended, and 1991 Director Option Plan, as amended.
<TABLE>
<CAPTION>
1995 1996
--------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE EXERCISE PRICE
PER PER
OPTIONS SHARE OPTIONS SHARE
------- ----------------- -------- -----------------
<S> <C> <C> <C> <C>
Shares issuable under outstanding
options at January 1............... 503,748 $ 10.59 771,830 $6.66
Options granted...................... 363,000 $ 5.96 566,000 $6.14
Options exercised.................... (968) $ 3.75 (22,540) $6.64
Options canceled or forfeited........ (93,950) $ 8.27 (170,507) $5.64
------- --------
Shares issuable under outstanding
options at December 31............. 771,830 $ 6.66 1,144,783 $6.65
======= ========
Options exercisable at December 31... 546,830 $ 6.79 836,970 $6.84
======= ========
</TABLE>
Options may be exercised in whole or part at any time as to shares which
have not yet vested under the provisions of the 1986 Stock Option Plan, as
amended, provided that the Optionee execute, as a condition to
54
<PAGE> 56
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the option, a Restricted Stock Purchase Agreement which gives the Company the
right to repurchase at cost the unvested shares in the event of a termination of
the optionee's employment with the Company prior to the date upon which they
would have vested under the Option agreement.
The following table summarizes information about options outstanding at
December 31, 1996.
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF AVERAGE WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING LIFE EXERCISE PRICE PER
EXERCISE PRICES OPTIONS (YEARS) SHARE
----------------------------- ------------------ -------------- ------------------
<S> <C> <C> <C>
$3.75-$5.25.................. 195,744 8.24 $ 5.13
$5.88-$8.00.................. 854,789 8.30 $ 6.29
$9.75-$15.25................. 94,250 6.37 $13.01
---------
Total: 1,144,783 8.13 $ 6.65
=========
</TABLE>
Options exercisable:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF NUMBER EXERCISABLE AT EXERCISE PRICE PER
EXERCISE PRICES DECEMBER 31, 1996 SHARE
------------------------------------------ --------------------- ------------------
<S> <C> <C>
$3.75-$5.25............................... 195,744 $ 5.13
$5.88-$8.00............................... 546,976 $ 6.38
$9.75-$15.25.............................. 94,250 $13.01
-------
Total: 836,970 $ 6.84
=======
</TABLE>
16. NON-RECURRING EXPENSES
On June 13, 1995, the Commissioner notified the Company that its
application for adjustment of its Proposition 103 return premium liability had
been denied and the Company accrued an additional $4.1 million for the
constitutionally mandated roll-back of insurance premiums under the Proposition.
This amount is included on the balance sheet as Reserve for Prop 103 and on the
income statement as non-recurring expense.
In the second quarter of 1994, the Company accrued $1.0 million for
restructuring charges in connection with the relocation of the Company's loan
tracking and customer service operations from Bellevue, Washington, to its South
San Francisco, California, headquarters.
17. RELATED PARTY TRANSACTIONS
The former President of the Company owns a controlling interest in, and the
Chief Executive Officer of the Company previously owned a controlling interest
in, another entity which ceased doing business in 1994. The Company assumed, in
1993, a lease of such entity's principal office located at 395 Oyster Point
Boulevard, South San Francisco, California (which the Company used to expand its
corporate headquarters), requiring lease payments of $21,000 per month.
In September 1996 National entered into a consulting agreement with
Scorpion Holdings, Inc., a Delaware corporation ("Scorpion") pursuant to which
Scorpion agreed to provide certain consulting services in connection with (i)
management and strategic planning, (ii) the identification of financing,
acquisitions and divestiture opportunities for National, and (iii) other matters
relating to the day-to-day business and operation of National or any of its
subsidiaries or affiliated companies, as the Board of Directors of National may
from time to time reasonably request. In addition, if National engages in any
(i) merger, consolidation or sale of any of its assets (other than in the
ordinary course of its business) or outstanding securities or (ii) acquisition
of assets or stock of another company, Scorpion has the right to act as a
financial advisor to National pursuant to an engagement agreement, the terms and
conditions of which shall be mutually agreed upon by National and Scorpion. The
term of the consulting agreement is for one year; provided, however, the term is
extended
55
<PAGE> 57
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for an additional period of one year unless written notice of termination is
given by either party not less than sixty (60) days prior to the first
anniversary date of the consulting agreement. Pursuant to the consulting
agreement, Scorpion receives an annual fee of $300,000 plus reimbursement for
reasonable out-of-pocket costs and expenses. Mr. Brandolini is the sole
shareholder, a director and chief executive officer of Scorpion. Mr. McCarthy is
a director and president of Scorpion. Mr. Brandolini and Mr. McCarthy are
directors of National.
In October 1996, National entered into a bridge loan agreement with
Hydrodynamics Corporation ("Hydrodynamics"), pursuant to which National loaned
to Hydrodynamics $300,000. The bridge loan is evidenced by a Convertible
Promissory Note, in the principal amount of $300,000, which note bears interest
at the rate of 10% per annum and matures on October 28, 1997. Mr. Brandolini and
Mr. McCarthy, who are directors of National are also directors, officers and
shareholders of Hydrodynamics. In December 1996, Hydrodynamics commenced
voluntary proceedings under Chapter 11 of the federal bankruptcy laws. In
February 1997, Arabella, S.A. purchased from National the Convertible Promissory
Note of Hydrodynamics issued to National for a purchase price of $300,000.
National assigned its rights under the Convertible Promissory Note and the Stock
Purchase Warrant to Arabella, S.A. Mr. Brandolini is also a director of Arabella
S.A.
18. CHANGE OF CONTROL
Pursuant to an Option and Stock Purchase Agreement entered into on May 1,
1996, between Howard L. Herman, a founder and former director of the Company,
and certain of Mr. Herman's relatives, and Mark A. Speizer, it was agreed that
824,295 shares of Common Stock of the Company (the "Herman shares") would be
sold to Mr. Speizer. 788,795 of the Herman Shares were purchased on May 31, 1996
and the remaining shares were purchased on June 18, 1996. At the annual meeting
of shareholders held on July 11, 1996, the slate of directors nominated by the
Board of Directors was elected. Following the annual meeting, Mr. Speizer was
elected Chairman of the Board and Chief Executive Officer of the Company and
each of Great Pacific Insurance Company, Fastrac Systems, Inc. Insurance Agent &
Broker, Fastrac Systems, Inc., and Pinnacle Data Corporation, the Company's
wholly owned subsidiaries through which the Company carries out its business
activities. In June 1996, the Company accrued $1.4 million of expense as a
result of retention agreements entered into with certain executives. The purpose
of the agreements was to ensure the availability and employment of those
executives through the transition following the change of control of the Company
which occurred in July 1996.
19. PENSION PLANS
The Company adopted a defined contribution 401(k) plan on July 1, 1996. All
full time employees are eligible to participate in the plan at the beginning of
a calendar quarter following completion of ninety days of continuous full time
employment. The Company matches 25% of the employee's contributions up to and
including the first 4% of the employee's salary. The Company's contribution was
$34,569 for 1996.
20. NOTES PAYABLE
In September 1996, a note agreement for $2,000,000 was entered into with a
financial institution. The note is to be repaid monthly over a two year period
with final payment due in October 1998. Interest is at the rate of 1% per year
in excess of the rate of interest which the financial institution has announced
as its prime lending rate or $250 per month whichever is greater. Collateral for
the note is the outstanding capital stock of Pinnacle Data Corporation (a wholly
owned subsidiary of the Company) which consists of 1,000 shares.
56
<PAGE> 58
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. LITIGATION
The Company is involved in various routine legal proceedings incident to
its business and other litigation. While the ultimate disposition of each
proceeding is not determinable, the Company does not believe that any of such
proceedings is likely to have a materially adverse effect on the consolidated
financial position of the Company.
22. COMMON STOCK REPURCHASE
On September 17, 1996, the Company repurchased 705,300 shares of its common
stock for $4.9 million. The shares were acquired through a private transaction
with institutional investors at a price of $7 per share. This repurchase
represents a reduction of approximately 15% of the Company's outstanding stock.
A second repurchase of 100,000 shares was made on October 22, 1996. The shares
were acquired through a private transaction at a price of $6.95 per share. The
repurchases were funded by cash flows from operations and from proceeds of a
bank credit facility. See Note 20 to Notes to Consolidated Financial Statements.
23. SEGMENT REPORTING
The principal sources of the Company's business are the following.
<TABLE>
<S> <C>
Insurance Products...... The Company provides force-place insurance for financial
institutions when their borrowers fail to maintain adequate
insurance in force, provides fire insurance on foreclosed
real estate and provides automobile physical damage
insurance.
Information Services.... The Company provides contract services, including insurance
tracking, outsourcing, and flood zone determinations for
financial institutions and others.
</TABLE>
Revenues and income from operations for each of these segments are
presented below. Segment revenues and operating income are based upon
transactions directly traceable to the segment and after elimination of
intersegment revenues and expenses. General corporate expenses benefitting more
than one segment, which include compensation of general corporate officers,
certain occupancy costs, shareholder reporting expenses, general insurance,
legal, sales and marketing and other corporate expenses and fees, are not
allocated to segments (in thousands):
<TABLE>
<CAPTION>
CONSOLIDATED REVENUES
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1994 1995 1996
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Insurance products......... $24,553 70.5% $20,564 57.2% $16,705 41.1%
Information services....... 10,234 29.5% 15,379 42.8% 23,978 58.9%
------- ----- ------- ----- ------- -----
$34,787 100.0% $35,943 100.0% $40,683 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED PRE-TAX INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Insurance products................................ $ 8,590 $ 5,559 $ 7,820
Information services.............................. (448) 13 3,545
General corporate expenses........................ (8,740) (8,895) (9,807)
Non-recurring charges............................. (1,020) (4,100) --
------- ------- -------
$(1,618) $(7,423) $ 1,558
======= ======= =======
</TABLE>
57
<PAGE> 59
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Identifiable assets, capital expenditures, and depreciation and
amortization by segment for the years ended as of December 31,1995 and 1996 are
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------------- -------------------------------------
DEPRECIATION DEPRECIATION
CAPITAL AND CAPITAL AND
ASSETS EXPENDITURES AMORTIZATION ASSETS EXPENDITURES AMORTIZATION
------- ------------ ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Insurance Products........... $45,052 $ 282 $ 605 $32,321 $ 239 $ 467
Information Services......... 597 1,069 1,588 15,338 1,206 1,291
Holding Company.............. 6,447 0 0 (547) 0 0
------- ------ ------ ------- ------ ------
$52,096 $1,351 $2,193 $47,112 $1,445 $1,758
</TABLE>
24. RESULTS BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER
31, 30, 30, 31, 31, 30, 30, 31,
1995 1995 1995 1995 1996 1996 1996 1996
------ ------ --------- -------- ------ ------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned, fee
income and commission
income.................. $7,382 $7,928 $ 8,880 $9,711 $9,911 $9,642 $ 9,627 $9,528
Income before provision
for income taxes........ (337) (6,376) 105 (815) 234 (1,350) 1,371 1,303
Net income (loss)......... (229) (4,336) 71 (370) 149 (857) 870 1,112
Net income per share...... $(0.05) $(0.93) $ 0.02 $(0.08) $ 0.03 $(0.18) $ 0.22 $ 0.29
</TABLE>
58
<PAGE> 60
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
Our report on the consolidated financial statements of National Insurance
Group and Subsidiaries is included in this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed in the index of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Francisco, California
February 7, 1997
59
<PAGE> 61
SCHEDULE I
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN
NUMBER OF IN THE
SHARES OR MARKET BALANCE
PRINCIPAL COST VALUE SHEET
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds and notes:
U.S. Government securities............... $ 2,599,225 $ 2,609,750 $ 2,609,750
Municipalities........................... 7,593,811 7,779,241 7,779,241
States................................... 2,688,727 2,737,932 2,737,932
Certificates of deposit.................. 5,330,914 5,330,914 5,330,914
Mortgage-backed securities............... 80,570 80,570 80,570
----------- ----------- -----------
Total Fixed Maturities.............. 18,293,247 18,538,407 18,538,407
----------- ----------- -----------
Equity Securities:
Preferred stock
Financial institution.................... 32,000 796,750 804,250 804,250
Public Utilities......................... 24,000 711,095 738,125 738,125
Industrial............................... 20,000 501,950 508,750 508,750
Common stock
Financial institution.................... 27,701 228,405 0 0
----------- ----------- -----------
Total Equity Securities............. 2,238,200 2,051,125 2,051,125
----------- ----------- -----------
Short-term Investments...................... 11,983,619 11,983,619 11,983,619
----------- ----------- -----------
Total Investments................... $32,515,066 $32,573,151 $32,573,151
=========== =========== ===========
</TABLE>
60
<PAGE> 62
SCHEDULE II
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Short-term investments and cash................................... $ 142,732 $ (42,845)
Investments in subsidiaries....................................... 25,298,919 27,397,827
Other assets...................................................... 8,889,193 4,267,506
----------- -----------
Total assets............................................ $34,330,844 $31,622,488
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Federal and state income taxes payable............................ $ 267,774 $ 316,817
Accrued Liabilities............................................... 527,352 1,054,814
Deferred federal income taxes..................................... 655,551 365,448
Notes payable..................................................... -- 1,333,333
----------- -----------
Total liabilities....................................... 1,450,677 3,070,412
----------- -----------
Shareholders' equity
Common stock.................................................... 23,070,551 17,591,787
Retained earnings............................................... 9,809,616 10,960,289
----------- -----------
Total shareholders' equity.............................. 32,880,167 28,552,076
----------- -----------
Total liabilities and shareholders' equity.............. $34,330,844 $31,622,488
=========== ===========
</TABLE>
61
<PAGE> 63
SCHEDULE II
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
Net investment income................................ $ 225,119 $ 67,979 $ 14,495
Operating expenses................................... (404,690) (1,141,735) 29,229
Provision for income taxes........................... (14,512) (116,145) (991,959)
Equity in net income of subsidiaries................. (889,457) (3,674,831) 2,221,737
----------- ----------- ----------
Net income (loss).......................... $(1,083,540) $(4,864,732) $1,273,502
=========== =========== ==========
</TABLE>
62
<PAGE> 64
SCHEDULE II
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1994 1995 1996
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ (1,083,540) $(4,864,732) $ 1,273,502
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed equity in net income of
subsidiaries.................................. 889,457 3,674,831 (2,221,737)
Increase (decrease) in taxes payable............. 1,158,488 (322,198) (241,060)
Other.............................................. (3,655,455) (1,875,270) 5,149,149
------------ ----------- -----------
Net cash provided (used) by operating activities... $ (2,691,050) $(3,387,369) $ 3,959,854
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments............................ $(68,599,619) $ 0 $ 0
Maturity of investments............................ 74,877,514 3,220,857 143,000
------------ ----------- -----------
Net cash provided by investing activities.......... $ 6,277,895 $ 3,220,857 $ 143,000
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital contributions................ $ 1,408,483 $ 0 $ 0
Dividends paid..................................... (1,202,894) 0 0
Proceeds from stock options exercised.............. 0 4,992 188,601
Repurchase of common stock......................... (3,610,000) 0 (5,667,365)
Proceeds from notes payable........................ 0 0 1,333,333
------------ ----------- -----------
Net cash provided (used) by financing activities... (3,404,411) 4,992 (4,145,431)
------------ ----------- -----------
Net increase (decrease) in cash.................... 182,434 (161,520) (42,577)
Cash at beginning of year.......................... (21,182) 161,252 (268)
------------ ----------- -----------
Cash at end of year................................ $ 161,252 $ (268) $ (42,845)
============ =========== ===========
</TABLE>
63
<PAGE> 65
SCHEDULE III
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION CONCERNING
PROPERTY CASUALTY OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Deferred Policy Acquisition Costs................... $ 3,573,248 $ 2,623,562 $ 2,186,586
Reserves for Unpaid Claims and Claims Adjustment
Expenses.......................................... 3,360,438 3,054,710 2,198,478
Less Reserve Discount............................... -- -- --
Unearned Premiums................................... 7,767,930 6,674,877 6,098,435
Earned Premiums..................................... 20,857,424 17,020,440 13,585,007
Net Investment Income............................... 1,836,000 2,042,225 1,974,925
Claims and Claim Adjustment Expenses Incurred
Related to:
Current Year...................................... 7,627,000 6,378,000 3,971,000
Prior Year........................................ 246,000 (334,000) 31,000
Amortization of Deferred Policy Acquisition Costs... 11,046,985 9,597,252 6,296,010
Paid Claims and Claim Adjustment Expense............ 10,141,100 6,349,000 4,859,000
Net Premiums Written................................ 20,035,560 14,955,906 12,635,058
</TABLE>
64
<PAGE> 66
SCHEDULE VI
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER ASSUMED
AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Fire and Allied Lines Insurance
Premiums:
Year ended December 31, 1996..... $13,005,117 $ 691,208 $ (29,511) $12,284,398 (0.2)%
=========== ========== =========== =========== ====
Year ended December 31, 1995..... $15,834,991 $ 922,579 $ (196,996) $14,715,416 (1.3)%
=========== ========== =========== =========== ====
Year ended December 31, 1994..... $21,442,240 $1,124,481 $(1,270,716) $19,047,043 (6.7)%
=========== ========== =========== =========== ====
Auto Physical Damage Insurance
Premiums:
Year ended December 31, 1996..... $ (18,430) $ 0 $ 0 $ (18,430) 0%
=========== ========== =========== =========== ====
Year ended December 31, 1995..... $ 254,462 $ 10,810 $ (11) $ 243,652 0%
=========== ========== =========== =========== ====
Year ended December 31, 1994..... $ 1,022,689 $ 45,235 $ 11,063 $ 988,517 1.1%
=========== ========== =========== =========== ====
Flood Insurance Premiums:
Year ended December 31, 1996..... $ 2,267,703 $2,267,703 0 0 0%
=========== ========== =========== =========== ====
Year ended December 31, 1995..... $ 1,234,443 $1,234,443 0 0 0%
=========== ========== =========== =========== ====
Year ended December 31, 1994..... $ 1,519,063 $1,519,063 0 0 0%
=========== ========== =========== =========== ====
</TABLE>
65
<PAGE> 67
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 on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of South San Francisco, State of California.
NATIONAL INSURANCE GROUP,
a California corporation
Date: March 28, 1997 By: /s/ ROBERT P. BARBAROWICZ
------------------------------------
Robert P. Barbarowicz,
Executive Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ---------------
<C> <S> <C>
/s/ MARK A. SPEIZER Director, Chief Executive March 28, 1997
- --------------------------------------------- Officer and Chairman of the
Mark A. Speizer Board
/s/ BRUCE A. COLE Director and President March 28, 1997
- ---------------------------------------------
Bruce A. Cole
/s/ GREGORY S. SAUNDERS Executive Vice President, March 28, 1997
- --------------------------------------------- Treasurer and Chief Financial
Gregory S. Saunders Officer (Principal Financial
Officer)
/s/ ROBERT J. LELIEUR Vice President and Controller March 28, 1997
- --------------------------------------------- (Principal Accounting
Robert J. Lelieur Officer)
/s/ NUNO BRANDOLINI D'ADDA Director March 28, 1997
- ---------------------------------------------
Nuno Brandolini d'Adda
/s/ KEVIN R. MCCARTHY Director March 28, 1997
- ---------------------------------------------
Kevin R. McCarthy
/s/ SAUL B. JODEL Director March 28, 1997
- ---------------------------------------------
Saul B. Jodel
</TABLE>
66
<PAGE> 68
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------------------------------------------------------------------- ------------
<S> <C> <C>
3.1 Articles of Incorporation of Company, as Amended (2)...................
3.2 Bylaws of Company(1)...................................................
10.1 1986 Stock Option Plan, as amended through July 11, 1996...............
10.2 1991 Director Option Plan, as amended through May 23, 1995(6)..........
10.4 Memoranda of Reinsurance as to First and Second Property Per Risk
Excess of Loss.........................................................
Reinsurance Agreements and the First, Second and Third Property
Catastrophe Excess Reinsurance Agreements (1995)(5)....................
10.5 Memoranda of Reinsurance as to First and Second Property Per Risk
Excess of Loss Reinsurance Agreements and the First, Second and Third
Property Catastrophe Excess Reinsurance Agreements (1996)(6)...........
10.6 Memoranda of Reinsurance as to First and Second Property Per Risk
Excess of Loss Reinsurance Agreements and the First, Second and Third
Property Catastrophe Excess Reinsurance Agreements (1997)..............
10.7 Agreement of Employment Termination and Release dated July 2, 1995
between National Insurance Group, Fastrac Systems, Inc., Fastrac
Systems, Inc. Insurance Agent & Broker, Great Pacific Insurance
Company, Pinnacle Data Corporation and Douglas Harold Helm(6)..........
10.8 Severance Agreement and Full Release of All Claims dated May 23, 1995
by and among Howard L. Herman, National Insurance Group and future
subsidiaries(6)........................................................
10.9 Severance Agreement and Release of Claims dated October 19, 1995 by and
among Mark A. Speizer, National Insurance Group and future
subsidiaries(6)........................................................
10.10 Consulting Agreement dated February 1, 1996 between National Insurance
Group and John R. Gaulding(6)..........................................
10.11 John R. Gaulding At-Will Employment Agreement dated February 25, 1996
by and among John R. Gaulding, National Insurance Group and future
subsidiaries(6)........................................................
10.12 Second Amendment of John R. Gaulding At-Will Employment Agreement dated
July 10, 1996 by and John R. Gaulding, National Insurance Group, its
current and future subsidiaries(7).....................................
10.13 Lease Agreement dated March 20, 1995 between Thomas H. Lagos, James H.
Lagos and Fastrac Systems, Inc., Insurance Agent and Broker for the
premises located at One South Limestone Street, Springfield, Ohio(6)...
10.14 Lease Agreement dated June 3, 1992 between the Company and Tomoe
Investment & Development, Inc. for the premises located at 395 Oyster
Point Boulevard, Suite 500, South San Francisco, California(3).........
10.15 Form of First Amendment of Oyster Point Marina Business Park Office
Lease (Suite 500) dated September 29, 1993 between Tomoe Investment &
Development, Inc. and National Insurance Group(4)......................
10.16 Assignment and Assumption of Lease dated August 1, 1993 between San
Mateo Financial Corporation and National Insurance Group for the
premises located at 395 Oyster Point Boulevard, Suite 550, South San
Francisco, California(4)...............................................
10.17 Form of First Amendment of Oyster Point Marina Business Park Office
Lease (Suite 550) dated September 29, 1993 between Tomoe Investment &
Development, Inc. and National Insurance Group(4)......................
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------------------------------------------------------------------- ------------
<S> <C> <C>
10.18 Sublease Agreement dated March 24, 1994 between the Company and PHH
Homequity Corporation for the premises located at 1855 Gateway
Boulevard, Concord, California(5)......................................
10.19 Form of Indemnification Agreement between Registrant and its officers
and directors(4).......................................................
10.20 Form of Change of Control Severance Agreement and Mutual Release
entered into between National and Paulette J. Taylor (July 10, 1996),
Kevin C. Eichler (June 26, 1996) and Roger Conley (July 10, 1996)(7)...
10.21 Form of Donation Agreement entered into between National and Roger
Conley (July 11, 1996), Kevin C. Eichler (July 11, 1996), John R.
Gaulding (July 11, 1996), and Paulette J. Taylor (July 11, 1996)(7)....
10.22 Mark A. Speizer Employment Agreement dated July 11, 1996 by and between
National and Mark A. Speizer (7).......................................
10.23 Bruce A. Cole Employment Agreement dated July 11, 1996 by and between
National and Bruce A. Cole(7)..........................................
10.24 Employment Agreement effective August 12, 1996 by and between National
and Robert P. Barbarowicz..............................................
10.25 Employment Agreement dated August 26, 1996 by and between National and
C. Alan Paylor(8)......................................................
10.26 Consulting Agreement dated September 11, 1996 by and between National
and Scorpion Holdings, Inc.(8).........................................
10.27 Employment Agreement dated March 10, 1997 by and between National and
Gregory S. Saunders....................................................
10.28 401(k) Plan, First Amendment to 401(k) Plan and Participation
Agreements.............................................................
11.1 Computation of Weighted Average Shares Outstanding and Earnings per
Share..................................................................
21.1 Subsidiaries of Company(5).............................................
24.1 Power of Attorney......................................................
27 Financial Data Schedule................................................
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-1 (No. 33-14940) which became effective July 21, 1987.
(2) Incorporated by reference to exhibits filed with the Company's Form 10-K for
the fiscal year ended December 31, 1990.
(3) Incorporated by reference to exhibits filed with the Company's Form 10-K for
the fiscal year ended December 31, 1992.
(4) Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-2 (No. 33-71290) which became effective December 16,
1993.
(5) Incorporated by reference to exhibits filed with the Company's Form 10-K for
the fiscal year ended December 31, 1994.
(6) Incorporated by reference to exhibits filed with the Company's Form 10-K for
the fiscal year ended December 31, 1995.
(7) Incorporated by reference to exhibits filed with the Company's Form 10-Q/A
for the quarter ended June 30, 1996.
(8) Incorporated by reference to exhibits filed with the Company's Form 8-K
dated October 23, 1996.
<PAGE> 1
Exhibit 10.1
NATIONAL INSURANCE GROUP
1986 STOCK OPTION PLAN
(AS AMENDED THROUGH JULY 11, 1996)
1. Purposes of the Plan. The purpose of this Stock Option Plan
is to provide additional incentive to Employees and Consultants to work to
maximize shareholder value. This Stock Option Plan also utilizes vesting periods
to encourage key Employees and Consultants to continue in the employ of or
service to the Company. The Plan and/or the granting of any option under the
Plan to any employee shall not be construed to be any form of employment
contract or guarantee of future employment or compensation.
Options granted hereunder shall be "nonstatutory stock
options."
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" shall mean the Committee, if one has been
appointed, or the Board of Directors of the Company, if no Committee is
appointed.
(b) "Common Stock" shall mean the Common Stock of the Company.
(c) "Company" shall mean National Insurance Group, a
California corporation.
(d) "Committee" shall mean the Committee appointed by the
Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if
one is appointed.
(e) "Employee" shall mean any person, including officers and
directors, employed by the Company or any parent or subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(f) "Consultant" shall mean any person who is engaged by the
Company or any subsidiary to render consulting services and is
-1-
<PAGE> 2
compensated for such consulting services, and any director of the Company
whether compensated for such services or not; provided that if and in the event
the Company registers any class of any equity security pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term
Consultant shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.
(g) "Option" shall mean a stock option granted pursuant to the
Plan.
(h) "Optioned Stock" shall mean the Common Stock subject to
an Option.
(i) "Optionee" shall mean an Employee or Consultant who
receives an Option.
(j) "Plan" shall mean this 1986 Stock Option Plan.
(k) "Share" shall mean a share of the Common Stock, as
adjusted in accordance with Section 11 of the Plan.
3. Stock Subject to the Plan. Subject to the provisions of Section 11
of the Plan, the maximum aggregate number of shares which may be optioned and
sold under the Plan is 1,006,820 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. If permitted by
Rule 16b-3 of the Exchange Act, the Plan may be administered by different bodies
with respect to members of the Board of Directors of the Company ("Directors"),
officers of the Company, within the meaning of Section 16 of the Exchange Act
and the rules and
-2-
<PAGE> 3
regulations promulgated thereunder ("Officers"), who are not
Directors, and Employees who are neither Directors nor Officers.
(ii) Administration With Respect to Directors and
Officers Subject to Section 16(b). With respect to Option grants made to
Employees who are also Officers or Directors subject to Section 16(b) of the
Exchange Act, the Plan shall be administered by (A) the Board of Directors, if
the Board of Directors may administer the Plan in compliance with the rules
governing a plan intended to qualify as a discretionary plan under Rule 16b-3,
or (B) a committee designated by the Board of Directors to administer the Plan,
which committee shall be constituted to comply with the rules governing a plan
intended to qualify as a discretionary plan under Rule 16b-3 (the "Committee").
Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board of Directors. From time to time
the Board of Directors may increase the size of the Committee and appoint
additional members, remove members (with or without cause) and substitute new
members, fill vacancies (however caused), and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by the rules governing a plan intended to qualify as a discretionary
plan under Rule 16b-3.
(ii) Administration With Respect to Other Persons.
With respect to Option grants made to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A) the
Board of Directors or (B) a committee designated by the Board of Directors,
which committee shall be constituted to satisfy the legal requirements relating
to the administration of stock option plans under state corporate and securities
laws and the Internal Revenue Code of 1986, as amended (the "Applicable Laws").
Once appointed, such Committee shall serve in its designated capacity until
otherwise directed by the Board of Directors. The Board of Directors may
increase the size of the Committee and appoint additional members, remove
members (with or without cause) and substitute new members, fill vacancies
(however caused), and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by Applicable Laws.
(b) Powers of the Board. Subject to the provisions of the
Plan, the Board shall have the authority, in its discretion:
-3-
<PAGE> 4
(i) to grant "nonstatutory stock options"; (ii) to determine, upon review of
relevant information and in accordance with Section 8(b) of the Plan, the fair
market value of the Common Stock; (iii) to determine the exercise price per
share of Options to be granted, which exercise price shall be determined in
accordance with Section 8(a) of the Plan; (iv) to determine the Employees or
Consultants to whom, and the time or times at which, Options shall be granted
and the number of shares to be represented by each Option; (v) to interpret the
Plan; (vi) to prescribe, amend and rescind rules and regulations relating to the
Plan; (vii) to deter mine the terms and provisions of each Option granted (which
need not be identical) and, with the consent of the holder thereof, modify or
amend each Option; (viii) to accelerate or defer (with the consent of the
Optionee) the exercise date of any Option, consistent with the provisions of
Section 5 of the Plan; (ix) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted by the Board; and (x) to make all other determinations deemed necessary
or advisable for the administration of the Plan.
(c) Effect of Board's Decision. All decisions, determinations
and interpretations of the Board shall be final and binding on all Optionees
and any other holders of any Options granted under the Plan.
5. Eligibility.
(a) Options may be granted only to Employees and Consultants.
An Employee or Consultant who has been granted an Option may, if he is otherwise
eligible, be granted an additional Option or Options.
(b) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment, compensation or consulting relationship
with the Company, nor shall it interfere in any way with his right or the
Company's right to terminate his employment or consulting relationship at any
time.
(c) The following limitations shall apply to grants of Options
to Employees:
-4-
<PAGE> 5
(i) No Employee shall be granted, in any fiscal year
of the Company, Options to purchase more than 150,000 Shares.
(ii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 11.
(iii) If an Option is canceled in the same fiscal
year of the Company in which it was granted (other than in connection with a
transaction described in Section 11), the cancelled Option will be counted
against the limit set forth in Section 5(c). For this purpose, if the exercise
price of an Option is reduced, the transaction will be treated as a cancellation
of the Option and the grant of a new Option.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 17 of the Plan. It shall
continue in effect for a term of twenty (20) years unless sooner terminated
under Section 13 of the Plan.
7. Term of Option. The term of each Option shall be ten (10) years from
the date of grant thereof or such shorter term as may be provided in the Stock
Option Agreement.
8. Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board, but shall be no less than 100% of the fair market value per Share on the
date of grant.
(b) The fair market value shall be determined by the Board in
its discretion; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the mean of the bid and
asked prices of the Common Stock for the date of grant, as reported in the Wall
Street Journal (or, if not so reported, as otherwise reported by the National
Association of Securities Dealers Automated Quotation (NASDAQ) System) or, in
the event the Common Stock is listed on a stock exchange, the fair market value
per Share shall be the closing
-5-
<PAGE> 6
price on such exchange on the date of grant of the Option, as reported in the
Wall Street Journal.
(c) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined
by the Board and may consist entirely of either cash or check in United States
currency.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance criteria with
respect to the Company and/or the Optionee, and as shall be permissible under
the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(c) of the Plan.
Until the Company receives written notice of such exercise and full payment for
the Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to Optioned Stock. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 11 of the
Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. If an
Employee or Consultant ceases to serve as an Employee or Consultant, he may,
but only within thirty (30) days (or such longer period of time as is determined
by the Board, but in no event later
-6-
<PAGE> 7
than the expiration date of the term of such Option as set forth in the Option
Agreement) after the date he ceases to be an Employee or Consultant of the
Company, exercise his Option to the extent that he was entitled to exercise it
at the date of such termination. To the extent that he was not entitled to
exercise the Option at the date of such termination, or if he does not exercise
such Option (which he was entitled to exercise) within the time specified
herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event an Employee or Consultant is unable to continue
his employment or consulting relationship (as the case may be) with the Company
as a result of his total and permanent disability (as defined in section
22(e)(3) of the Internal Revenue Code), he may, but only within six (6) months
(or such longer period of time as is determined by the Board, but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement) from the date of termination, exercise his Option to the
extent he was entitled to exercise it at the date of such termination. To the
extent that he was not entitled to exercise the Option at the date of
termination, or if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an
Optionee:
(i) during the term of the Option who is at the
time of his death an Employee or Consultant of the Company
and who shall have been in continuous status as an Employee
or Consultant since the date of grant of the Option, the
Option may be exercised, at any time within twelve (12)
months following the date of death (or such longer period
of time as is determined by the Board, but in no event
later than the expiration date of the term of such Option
as set forth in the Option Agreement), by the Optionee's
estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the
extent of the right to exercise that had accrued at the
date of the Optionee's death; or
-7-
<PAGE> 8
(ii) within thirty (30) days (or such longer period of
time as is determined by the Board, but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement) after the termination of continuous status as an employee
or Consultant, the Option may be exercised, at any time within six
(6) months following the date of death (or such longer period of time
as is determined by the Board, but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), by the Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of
termination.
10. Non-Transferability of Options. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to
any required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no
-8-
<PAGE> 9
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation
of the Company, the Option will terminate immediately prior to the consummation
of such proposed action, unless otherwise provided by the Board. The Board may,
in the exercise of its sole discretion in such instances, declare that any
Option shall terminate as of a date fixed by the Board and give each Optionee
the right to exercise his Option as to all or any part of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable. In
the event of a proposed sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another corporation, the
Option shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the Board determines, in the exercise of its sole discretion and in lieu
of such assumption or substitution, that the Optionee shall have the right to
exercise the Option as to all of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable. If the Board makes an
Option fully exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and the Option will terminate upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall,
for all purposes, be the date on which the Board makes the determination
granting such Option. Notice of the determination shall be given to each
Employee or Consultant to whom an Option is so granted within a reasonable time
after the date of such grant.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable; provided, however, that a following revision or amendment shall
require approval of the Shareholders of the Company in the manner described in
Section 17 of the Plan:
-9-
<PAGE> 10
(i) if the Company has a class of equity
security registered under Section 12 of the Exchange Act at
the time of such revision or amendment, any material
increase in the benefits accruing to participants under the
Plan.
(b) Shareholder Approval. If any amendment requiring
shareholder approval under Section 13(a) of the Plan is made subsequent to the
first registration of any class of equity security by the Company under Section
12 of the Exchange Act, such shareholder approval shall be solicited as
described in Section 17(a) of the Plan.
(c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and
the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
of 1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the afore mentioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
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<PAGE> 11
Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue
or sell such Shares as to which such requisite authority shall not have been
obtained.
16. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. Shareholder Approval. If and in the event that the Company
registers any class of any equity security pursuant to Section 12 of the
Exchange Act, the approval of such shareholders of the Company shall be:
(a) (1) solicited substantially in accordance with Section 14(a) of
the Exchange Act and the rules and regulations promulgated thereunder, or (2)
solicited after the Company has furnished in writing to the holders entitled to
vote substantially the same information concerning the Plan as that which would
be required by the rules and regulations in effect under Section 14(a) of the
Exchange Act at the time such information is furnished; and
(b) obtained at or prior to the first annual meeting of
shareholders held subsequent to the first registration of any class of equity
securities of the Company under Section 12 of the Exchange Act.
If such shareholder approval is obtained by written con sent, it
must be obtained by the unanimous written consent of all shareholders of the
Company.
18. Information to Optionees. The Company shall provide to each
Optionee, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports and other information which are
provided to all shareholders of the Company. The Company shall not be required
to provide such information if the issuance of Options under the Plan is limited
to key employees whose duties in connection with the Company assure their access
to equivalent information.
-11-
<PAGE> 1
Exhibit 10.6
Number: C-97-01332
Renewal of: C-96-01332
REASSURED: NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
South San Francisco, California
CONTRACT: FIRST PROPERTY PER RISK EXCESS OF LOSS REINSURANCE CONTRACT
Effective January 1, 1997
BUSINESS
COVERED: Business produced by Fastrac Systems, Inc. of Bellevue,
Washington, and produced by M.A. Speizer & Co., Inc. or any other
of the National Insurance Group Companies of South San Francisco,
California on behalf of the Reassured and classified as:
Coverage A: Dwelling Fire, Fire, Extended Perils, Special Form
on Interim Coverage policies, Forced Order policies,
Real-Estate Owned (REO) policies, Personal Article
Floaters, Personal Lines, Watercraft and Private
Passenger Planes, Force Placed Property and/or
Blanket Mortgage Security Insurance.
Coverage B: Comprehensive Personal Liability (Section II
Liability), including, but not limited to, General
Bodily Injury and Property Damage Liability, Medical
Payments and Third Party Liability Coverages which
may be written in conjunction with the Reassured's
Coverage A Policies.
TERM AND
CANCELLATION: The term of this Contract shall be from January 1, 1997 to
January 1, 1998, both days at 12:01 a.m., Local Standard Time
(Local Standard Time being that time which applies in the area
where the risk is located) for losses occurring on new, renewal
and in force policies.
In the event of cancellation, all cessions with an effective date
prior to the date of termination of this Contract shall remain in
full force and shall continue to be covered hereunder for a
period of up to one year subsequent to the date of termination.
The Reassured shall have the option to waive the run-off
provision and the reinsurance premium shall be adjusted on the
gross earned premium income as of the date and time of
cancellation. In such event, the Reinsurer shall not be liable as
respects losses occurring subsequent to the effective date and
time of cancellation.
TERRITORY: This reinsurance shall cover wherever the Reassured's policies
apply.
Page 1 of 8
<PAGE> 2
Number: C-97-01332
Renewal of: C-96-01332
RETENTION
AND LIMIT: Coverage A:
100% of $2,000,000 excess of $500,000 on any one risk, in any
one loss occurrence, subject to a maximum recovery of 100% of
$4,000,000 any one loss occurrence. Limits include affiliated
coverages.
Affiliated coverages shall mean appurtenant structures, living
expenses and shrubbery.
Coverage B:
100% of $90,000 excess of $10,000 each occurrence.
Allocated loss adjustment expenses pro rata in addition.
REINSTATEMENTS: Unlimited reinstatements without charge.
REINSURANCE
RATE: 0.83% of Gross Earned Premium Income.
MINIMUM
AND DEPOSIT
PREMIUM: Deposit Premium of $175,000 payable in advance in equal
quarterly installments. Annual minimum premium of $157,500.
Subject to annual adjustment.
EXCLUSIONS: A. Business classified as Ocean Marine except for personal
lines watercraft physical damage not to exceed $100,000 any
one risk;
B. Personal Accident, Health, Surety and Fidelity, Workers'
Compensation, and all classes of Casualty;
C. Financial and Insolvency guarantees;
D. Aviation business except for physical damage on private
planes not to exceed $100,000 any one risk;
E. Automobile business;
F. Inland Marine policies covering railroad rolling stock,
streamlined trains, negative films, registered mail, jewelers
block, animal mortality, offshore drilling rigs;
Page 2 of 8
<PAGE> 3
Number: C-97-01332
Renewal of: C-96-01332
G. Excess of Loss Reinsurance and reinsurance accepted under
obligatory reinsurance treaties except for business
produced by Fastrac Systems, Inc. of Bellevue, Washington,
and by M.A. Speizer & Co., Inc. or any other of the
National Insurance Group companies of South San Francisco,
California;
H. Hail damage to growing/standing crops;
I. Flood insurance when written as such;
J. Pools, Associations or Syndicates as per Exclusion Clause
attached (amended to include coverage for the California
Fair Plan);
K. Insolvency Funds as per Exclusion Clause attached;
L. Loss or damage occasioned by invasion, hostilities, acts
of foreign enemies, civil war, rebellion, insurrection,
military or usurped power, martial law or confiscation by
order of any government or public authority, as excluded
under a standard policy containing a Standard War
Exclusion Clause;
M. Nuclear Incident as per Nuclear Incident Exclusion Clause
Physical Damage - Reinsurance - (USA & Canada) attached;
N. Nuclear Incident as per Nuclear Incident Exclusion Clause
- Liability - Reinsurance - (USA & Canada) attached;
O. See page and Pollution as per ISO wording, or so deemed;
P. Transmission and Distribution Lines.
GENERAL
CONDITIONS: Definition of Loss Occurrence Clause (Property and Casualty
Business) as per the attached Exhibit A
Extra Contractual Obligations (100%)
Excess of Policy Limits (100%)
Definition of Net Loss Clause
Net Retained Lines Clause (All recoveries received from the
Florida Hurricane Fund will be retained net by the
Reassured, down to a net occurrence loss to the Reassured
of $250,000, after which any additional recoveries will
inure to this Contract by reducing the gross loss subject
to this program.)
Notice of Loss and Loss Settlement
Currency Clause
Tax Provisions Clause
Access to Records Clause
Page 3 of 8
<PAGE> 4
Number: C-97-01332
Renewal of: C-96-01332
Errors and Omissions Clause
Insolvency Clause
Arbitration Clause
Service of Suit Clause
Towers Perrin Reinsurance Reserves Clause which complies with
requirements of New York, California, and other states
Towers Perrin Reinsurance Intermediary Clause
WORDING: As per the expiring Contract.
REINSURERS: 100% placement through Towers Perrin Reinsurance.
See attached Schedule for listing of Reinsurers and their
respective participations.
Note:
1. The financial statements of participating Reinsurers will
be furnished upon request.
2. Towers Perrin Reinsurance has no ownership interest in or
control of:
- any Reinsurer subscribing to this reinsurance.
- any underwriting agent or correspondent intermediary
involved in this reinsurance.
3. Towers Perrin Reinsurance has on file written evidence
from any Reinsurer whose participation in this reinsurance
was authorized by a representative other than an employee.
This written evidence states the representative's
authority to bind the participation of such Reinsurer.
Page 4 of 8
<PAGE> 5
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01332
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
FIRST PROPERTY PER RISK EXCESS OF LOSS REINSURANCE CONTRACT
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
Constitution Reinsurance Corporation 20.00%
New York, New York
FEIN# 13-5009848
NAIC# 21032
Continental Casualty Company 7.00%
Chicago, Illinois
FEIN# 36-2114545
NAIC# 20443
Employers Mutual Casualty Company 1.50%
Des Moines, Iowa
FEIN# 42-0234980
NAIC# 21415
First Excess & Reinsurance Corporation 5.00%
Jefferson City, Missouri
FEIN# 43-1037123
NAIC# 32018
Folksamerica Reinsurance Company 5.00%
New York, New York
FEIN# 13-2997499
NAIC# 38776
Page 5 of 8
<PAGE> 6
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01332
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
The Hanover Insurance Company 5.00%
Bedford, New Hampshire
FEIN# 13-5129825
NAIC# 22292
through Allmerica Re,
a division of The Hanover Insurance Company
Florham Park, New Jersey
Hartford Fire Insurance Company 7.00%
Hartford, Connecticut
FEIN# 06-0383750
NAIC# 19682
through Hartford Re Management Company
Hartford, Connecticut
PMA Reinsurance Corporation 6.00%
Philadelphia, Pennsylvania
FEIN# 23-2153760
NAIC# 39675
Republic Western Insurance Company 3.00%
Phoenix, Arizona
FEIN# 86-0274508
NAIC# 31089
St. Paul Fire and Marine Insurance Company 10.00%
St. Paul, Minnesota
FEIN# 41-0406690
NAIC# 24767
through St. Paul Reinsurance Management Corporation
New York, New York
Sumitomo Marine & Fire Insurance Company Ltd. (U.S.) 2.00%
New York, New York
FEIN# 13-2758523
NAIC# 20362
through Sumitomo Marine Re Management, Inc.
New York, New York
Page 6 of 8
<PAGE> 7
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01332
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
Sydney Reinsurance Corporation 10.00%
Philadelphia, Pennsylvania
FEIN# 23-1641984
NAIC# 10219
USF Re Insurance Company 8.50%
Boston, Massachusetts
FEIN# 04-1590940
NAIC# 11835
Vesta Fire Insurance Corporation 10.00%
Birmingham, Alabama
FEIN# 63-0598629
NAIC# 11762
Total Placement 100.00%
Page 7 of 8
<PAGE> 8
REINSURANCE COVER NOTE NO. C-97-01332
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
FIRST PROPERTY PER RISK EXCESS OF LOSS REINSURANCE CONTRACT
EFFECTIVE JANUARY 1, 1997
The Reassured hereby confirms its approval of the terms and conditions of the
reinsurance set forth in this Reinsurance Cover Note and the Reinsurers
participating hereon. A copy of Towers Perrin Reinsurance's Market Security
Policy and Procedures has been attached to this Cover Note and the Reassured has
been advised as to the status of all Reinsurers participating herein as regards
this market security criteria.
By: /s/ Robert P. Barbarowicz
-------------------------------------
Title: Executive Vice President
--------------------------------------
Date: February 15, 1997
---------------------------------------
Page 8 of 8
<PAGE> 9
EXHIBIT A
DEFINITION OF LOSS OCCURRENCE (PROPERTY)
1. As respects Property coverages under Coverage A of the Business Covered
provision, the term "Loss Occurrence" shall mean the sum of all individual
losses directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which occurs within the
area of one state of the United States of America or province of Canada and
states or provinces contiguous thereto and to one another. However, the duration
and extent of any one "Loss Occurrence" shall be limited to all individual
losses sustained by the Reassured occurring during any period of 168 consecutive
hours arising out of and directly occasioned by the same event except that the
term "Loss Occurrence" shall be further defined as follows:
a. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained
by the Reassured occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states or
provinces contiguous thereto.
b. As regards riot, riot attending a strike, civil commotion, vandalism
and malicious mischief, all individual losses sustained by the
Reassured, occurring during any period of 120 consecutive hours
within the area of one municipality or county and the municipalities
or counties contiguous thereto arising out of and directly
occasioned by the same event. The maximum duration of 120
consecutive hours may be extended in respect of individual losses
which occur beyond such 120 consecutive hours during the continued
occupation of an assured's premises by strikers, provided such
occupation commenced during the aforesaid period.
c. As regards earthquake (the epicenter of which need not necessarily
be within the territorial confines referred to in the opening
paragraph of this Article) and fire following directly occasioned by
the earthquake, only those individual fire losses which commence
during the period of 168 consecutive hours may be included in the
Reassured's "Loss Occurrence."
d. As regards "Freeze," only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of
frozen pipes and tanks) may be included in the Reassured's "Loss
Occurrence."
2. Except for those "Loss Occurrences" referred to in Paragraphs a. and b. the
Reassured may choose the date and time when any such period of consecutive hours
commences provided that it is not earlier than the date and time of the
occurrence of the first recorded individual loss sustained by the Reassured
arising out of that disaster, accident or loss and provided that only one such
period of 168 consecutive hours shall apply with respect to one event.
3. However, as respects those "Loss Occurrences" referred to in Paragraphs a.
and b., if the disaster, accident or loss occasioned by the event is of greater
duration than 120 consecutive hours then the Reassured may divide the disaster,
accident or loss into two or more "Loss Occurrences" provided no two periods
overlap and no individual loss is included in more than one such period and
provided that no period commences earlier than the date and time of the
occurrence of the first recorded individual loss sustained by the Reassured
arising out of that disaster, accident or loss.
Page 1 of 2
<PAGE> 10
4. No individual losses occasioned by an event that would be covered by 72 or
120 hours clauses may be included in any "Loss Occurrence" claimed under the 168
hours provision.
DEFINITION OF OCCURRENCE (CASUALTY)
5. As respects Section II Liability coverage under Coverage B of the Business
Covered provision, the term "occurrence", except as otherwise provided herein,
shall mean any one accident, disaster, casualty, or happening, or series of
accidents, disasters, casualties, or happenings arising out of or caused by one
event, regardless of the number of interests insured or the number of policies
responding. Furthermore, all losses having a common origin or traceable to the
same act, omission, mistake, or happening shall be considered an accident,
disaster, casualty, or happening. The term "loss occurrence" shall otherwise
follow the definitions of the Reassured's original policies.
Page 2 of 2
<PAGE> 11
Number: C-97-01371
Renewal of: C-96-01371
REASSURED: NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
South San Francisco, California
CONTRACT: FIRST PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT
Effective January 1, 1997
BUSINESS
COVERED: Business classified as Dwelling Fire, Fire, Extended Perils,
Special Form on Interim Coverage policies, Forced Order
policies, Real-Estate Owned (REO) policies, Personal Article
Floaters, Personal Lines; Watercraft and Private Passenger
Planes, Force Placed Property and/or Blanket Mortgage Security
Insurance produced by Fastrac Systems, Inc. of Bellevue,
Washington, and produced by M.A. Speizer & Co., Inc. or any
other of the National Insurance Group Companies of South San
Francisco, California on behalf of the Reassured.
TERM AND
CANCELLATION: The term of this Contract shall be from January 1, 1997 to
January 1, 1998, both days at 12:01 a.m., Local Standard Time
(Local Standard Time being that time which applies in the area
where the risk is located) for losses occurring on new,
renewal and in force policies.
Should this Contract terminate while a loss occurrence is in
progress, the Reinsurers shall nevertheless be liable, to the
extent of their interest and subject to the other conditions
of this Contract, for all losses resulting from such loss
occurrence, whether such losses occur before or after such
termination.
TERRITORY: This reinsurance shall cover wherever the Reassured's policies
apply.
RETENTION
AND LIMIT: The Reinsurers shall be liable in each and every loss
occurrence irrespective of the number and kinds of risks and
perils involved, for 95% of $2,500,000 Net Loss each loss
occurrence excess of $2,500,000 Net Loss each loss occurrence,
not to exceed 95% of $5,000,000 Net Loss for all loss
occurrences during the term of this Contract.
All recoveries received from the Florida Hurricane Fund will
be retained net by the Reassured, down to a net occurrence
loss to the Reassured of $250,000 after which any additional
recoveries will inure to the Catastrophe Excess Program by
reducing the gross loss subject to the Catastrophe program.
Recoveries from all underlying reinsurance greater than
$2,500,000 shall inure to the sole benefit of the Reinsurers
hereunder; subject to a minimum net retention by the Reassured
any one loss of no less than $250,000.
Page 1 of 6
<PAGE> 12
Number: C-97-01371
Renewal of: C-96-01371
The reassured agrees to carry at its own risk and not
reinsured in any way the remaining 5% of each excess net loss
for which claim is made hereunder.
REINSTATEMENT: One full reinstatement at pro rata additional premium with
respect to amount and a minimum of 100% with respect to time.
(Refer to Exhibit A for further details).
WARRANTY: It is hereby warranted that any recovery under this Contract
shall involve two or more risks in each loss occurrence.
REINSURANCE
RATE: 1.03% of Gross Earned Premium Income.
MINIMUM
AND DEPOSIT
PREMIUM: Deposit Premium of $215,000 payable in advance in equal
quarterly installments. Annual minimum premium of $172,000.
Subject to annual adjustment.
EXCLUSIONS: A. Business classified as Ocean Marine except for personal
lines watercraft physical damage not to exceed $100,000
any one risk;
B. Personal Accident, Health, Surety and Fidelity, Workers'
Compensation, and all classes of Casualty;
C. Financial and Insolvency guarantees;
D. Aviation business except for physical damage on private
planes not to exceed $100,000 any one risk;
E. Automobile;
F. Inland Marine policies covering railroad rolling stock,
streamlined trains, negative films, registered mail,
jewelers block, animal mortality, offshore drilling rigs;
G. Excess of Loss Reinsurance and reinsurance accepted under
obligatory reinsurance treaties except for business
produced by Fastrac Systems, Inc. of Bellevue, Washington,
and by M.A. Speizer & Co., Inc. or any other of the
National Insurance Group companies of South San Francisco,
California;
H. Hail damage to growing/standing crops;
I. Flood insurance when written as such;
J. Pools, Associations or Syndicates as per Exclusion Clause
attached;
K. Insolvency Funds as per Exclusion Clause attached;
Page 2 of 6
<PAGE> 13
Number: C-97-01371
Renewal of: C-96-01371
L. Loss or damage occasioned by invasion, hostilities, acts
of foreign enemies, civil war, rebellion, insurrection,
military or usurped power, martial law or confiscation by
order of any government or public authority, as excluded
under a standard policy containing a Standard War
Exclusion Clause;
M. Nuclear Incident as per Nuclear Incident Exclusion Clause
Physical Damage - Reinsurance - (USA & Canada) attached;
N. Seepage and Pollution as per ISO wording, or so deemed;
O. Transmission and Distribution Lines.
GENERAL
CONDITIONS: Definition of Loss Occurrence Clause to include definition of
hours clause as attached, and as follows (no reinstatement for
wind):
- 72 hours clause tornado, cyclone, hurricane, windstorm and
hail
- 120 hours clause riots and civil commotion/vandalism and
malicious mischief within the area of one municipality or
county and the municipalities or counties contiguous
thereto
- 168 hours Freeze
- 168 hours Earthquake and Ensuing Loss
- 168 hours All Other Perils
Extra Contractual Obligations (100%)
Excess of Policy Limits (100%) (ECO/XPL subject to a maximum
of 25% of original catastrophe loss)
Definition of Net Loss Clause (which shall include defense
costs but not limited to expenses incurred in
determination of coverage)
Net Retained Lines Clause
Notice of Loss and Loss Settlement Clause
Currency Clause
Tax Provisions Clause
Access to Records Clause
Errors and Omissions Clause
Insolvency Clause
Arbitration Clause
Service of Suit Clause
Towers Perrin Reinsurance Reserves Clause which complies with
requirements of New York, California, and other states
Towers Perrin Reinsurance Intermediary Clause
WORDING: As per the expiring Contract.
Page 3 of 6
<PAGE> 14
Number: C-97-01371
Renewal of: C-96-01371
REINSURERS: 100% placement through Towers Perrin Reinsurance.
See attached Schedule for listing of Reinsurers and their
respective participations.
Note:
1. The financial statements of participating Reinsurers will
be furnished upon request.
2. Towers Perrin Reinsurance has no ownership interest in or
control of:
- any Reinsurer subscribing to this reinsurance.
- any underwriting agent or correspondent intermediary
involved in this reinsurance.
3. Towers Perrin Reinsurance has on file written evidence
from any Reinsurer whose participation in this reinsurance
was authorized by a representative other than an employee.
This written evidence states the representative's
authority to bind the participation of such Reinsurer.
Page 4 of 6
<PAGE> 15
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01371
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
FIRST PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
Direct Placement through Towers Perrin Reinsurance Share
Constitution Reinsurance Corporation 8.50%
New York, New York
FEIN# 13-5009848
NAIC# 21032
Folksamerica Reinsurance Company 8.00%
New York, New York
FEIN# 13-2997499
NAIC# 38776
The Hanover Insurance Company 5.00%
Bedford, New Hampshire
FEIN# 13-5129825
NAIC# 22292
through Allmerica Re,
a division of The Hanover Insurance Company
Florham Park, New Jersey
Hartford Fire Insurance Company 10.00%
Hartford, Connecticut
FEIN# 06-0383750
NAIC# 19682
through Hartford Re Management Company
Hartford, Connecticut
Page 5 of 6
<PAGE> 16
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01371
Direct Placement through Towers Perrin Reinsurance Share
Nationwide Mutual Insurance Company 7.50%
Columbus, Ohio
FEIN# 31-4177100
NAIC# 23787
Republic Western Insurance Company 5.00%
Phoenix, Arizona
FEIN# 86-0274508
NAIC# 31089
St. Paul Fire and Marine Insurance Company 8.00%
St. Paul, Minnesota
FEIN# 41-0406690
NAIC# 24767
through St. Paul Reinsurance Management Corporation
New York, New York
Sydney Reinsurance Corporation 10.00%
Philadelphia, Pennsylvania
FEIN# 23-1641984
NAIC# 10219
USF Re Insurance Company 5.00%
Boston, Massachusetts
FEIN# 04-1590940
NAIC# 11835
Vesta Fire Insurance Corporation 25.00%
Birmingham, Alabama
FEIN# 63-0598629
NAIC# 11762
Winterthur Reinsurance Corporation of America 8.00%
New York, New York
FEIN# 13-3531373
NAIC# 10006
Total Placement 100.00%
Page 6 of 6
<PAGE> 17
REINSURANCE COVER NOTE NO. C-97-01371
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
FIRST PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EFFECTIVE JANUARY 1, 1997
The Reassured hereby confirms its approval of the terms and conditions of the
reinsurance set forth in this Reinsurance Cover Note and the Reinsurers
participating hereon. A copy of Towers Perrin Reinsurance's Market Security
Policy and Procedures has been attached to this Cover Note and the Reassured has
been advised as to the status of all Reinsurers participating herein as regards
this market security criteria.
By: /s/ Robert P. Barbarowicz
Title: Executive Vice President
Date: February 15, 1997
Page 7 of 6
<PAGE> 18
EXHIBIT A
DEFINITION OF LOSS OCCURRENCE
1. The term "Loss Occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which occurs within the
area of one state of the United States of America or province of Canada and
states or provinces contiguous thereto and to one another. However, the duration
and extent of any one "Loss Occurrence" shall be limited to all individual
losses sustained by the Reassured occurring during any period of 168 consecutive
hours arising out of and directly occasioned by the same event except that the
term "Loss Occurrence" shall be further defined as follows:
a. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained
by the Reassured occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states or
provinces contiguous thereto.
b. As regards riot, riot attending a strike, civil commotion, vandalism
and malicious mischief, all individual losses sustained by the
Reassured, occurring during any period of 120 consecutive hours
within the area of one municipality or county and the municipalities
or counties contiguous thereto arising out of and directly
occasioned by the same event. The maximum duration of 120
consecutive hours may be extended in respect of individual losses
which occur beyond such 120 consecutive hours during the continued
occupation of an assured's premises by strikers, provided such
occupation commenced during the aforesaid period.
c. As regards earthquake (the epicenter of which need not necessarily
be within the territorial confines referred to in the opening
paragraph of this Article) and fire following directly occasioned by
the earthquake, only those individual fire losses which commence
during the period of 168 consecutive hours may be included in the
Reassured's "Loss Occurrence."
d. As regards "Freeze," only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of
frozen pipes and tanks) may be included in the Reassured's "Loss
Occurrence."
2. Except for those "Loss Occurrences" referred to in Paragraphs a. and b. the
Reassured may choose the date and time when any such period of consecutive hours
commences provided that it is not earlier than the date and time of the
occurrence of the first recorded individual loss sustained by the Reassured
arising out of that disaster, accident or loss and provided that only one such
period of 168 consecutive hours shall apply with respect to one event.
3. However, as respects those "Loss Occurrences" referred to in Paragraphs a.
and b., if the disaster, accident or loss occasioned by the event is of greater
duration than 120 consecutive hours then the Reassured may divide the disaster,
accident or loss into two or more "Loss Occurrences" provided no two periods
overlap and no individual loss is included in more than one such period and
provided that no period commences earlier than the date and time of the
occurrence of the first recorded individual loss sustained by the Reassured
arising out of that disaster, accident or loss.
<PAGE> 19
4. No individual losses occasioned by an event that would be covered by 72 or
120 hours clauses may be included in any "Loss Occurrence" claimed under the 168
hours provision.
Page 2 of 2
<PAGE> 20
Number: C-97-01402
Renewal of: C-96-01402
REASSURED: NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
South San Francisco, California
CONTRACT: SECOND PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT
Effective January 1, 1997
BUSINESS
COVERED: Business classified as Dwelling Fire, Fire, Extended Perils,
Special Form on Interim Coverage policies, Forced Order
policies, Real-Estate Owned (REO) policies, Personal Article
Floaters, Personal Lines; Watercraft and Private Passenger
Planes, Force Placed Property and/or Blanket Mortgage Security
Insurance produced by Fastrac Systems, Inc. of Bellevue,
Washington, and produced by M.A. Speizer & Co., Inc. or any
other of the National Insurance Group Companies of South San
Francisco, California on behalf of the Reassured.
TERM AND
CANCELLATION: The term of this Contract shall be from January 1, 1997 to
January 1, 1998, both days at 12:01 a.m., Local Standard Time
(Local Standard Time being that time which applies in the area
where the risk is located) for losses occurring on new,
renewal and in force policies.
Should this Contract terminate while a loss occurrence is in
progress, the Reinsurers shall nevertheless be liable, to the
extent of their interest and subject to the other conditions
of this Contract, for all losses resulting from such loss
occurrence, whether such losses occur before or after such
termination.
TERRITORY: This reinsurance shall cover wherever the Reassured's policies
apply.
RETENTION
AND LIMIT: The Reinsurers shall be liable in each and every loss
occurrence irrespective of the number and kinds of risks and
perils involved, for 95% of $5,000,000 Net Loss each loss
occurrence excess of $5,000,000 Net Loss each loss occurrence,
not to exceed 95% of $10,000,000 Net Loss for all loss
occurrences during the term of this Contract.
All recoveries received from the Florida Hurricane Fund will
be retained net by the Reassured, down to a net occurrence
loss to the Reassured of $250,000 after which any additional
recoveries will inure to the Catastrophe Excess Program by
reducing the gross loss subject to the Catastrophe program.
Recoveries from all underlying reinsurance greater than
$2,500,000 shall inure to the sole benefit of the Reinsurers
hereunder; subject to a minimum net retention by the Reassured
any one loss of no less than $250,000.
Page 1 of 8
<PAGE> 21
Number: C-97-01402
Renewal of: C-96-01402
The reassured agrees to carry at its own risk and not
reinsured in any way the remaining 5% of each excess net loss
for which claim is made hereunder.
REINSTATEMENT: One full reinstatement at pro rata additional premium with
respect to amount and a minimum of 100% with respect to time.
(Refer to Exhibit A for further details).
WARRANTY: It is hereby warranted that any recovery under this Contract
shall involve two or more risks in each loss occurrence.
REINSURANCE
RATE: 1.43% of Gross Earned Premium Income.
MINIMUM
AND DEPOSIT
PREMIUM: Deposit Premium of $300,000 payable in advance in equal
quarterly installments. Annual minimum premium of $240,000.
Subject to annual adjustment.
EXCLUSIONS: A. Business classified as Ocean Marine except for personal
lines watercraft physical damage not to exceed $100,000
any one risk;
B. Personal Accident, Health, Surety and Fidelity, Workers'
Compensation, and all classes of Casualty;
C. Financial and Insolvency guarantees;
D. Aviation business except for physical damage on private
planes not to exceed $100,000 any one risk;
E. Automobile business;
F. Inland Marine policies covering railroad rolling stock,
streamlined trains, negative films, registered mail,
jewelers block, animal mortality, offshore drilling rigs;
G. Excess of Loss Reinsurance and reinsurance accepted under
obligatory reinsurance treaties except for business
produced by Fastrac Systems, Inc. of Bellevue, Washington,
and by M.A. Speizer & Co., Inc. or any other of the
National Insurance Group companies of South San Francisco,
California;
H. Hail damage to growing/standing crops;
I. Flood insurance when written as such;
J. Pools, Associations or Syndicates as per Exclusion Clause
attached;
Page 2 of 8
<PAGE> 22
Number: C-97-01402
Renewal of: C-96-01402
K. Insolvency Funds as per Exclusion Clause attached;
L. Loss or damage occasioned by invasion, hostilities, acts
of foreign enemies, civil war, rebellion, insurrection,
military or usurped power, martial law or confiscation by
order of any government or public authority, as excluded
under a standard policy containing a Standard War
Exclusion Clause;
M. Nuclear Incident as per Nuclear Incident Exclusion Clause
Physical Damage - Reinsurance - (USA & Canada) attached;
N. Seepage and Pollution as per ISO wording, or so deemed;
O. Transmission and Distribution Lines.
GENERAL
CONDITIONS: Definition of Loss Occurrence Clause to include definition of
hours clause as attached, and as follows (no reinstatement
for wind):
- 72 hours clause tornado, cyclone, hurricane, windstorm and
hail
- 120 hours clause riots and civil commotion/vandalism and
malicious mischief within the area of one municipality or
county and the municipalities or counties contiguous
thereto
- 168 hours Freeze
- 168 hours Earthquake and Ensuing Loss
- 168 hours All Other Perils
Extra Contractual Obligations (100%)
Excess of Policy Limits (100%) (ECO/XPL subject to a maximum
of 25% of original catastrophe loss)
Definition of Net Loss Clause (which shall include defense
costs but not limited to expenses incurred in
determination of coverage)
Net Retained Lines Clause
Notice of Loss and Loss Settlement Clause
Currency Clause
Tax Provisions Clause
Access to Records Clause
Errors and Omissions Clause
Insolvency Clause
Arbitration Clause
Service of Suit Clause
Towers Perrin Reinsurance Reserves Clause which complies with
requirements of New York, California, and other states
Towers Perrin Reinsurance Intermediary Clause
WORDING: As per the expiring Contract.
Page 3 of 8
<PAGE> 23
Number: C-97-01402
Renewal of: C-96-01402
REINSURERS: 100% placement through Towers Perrin Reinsurance.
See attached Schedule for listing of Reinsurers and their
respective participations.
Note:
1. The financial statements of participating Reinsurers will
be furnished upon request.
2. Towers Perrin Reinsurance has no ownership interest in or
control of:
- any Reinsurer subscribing to this reinsurance.
- any underwriting agent or correspondent intermediary
involved in this reinsurance.
3. Towers Perrin Reinsurance has on file written evidence
from any Reinsurer whose participation in this reinsurance
was authorized by a representative other than an employee.
This written evidence states the representative's
authority to bind the participation of such Reinsurer.
Page 4 of 8
<PAGE> 24
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01402
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
SECOND PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
Direct Placement through Towers Perrin Reinsurance Share
Constitution Reinsurance Corporation 5.00%
New York, New York
FEIN# 13-5009848
NAIC# 21032
Continental Casualty Company 14.50%
Chicago, Illinois
FEIN# 36-2114545
NAIC# 20443
Employers Mutual Casualty Company 2.25%
Des Moines, Iowa
FEIN# 42-0234980
NAIC# 21415
First Excess & Reinsurance Corporation 7.50%
Jefferson City, Missouri
FEIN# 43-1037123
NAIC# 32018
Folksamerica Reinsurance Company 8.00%
New York, New York
FEIN# 13-2997499
NAIC# 38776
Page 5 of 8
<PAGE> 25
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01402
Direct Placement through Towers Perrin Reinsurance Share
The Hanover Insurance Company 5.00%
Bedford, New Hampshire
FEIN# 13-5129825
NAIC# 22292
through Allmerica Re,
a division of The Hanover Insurance Company
Florham Park, New Jersey
Insurance Company of the West 8.00%
San Diego, California
FEIN# 95-2769232
NAIC# 27847
Nationwide Mutual Insurance Company 7.50%
Columbus, Ohio
FEIN# 31-4177100
NAIC# 23787
Reliance Insurance Company 2.10%
Philadelphia, Pennsylvania
FEIN# 23-0580680
NAIC# 24457
through Reliance Reinsurance Corporation
Philadelphia, Pennsylvania
St. Paul Fire and Marine Insurance Company 8.00%
St. Paul, Minnesota
FEIN# 41-0406690
NAIC# 24767
through St. Paul Reinsurance Management Corporation
New York, New York
United Fire & Casualty Company 0.50%
Cedar Rapids, Iowa
FEIN# 42-0644327
NAIC# 13021
Page 6 of 8
<PAGE> 26
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01402
Direct Placement through Towers Perrin Reinsurance Share
USF Re Insurance Company 3.15%
Boston, Massachusetts
FEIN# 04-1590940
NAIC# 11835
Vesta Fire Insurance Corporation 25.00%
Birmingham, Alabama
FEIN# 63-0598629
NAIC# 11762
Winterthur Reinsurance Corporation of America 3.50%
New York, New York
FEIN# 13-3531373
NAIC# 10006
Total Placement 100.00%
Page 7 of 8
<PAGE> 27
REINSURANCE COVER NOTE NO. C-97-01402
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
SECOND PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EFFECTIVE JANUARY 1, 1997
The Reassured hereby confirms its approval of the terms and conditions of the
reinsurance set forth in this Reinsurance Cover Note and the Reinsurers
participating hereon. A copy of Towers Perrin Reinsurance's Market Security
Policy and Procedures has been attached to this Cover Note and the Reassured has
been advised as to the status of all Reinsurers participating herein as regards
this market security criteria.
By: /s/ Robert P. Barbarowicz
Title: Executive Vice President
Date: February 15, 1997
Page 8 of 8
<PAGE> 28
EXHIBIT A
DEFINITION OF LOSS OCCURRENCE
1. The term "Loss Occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which occurs within the
area of one state of the United States of America or province of Canada and
states or provinces contiguous thereto and to one another. However, the duration
and extent of any one "Loss Occurrence" shall be limited to all individual
losses sustained by the Reassured occurring during any period of 168 consecutive
hours arising out of and directly occasioned by the same event except that the
term "Loss Occurrence" shall be further defined as follows:
a. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained
by the Reassured occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states or
provinces contiguous thereto.
b. As regards riot, riot attending a strike, civil commotion, vandalism
and malicious mischief, all individual losses sustained by the
Reassured, occurring during any period of 120 consecutive hours
within the area of one municipality or county and the municipalities
or counties contiguous thereto arising out of and directly
occasioned by the same event. The maximum duration of 120
consecutive hours may be extended in respect of individual losses
which occur beyond such 120 consecutive hours during the continued
occupation of an assured's premises by strikers, provided such
occupation commenced during the aforesaid period.
c. As regards earthquake (the epicenter of which need not necessarily
be within the territorial confines referred to in the opening
paragraph of this Article) and fire following directly occasioned by
the earthquake, only those individual fire losses which commence
during the period of 168 consecutive hours may be included in the
Reassured's "Loss Occurrence."
d. As regards "Freeze," only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of
frozen pipes and tanks) may be included in the Reassured's "Loss
Occurrence."
2. Except for those "Loss Occurrences" referred to in Paragraphs a. and b. the
Reassured may choose the date and time when any such period of consecutive hours
commences provided that it is not earlier than the date and time of the
occurrence of the first recorded individual loss sustained by the Reassured
arising out of that disaster, accident or loss and provided that only one such
period of 168 consecutive hours shall apply with respect to one event.
3. However, as respects those "Loss Occurrences" referred to in Paragraphs a.
and b., if the disaster, accident or loss occasioned by the event is of greater
duration than 120 consecutive hours then the Reassured may divide the disaster,
accident or loss into two or more "Loss Occurrences" provided no two periods
overlap and no individual loss is included in more than one such period and
provided that
Page 1 of 2
<PAGE> 29
no period commences earlier than the date and time of the occurrence of the
first recorded individual loss sustained by the Reassured arising out of that
disaster, accident or loss.
4. No individual losses occasioned by an event that would be covered by 72 or
120 hours clauses may be included in any "Loss Occurrence" claimed under the 168
hours provision.
Page 2 of 2
<PAGE> 30
Number: C-97-01493
Renewal of: C-96-01493
REASSURED: NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
South San Francisco, California
CONTRACT: THIRD PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT
Effective January 1, 1997
BUSINESS
COVERED: Business classified as Dwelling Fire, Fire, Extended Perils,
Special Form on Interim Coverage policies, Forced Order
policies, Real-Estate Owned (REO) policies, Personal Article
Floaters, Personal Lines; Watercraft and Private Passenger
Planes, Force Placed Property and/or Blanket Mortgage Security
Insurance produced by Fastrac Systems, Inc. of Bellevue,
Washington, and produced by M.A. Speizer & Co., Inc. or any
other of the National Insurance Group Companies of South San
Francisco, California on behalf of the Reassured.
TERM AND
CANCELLATION: The term of this Contract shall be from January 1, 1997 to
January 1, 1998, both days at 12:01 a.m., Local Standard Time
(Local Standard Time being that time which applies in the area
where the risk is located) for losses occurring on new,
renewal and in force policies.
Should this Contract terminate while a loss occurrence is in
progress, the Reinsurers shall nevertheless be liable, to the
extent of their interest and subject to the other conditions
of this Contract, for all losses resulting from such loss
occurrence, whether such losses occur before or after such
termination.
TERRITORY: This reinsurance shall cover wherever the Reassured's policies
apply.
RETENTION
AND LIMIT: The Reinsurers shall be liable in each and every loss
occurrence irrespective of the number and kinds of risks and
perils involved, for 95% of $5,000,000 Net Loss each loss
occurrence excess of $10,000,000 Net Loss each loss
occurrence, not to exceed 95% of $10,000,000 Net Loss for all
loss occurrences during the term of this Contract.
All recoveries received from the Florida Hurricane Fund will
be retained net by the Reassured, down to a net occurrence
loss to the Reassured of $250,000 after which any additional
recoveries will inure to the Catastrophe Excess Program by
reducing the gross loss subject to the Catastrophe program.
Recoveries from all underlying reinsurance greater than
$2,500,000 shall inure to the sole benefit of the Reinsurers
hereunder; subject to a minimum net retention by the Reassured
any one loss of no less than $250,000.
<PAGE> 31
Number: C-97-01493
Renewal of: C-96-01493
The reassured agrees to carry at its own risk and not
reinsured in any way the remaining 5% of each excess net loss
for which claim is made hereunder.
REINSTATEMENT: One full reinstatement at pro rata additional premium with
respect to amount and a minimum of 100% with respect to time.
(Refer to Exhibit A for further details).
WARRANTY: It is hereby warranted that any recovery under this Contract
shall involve two or more risks in each loss occurrence.
REINSURANCE
RATE: .72% of Gross Earned Premium Income.
MINIMUM
AND DEPOSIT
PREMIUM: Deposit Premium of $150,000 payable in advance in equal
quarterly installments. Annual minimum premium of $120,000.
Subject to annual adjustment.
EXCLUSIONS: A. Business classified as Ocean Marine except for personal
lines watercraft physical damage not to exceed $100,000
any one risk;
B. Personal Accident, Health, Surety and Fidelity, Workers'
Compensation, and all classes of Casualty;
C. Financial and Insolvency guarantees;
D. Aviation business except for physical damage on private
planes not to exceed $100,000 any one risk;
E. Automobile business;
F. Inland Marine policies covering railroad rolling stock,
streamlined trains, negative films, registered mail,
jewelers block, animal mortality, offshore drilling rigs;
G. Excess of Loss Reinsurance and reinsurance accepted under
obligatory reinsurance treaties except for business
produced by Fastrac Systems, Inc. of Bellevue, Washington,
and by M.A. Speizer & Co., Inc. or any other of the
National Insurance Group companies of South San Francisco,
California;
H. Hail damage to growing/standing crops;
I. Flood insurance when written as such;
J. Pools, Associations or Syndicates as per Exclusion Clause
attached;
K. Insolvency Funds as per Exclusion Clause attached;
Page 2 of 8
<PAGE> 32
Number: C-97-01493
Renewal of: C-96-01493
L. Loss or damage occasioned by invasion, hostilities, acts
of foreign enemies, civil war, rebellion, insurrection,
military or usurped power, martial law or confiscation by
order of any government or public authority, as excluded
under a standard policy containing a Standard War
Exclusion Clause;
M. Nuclear Incident as per Nuclear Incident Exclusion Clause
Physical Damage - Reinsurance - (USA & Canada) attached;
N. Seepage and Pollution as per ISO wording, or so deemed;
O. Transmission and Distribution Lines.
GENERAL
CONDITIONS: Definition of Loss Occurrence Clause to include definition of
hours clause as attached, and as follows (no reinstatement
for wind):
- 72 hours clause tornado, cyclone, hurricane, windstorm and
hail
- 120 hours clause riots and civil commotion/vandalism and
malicious mischief within the area of one municipality or
county and the municipalities or counties contiguous
thereto
- 168 hours Freeze
- 168 hours Earthquake and Ensuing Loss
- 168 hours All Other Perils
Extra Contractual Obligations (100%)
Excess of Policy Limits (100%)
(ECO/XPL subject to a maximum
of 25% of original catastrophe loss)
Definition of Net Loss Clause (which shall include defense
costs but not limited to expenses incurred in
determination of coverage)
Net Retained Lines Clause
Notice of Loss and Loss Settlement Clause
Currency Clause
Tax Provisions Clause
Access to Records Clause
Errors and Omissions Clause
Insolvency Clause
Arbitration Clause
Service of Suit Clause
Towers Perrin Reinsurance Reserves Clause which complies with
requirements of New York, California, and other states
Towers Perrin Reinsurance Intermediary Clause
WORDING: As per the expiring Contract.
Page 3 of 8
<PAGE> 33
Number: C-97-01493
Renewal of: C-96-01493
REINSURERS: 100% placement through Towers Perrin Reinsurance.
See attached Schedule for listing of Reinsurers and their
respective participations.
Note:
1. The financial statements of participating Reinsurers will
be furnished upon request.
2. Towers Perrin Reinsurance has no ownership interest in or
control of:
- any Reinsurer subscribing to this reinsurance.
- any underwriting agent or correspondent intermediary
involved in this reinsurance.
3. Towers Perrin Reinsurance has on file written evidence
from any Reinsurer whose participation in this reinsurance
was authorized by a representative other than an employee.
This written evidence states the representative's
authority to bind the participation of such Reinsurer.
Page 4 of 8
<PAGE> 34
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01493
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
THIRD PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
Direct Placement through Towers Perrin Reinsurance Share
Constitution Reinsurance Corporation 5.00%
New York, New York
FEIN# 13-5009848
NAIC# 21032
Employers Mutual Casualty Company 2.25%
Des Moines, Iowa
FEIN# 42-0234980
NAIC# 21415
First Excess & Reinsurance Corporation 5.50%
Jefferson City, Missouri
FEIN# 43-1037123
NAIC# 32018
Hartford Fire Insurance Company 7.00%
Hartford, Connecticut
FEIN# 06-0383750
NAIC# 19682
through Hartford Re Company
Hartford, Connecticut
The Hanover Insurance Company 7.50%
Bedford, New Hampshire
FEIN# 13-5129825
NAIC# 22292
through Allmerica Re,
a division of The Hanover Insurance Company
Florham Park, New Jersey
Page 5 of 8
<PAGE> 35
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01493
Direct Placement through Towers Perrin Reinsurance Share
Insurance Company of the West 8.00%
San Diego, California
FEIN# 95-2769232
NAIC# 27847
Nationwide Mutual Insurance Company 7.50%
Columbus, Ohio
FEIN# 31-4177100
NAIC# 23787
PMA Reinsurance Corporation 7.00%
Philadelphia, Pennsylvania
FEIN# 23-2153760
NAIC# 39675
Republic Western Insurance Company 5.00%
Phoenix, Arizona
FEIN# 86-0274508
NAIC# 31089
St. Paul Fire and Marine Insurance Company 8.00%
St. Paul, Minnesota
FEIN# 41-0406690
NAIC# 24767
through St. Paul Reinsurance Management Corporation
New York, New York
The Sumitomo Marine & Fire Insurance Company Ltd. 3.25%
New York, New York
FEIN# 13-2758523
NAIC# 20362
through Sumitomo Marine Re Management, Inc.
New York, New York
Sydney Reinsurance Corporation 15.00%
Philadelphia, Pennsylvania
FEIN# 23-1641984
NAIC# 10219
Page 6 of 8
<PAGE> 36
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-97-01493
Direct Placement through Towers Perrin Reinsurance Share
United Fire & Casualty Company 3.00%
Cedar Rapids, Iowa
FEIN# 42-0644327
NAIC# 13021
Vesta Fire Insurance Corporation 16.00%
Birmingham, Alabama
FEIN# 63-0598629
NAIC# 11762
Total Placement 100.00%
Page 7 of 8
<PAGE> 37
REINSURANCE COVER NOTE NO. C-97-01493
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
THIRD PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EFFECTIVE JANUARY 1, 1997
The Reassured hereby confirms its approval of the terms and conditions of the
reinsurance set forth in this Reinsurance Cover Note and the Reinsurers
participating hereon. A copy of Towers Perrin Reinsurance's Market Security
Policy and Procedures has been attached to this Cover Note and the Reassured has
been advised as to the status of all Reinsurers participating herein as regards
this market security criteria.
By: /s/ Robert P. Barbarowicz
Title: Executive Vice President
Date: February 15, 1997
Page 8 of 8
<PAGE> 38
EXHIBIT A
DEFINITION OF LOSS OCCURRENCE
1. The term "Loss Occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which occurs within the
area of one state of the United States of America or province of Canada and
states or provinces contiguous thereto and to one another. However, the duration
and extent of any one "Loss Occurrence" shall be limited to all individual
losses sustained by the Reassured occurring during any period of 168 consecutive
hours arising out of and directly occasioned by the same event except that the
term "Loss Occurrence" shall be further defined as follows:
a. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained
by the Reassured occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states or
provinces contiguous thereto.
b. As regards riot, riot attending a strike, civil commotion, vandalism
and malicious mischief, all individual losses sustained by the
Reassured, occurring during any period of 120 consecutive hours
within the area of one municipality or county and the municipalities
or counties contiguous thereto arising out of and directly
occasioned by the same event. The maximum duration of 120
consecutive hours may be extended in respect of individual losses
which occur beyond such 120 consecutive hours during the continued
occupation of an assured's premises by strikers, provided such
occupation commenced during the aforesaid period.
c. As regards earthquake (the epicenter of which need not necessarily
be within the territorial confines referred to in the opening
paragraph of this Article) and fire following directly occasioned by
the earthquake, only those individual fire losses which commence
during the period of 168 consecutive hours may be included in the
Reassured's "Loss Occurrence."
d. As regards "Freeze," only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of
frozen pipes and tanks) may be included in the Reassured's "Loss
Occurrence."
2. Except for those "Loss Occurrences" referred to in Paragraphs a. and b. the
Reassured may choose the date and time when any such period of consecutive hours
commences provided that it is not earlier than the date and time of the
occurrence of the first recorded individual loss sustained by the Reassured
arising out of that disaster, accident or loss and provided that only one such
period of 168 consecutive hours shall apply with respect to one event.
3. However, as respects those "Loss Occurrences" referred to in Paragraphs a.
and b., if the disaster, accident or loss occasioned by the event is of greater
duration than 120 consecutive hours then the Reassured may divide the disaster,
accident or loss into two or more "Loss Occurrences" provided no two periods
overlap and no individual loss is included in more than one such period and
provided that
Page 1 of 2
<PAGE> 39
no period commences earlier than the date and time of the occurrence of the
first recorded individual loss sustained by the Reassured arising out of that
disaster, accident or loss.
4. No individual losses occasioned by an event that would be covered by 72 or
120 hours clauses may be included in any "Loss Occurrence" claimed under the 168
hours provision.
Page 2 of 2
<PAGE> 1
Exhibit 10.24
As of August 12, 1996
National Insurance Group
395 Oyster Point Blvd., Suite 500
South San Francisco, CA 94080
Attention: Mr. Mark A. Speizer
Chairman and Chief Executive Officer
Dear People:
This letter agreement (the "Agreement") confirms my understanding and agreement
that (i) the following terms and conditions were discussed with me prior to
being offered employment, and (ii) I agreed to them at that time and I accept
them as terms and conditions of my employment as an employee of National
Insurance Group, or any of its subsidiaries which currently exist or may exist
in the future. The current subsidiaries of the Company are Fastrac(R) Systems,
Inc., Fastrac(R) Systems Inc. Insurance Agent & Broker, Pinnacle Data
Corporation, and Great Pacific Insurance Company. Any references in this
Agreement to the Company shall mean National Insurance Group and its
subsidiaries collectively.
I understand and agree that this Agreement supersedes any prior understanding,
agreement, discussions or negotiations and that any such prior understanding,
agreement, discussion or negotiation does not constitute an agreement between
the Company and me and is void as being any such agreement.
My employment by the Company shall be as an employee of the Company
("Employment") and is subject to the terms and conditions set forth in this
Agreement, together with all written rules, policies and procedures of the
Company that may be in effect from time to time during my employment ("Policies
and Procedures").
1
<PAGE> 2
1. Compensation.
1.1 Salary Compensation. I shall be paid $25,000 on the first day of my
Employment. Thereafter, my bi-weekly salary shall be $4,807.69 ("Salary
Compensation"), which shall be paid to me in accordance with payroll practices
and procedures of the Company, less any applicable withholdings, taxes and
deductions as required by law and any deductions authorized by me. My Salary
Compensation shall accrue from the first day of my Employment, which shall be
August 12, 1996. My Salary Compensation may be adjusted, to be increased or
decreased on or after the first anniversary of my Employment if I am an employee
of the Company at such time.
1.2 Eligibility to Participate in Bonus Plans for Senior Management. In
addition to my Salary Compensation, I understand that I shall be eligible to
participate in and may receive awards made by the Company under a bonus plan for
senior management of the Company as the same may be adopted by the Company. I
further understand that any such participation in any such plan shall commence
with calender year 1997. I understand that there is no guarantee or assurance
that I will be granted any award under any such bonus plan or that any award
granted to me would be equal to those granted to other employees of the Company,
including but not limited to, officers who hold the same or similar titles or
offices or who perform the same or similar duties as me.
1.3 Reimbursement for Reasonable Business Expenses. I further understand
that the Company will reimburse me for any reasonable business related expenses
incurred by me for travel, entertainment or other business expenses in
accordance with the Policies and Procedures of the Company. All requests for
reimbursements or any advances by the Company for expenses shall be on such
forms as the Company may require with documentation or substantiation of any
such expenses. All requests for reimbursement of expenses or advances shall be
approved by one of the following officers of the Company (i) the Chairman of the
Board and Chief Executive Officer, (ii) the President; or (iii) any Executive
Vice President as may be designated by the Chairman or the President. I
understand that I may be issued one or more credit cards issued to me on the
account of the Company. I agree that I will use any such charge only for
business purposes or, in the event that I use any such credit cards for personal
purposes,
2
<PAGE> 3
I will identify any such expense as personal in nature and pay to the Company
the amount of any such charges at the time the account is rendered to the
Company for payment by the credit card entity. The Company may revoke, modify or
suspend its issuance of credit cards to its employees, including me.
2. Position and Title. My position shall be Executive Vice President, General
Counsel and Secretary of the Company and I understand that I will be elected as
an officer of the Company and may be elected as an officer of one of more of the
subsidiaries of the Company. I shall have such duties as may be assigned to me
by the Chairman of the Board and Chief Executive Officer or the President of the
Company at any time or from time to time. I shall report to the Chairman of the
Board and Chief Executive Officer or to the President of the Company if the
Chairman so designates.
3. Work Hours; Exempt Employee Status. I agree that I will work at least forty
hours per week, during the normal business hours of the Company, prevailing
local time, however. I understand that I will not receive any additional
compensation for any hours that I work in excess of eight hours per day and
forty hours per week. As an executive officer of the Company with my duties as
Executive Vice President, General Counsel, I understand and agree that my duties
may require my services in excess of the services performed by other employees
of the Company. I agree that I will devote my full time and attention to the
performance of my duties during normal business hours. I further agree that I
will not engage in any civic or other activities that would materially interfere
with the performance of my duties under this Agreement or as an employee of the
Company. I will not engage in any other business or commercial activity.
4. At Will Employment. I understand and agree that my Employment will be
"at-will". This means that the Company has the right to and can terminate my
Employment at any time, with or without cause, and without notice, and I can
terminate my Employment at any time, with or without cause, and without notice.
There is no promise that my Employment will continue for a specific period of
time, duration or term and there is no promise that my employment will be
terminated only under particular circumstances. NO POSITION WITHIN THE COMPANY
IS
3
<PAGE> 4
CONSIDERED PERMANENT. This Section 4 constitutes the entire agreement between me
and the Company regarding the term of my Employment.
5. Vacations. The following is the vacation policy of the Company applicable to
me.
a. My paid vacation time ("Vacation Time") will accrue on the following
basis: (i) .0625 of a vacation day for each full working day worked at the
Company during each Working Year until such Vacation Time is modified by the
Company. A "Working Year" begins on the first day of my Employment and ends 365
continuous days thereafter.
b. If I do not take any Vacation Time within 180 days from the end of each
Working Year of my Employment, the Company will require that I take my accrued
Vacation Time and will assign me Vacation Time that must be used by me. I am
required to take Vacation Time within the 180 day period described in Section
5.b because a stacking of accrued Vacation Time beyond one Working Year into an
extended vacation may be a hardship on the Company.
c. I will give advance written notice of the dates my Vacation Time is to
begin and end by completing the Company's Vacation Request Form then in effect
("Vacation Request") and submitting it to my supervisor, no less than 60 days
before my proposed Vacation Time will begin. I will be given a written receipt
for the Vacation Request and my supervisor will review my Vacation Request with
the Company's payroll supervisor. If my supervisor and the payroll supervisor
are unable to agree mutually to approve the Vacation Request, my Vacation
Request shall be forwarded to the Chief Executive Officer or President of the
Company for review (my supervisor, the payroll supervisor, and/or the Chief
Executive Officer or President shall be referred to herein as the "Designated
Persons"). The Designated Persons can, in their discretion, turn down my request
for the proposed dates of Vacation Time in my Vacation Request, but the
Designated Persons must provide me with alternative dates which I must use
instead. The Designated Persons will provide me with a written acceptance or
rejection of the Vacation Request no more than 30 days after I present it to my
supervisor.
6. Health/Life/Welfare Plans.
4
<PAGE> 5
a. I will be eligible for coverage under the Company's health/life/welfare
plans ("plans"), as may be amended from time-to-time, on the thirty-first
consecutive day of my Employment. Even though I will be eligible for the plans
on the thirty-first consecutive day of my Employment, the actual date coverage
would go into effect on the plans, as respects me or my dependents eligible for
coverage, is at the sole discretion of the plans' provider(s) (i.e., the
insurance company or plans' trust).
b. Once I am covered by the plans I will be covered until the earlier of
the following:
i. The date my Employment ceases, subject to Federal and State laws
and regulations regarding the termination date of such coverage, or
ii. Coverage for me or the Companies under the plans is terminated
by the insurance company or other organization providing these benefits, or
iii. The insurance company or other organization providing these
benefits refuses to cover me under any of the plans.
7. Sick Time.
a. If I do not work because of illness, sickness, disease, accident or
disability, at option of the Company, the Company, in its sole discretion, may
require me to bring a written notice from my physician, addressed to the
Company, on the day I return to work (i) indicating the reason I was unable to
work on the days that I missed work and stating "I have determined that (my
name) was too ill, sick, diseased, injured or disabled to report to work and
perform his duties from (insert date) to (insert date)", and (ii) stating that I
am now able to resume the duties I performed and work the number of hours I was
employed to work prior to such absence. I consent to the disclosure by my
physician to the Company of such medical information as the Company may be
legally entitled to obtain regarding my ability to perform my job.
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b. If sick time pay ("Sick Time") is provided by the Company, it is only
payable to me for the times when I am too ill, sick, diseased, injured or
disabled to do the work which I was then employed by the Company to do.
c. Currently, the Company provides me with six (6) Sick Time days during
my Working Year. The Sick Time accrues at one-half day per each two consecutive
pay periods. At the end of any Working Year, all accrued unused Sick Time is
transferred to the next concurrent Working Year. No more than six (6) Sick Time
days may be used in any Working Year. If unused Sick Time days are carried over
from one Working Year to the next concurrent Working Year, then the amount of
Sick Time days I can accrue in that next concurrent Working Year shall be
limited to the difference between the unused Sick Time days carried forward to
the next concurrent Working Year and six (6) days.
d. The Company reserve the right to eliminate Sick Time upon 30 days'
notice to its employees.
d. Normal visits to my doctor or dentist, which are not due to illness,
sickness, disease, accident or disability of a nature which prevented me from
performing the work which I was then employed by the Company to do, shall not be
considered Sick Time and I shall prearrange such visit with my supervisor.
8. Unpaid Absences. Any absence from work for any reason that is not expressly
compensated pursuant to this Agreement will result in a deduction from my salary
compensation, for the appropriate pay period, of an amount equal to the salary
compensation I would have been paid for the time of such absence and, in the
Company's discretion, I may not be allowed to make up time in this regard.
Nothing herein shall operate to authorize an unpaid absence.
9. Cellular Telephone, Travel Expectations.
9.1 Cellular Telephone Expenses. I shall be reimbursed for cellular
telephone expenses related to the business of the Company.
9.2 Travel Required in Connection with Duties. I understand that my duties
as an employee shall require that I
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travel during the term of my employment with the Company. The areas to which I
shall travel and the frequency of my travel to perform my duties as an employee
may be changed from time to time in the sole discretion of the Company.
10. Proprietary Information. I agree to be bound by the terms of the Proprietary
Information Agreement and exhibits thereto, which are attached as Exhibit "A"
and incorporated by this reference ("Proprietary Agreement"), and, by the rules
of confidentiality promulgated by the Company from time to time and applicable
to employees of the Company.
11. Outside Activities. Unless I receive official notification to the contrary
in writing from either the Chairman of the Board and Chief Executive Officer of
the Board or President of the Company ("Official Notice"), the Company does not
now nor will it in the future sponsor any kind of event or activity for
employees or others, including, without limitation any athletic events. Any
participation in an activity by any officer, manager or director of the Company
does not in any way signify or imply a change to the foregoing. I assume
personal risk for any injury or loss associated with any activity or event,
whether I, or my dependents are participants or spectators, unless I have
received Official Notice that such activity or event is sponsored by the
Company, in which case the activity or event shall be subject to the terms and
conditions of that Official Notice.
12. No Promises or Representations With Respect to Career, Advancement, Stock
Ownership and other Employment Issues.
a. No promises of a career opportunity at the Company have been made to
me.
b. No promises of future increases in Salary Compensation, or other
compensation payable by the Company have been made to me.
c. No promises of being able to obtain ownership in the Company have been
made to me.
d. No promises of sharing the profits of the Company have been made to me.
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e. No promises of advancement in the Company have been made to me.
f. No promises of a review of my work and/or performance at the Company
have been made to me, but the Company reserve the right to do so at any time.
13. Constitutional Rights and Offensive Conduct. The Company
has advised me that it does not condone or approve any matter or
thing, written or oral:
a. that denigrates any person, creed, color, sex, race, religion, national
origin, personal persuasion, derivation or political belief;
b. or anything else that, to the reasonable employer or employee, would be
considered offensive.
14. Consequences of Breach by Employee. Any breach by me of the terms and/or
conditions of employment set forth in this Agreement or the Policies and
Procedures, may result in discipline up to and including termination of my
Employment. Timely performance of my duties of Employment is very important to
the Company.
15. References. If and when the Company is asked for references of any kind on
prior or current employees, including me, the Company may withhold any
references for any reason.
16. Conditions of Offer. This Agreement and the terms and conditions described
in it are subject to (i) my first completing, signing and submitting an
Application for Employment to the Company, and (ii) the receipt of the
following, which the Company may then deem acceptable: my references and
background information received from any present or past employer or supervisor,
educational institution, law enforcement agency, state and/or federal
administrator, credit bureau, collection agency, military branch, the National
Personnel Records Center and/or for the purpose of obtaining my motor vehicle
history, credit history and/or criminal history. I hereby release any person
and/or entity from any and all liability relating to their furnishing any such
information to the Company; provided, that such information relating to me is
factually correct.
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17. Modifications to this Agreement.
a. No promises or changes in my Employment status or concerning any of the
terms and conditions of this Agreement or any other matter affecting or relating
to my relationship with the Company have been be made to me and I agree that no
such promises, or changes are valid unless they are made to me in writing and
signed by the Chairman of the Board and Chief Executive Officer or President of
the Company, or the person designated in writing by either of them to make such
promises or changes.
b. This Agreement and the terms and conditions described in it cannot be
changed orally or by any conduct of either me or the Company or any course of
dealings between me or another and the Company. Oral agreements are not binding
on the Company. This Agreement is a fully-integrated agreement that stands on
its own and requires no other document to interpret its meaning, and is binding
by itself and covers all the issues raised within it.
18. Worker's Compensation Insurance. I have been informed that the Company
carries Workers' Compensation Insurance, as required by law.
19. Miscellaneous. If my Employment changes from the Company to any subsidiary
of the Company, then all of the above terms and conditions remain in force with
respect to my Employment by the entity for whom I previously worked and by the
entity for whom I am then working. If any term or condition, or any part of a
term or condition, of this Agreement or the Policies and Procedures shall prove
to be invalid, void or illegal, it shall in no way affect, impair or invalidate
any of the other terms or conditions of this Agreement or the Policies and
Procedures, which shall remain in full force and effect. The captions to this
Agreement are for purposes of reference only and will be ignored in interpreting
or construing the meaning of this Agreement. Any waiver by the Company of any
breach by me of any term or condition of this Agreement or the Policies and
Procedures shall not be construed as a waiver of any subsequent breach by me of
this Agreement or the Policies and Procedures. I acknowledge that I have
received a copy of this Agreement.
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20. Arbitration. Any dispute between me and the Company relating to this
Agreement, the Policies and Procedures or my Employment shall be resolved by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, except as otherwise mandated by law or
governmental regulation. Any such arbitration shall occur in San Francisco,
California. The fees and expenses of the arbitrator for any arbitration under
this Agreement shall be paid by the Company.
21. Governing Law. This Agreement shall be governed by the laws of the State of
California.
22. Severability. If any provision of this Agreement is held to be illegal,
invalid, or unenforceable, such provision shall be full, severable, and this
Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision were never a part of this Agreement; and the remaining
provisions of this Agreement shall remain in full force and effect and shall not
be affected by the illegal, invalid, or unenforceable provision or by its
severance. In lieu of any such provision that is illegal, invalid or
unenforceable, there shall be added automatically as part of this Agreement, a
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
23. Headings. The headings for the various sections and provisions of this
Agreement are solely for the purpose of ease of reference for the parties and
will not be considered in any manner as affecting the construction or
interpretation of this Agreement.
24. Effective Date. This Agreement shall be effective as of the first day of my
Employment by the Company notwithstanding any subsequent date of execution or
acceptance by the Company.
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I have read the foregoing provisions of this Agreement, including Exhibit "A" to
this Agreement, consisting of this and the preceding eight pages and I fully
understand and agree to the terms and conditions of this Agreement, and those of
Exhibit "A", as a condition to my employment by the Company.
/s/ Robert P. Barbarowicz Dated: March 21,1997
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Robert P. Barbarowicz
ACCEPTED and AGREED
NATIONAL INSURANCE GROUP
By: /s/ Mark A. Speizer Dated: March 21, 1997
----------------------
Mark A. Speizer
Chairman and Chief Executive Officer
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Exhibit 10.27
March 10 ,1997
National Insurance Group
395 Oyster Point Blvd., Suite 500
South San Francisco, CA 94080
Attention: Mark A. Speizer, Chairman and Chief Executive Officer
Dear Mr. Speizer:
This letter agreement (the "Agreement") confirms my understanding and agreement
that (i) the following terms and conditions were discussed with me prior to
being offered employment, and (ii) I agreed to them at that time and I accept
them as terms and conditions of my employment as an employee of National
Insurance Group, or any of its subsidiaries which currently exist or may exist
in the future. The current subsidiaries of the Company are Fastrac Systems,
Inc., Fastrac Systems Inc. Insurance Agent & Broker, Pinnacle Data Corporation;
and Great Pacific Insurance Company. Any references in this Agreement to the
Company shall mean National Insurance Group and its subsidiaries collectively.
I understand and agree that this Agreement supersedes any prior understanding,
agreement, discussions or negotiations and that any such prior understanding,
agreement, discussion or negotiation does not constitute an agreement between
the Company and me and is void as being any such agreement.
My employment by the Company shall be as an employee of the Company
("Employment") and is subject to the terms and conditions set forth in this
Agreement, together with all written rules, policies and procedures of the
Company that may be in effect from time to time during my employment ("Policies
and Procedures").
1. Compensation.
1.1 Salary Compensation. My bi-weekly salary shall be $5,769.23 ("Salary
Compensation"), which shall be paid to me in accordance with payroll practices
and procedures of the Company,
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less any applicable withholdings, taxes as required by law and any deductions
authorized by me. My Salary Compensation shall accrue from the first day of my
Employment, which shall be March 10, 1997. My Salary Compensation may be
adjusted, to be increased or decreased on or after the first anniversary of my
Employment if I am an employee of the Company at such time.
1.2 Eligibility to Participate in Bonus Plans for Senior Management. In
addition to my Salary Compensation, I understand that I shall be eligible to
participate in and may receive awards made by the Company under a bonus plan for
senior management of the Company as the same may be adopted by the Company. I
further understand that any such participation in any such plan shall commence
with calender year 1997. I understand that there is no guarantee or assurance
that I will be granted any award under any such bonus plan or that any award
granted to me would be equal to those granted to other employees of the Company,
including but not limited to, officers who hold the same or similar titles or
offices or who perform the same or similar duties as me.
1.3 Reimbursement for Reasonable Business Expenses. I further understand
that the Company will reimburse me for any reasonable business related expenses
incurred by me for travel, entertainment or other business expenses in
accordance with the Policies and Procedures of the Company. All requests for
reimbursements or any advances by the Company for expenses shall be on such
forms as the Company may require with documentation or substantiation of any
such expenses. All requests for reimbursement of expenses or advances shall be
approved by one of the following officers of the Company (i) the Chairman of the
Board and Chief Executive Officer, (ii) the President; or (iii) any Executive
Vice President as may be designated by the Chairman or the President. I
understand that I may be issued one or more credit cards issued to me on the
account of the Company. I agree that I will use any such charge only for
business purposes or, in the event that I use any such credit cards for personal
purposes, I will identify any such expense as personal in nature and pay to the
Company the amount of any such charges at the time the account is rendered to
the Company for payment by the credit card entity. The Company may revoke,
modify or suspend its issuance of credit cards to its employees, including me.
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1.4 Recommendation for Stock Option Grant. I understand that a
recommendation will be made to the Board of Directors of the Company that I be
granted a stock option award under the Company's 1986 Stock Option Plan, as
amended, to purchase 25,000 shares of the Company's stock, at a price equal to
the fair market value per share on the date of such grant and subject to the
terms and conditions generally imposed by the Company or its Board of Directors
with respects to grants made under such plan.
2. Position and Title. My position shall be an Executive Vice President,
Treasurer and Chief Financial Officer of the Company and I understand that I
will be elected as an officer of the Company and may be elected as an officer of
one of more of the subsidiaries of the Company. I shall have such duties as may
be assigned to me by the Chairman of the Board and Chief Executive Officer or
the President of the Company at any time or from time to time. I shall report to
the Chairman of the Board and Chief Executive Officer or to the President of the
Company if the Chairman so designates.
3. Work Hours; Exempt Employee Status. I agree that I will work at least forty
hours per week, during the normal business hours of the Company, prevailing
local time, however. I understand that I will not receive any additional
compensation for any hours that I work in excess of eight hours per day and
forty hours per week. As an executive officer of the Company with my duties as
Chief Financial Officer, I understand and agree that my duties may require my
services in excess of the services performed by other employees of the Company.
I agree that I will devote my full time and attention to the performance of my
duties during business hours. I further agree that I will not engage in any
civic or other activities that would materially interfere with the performance
of my duties under this Agreement or as an employee of the Company. I will not
engage in any other business or commercial activity.
4. At Will Employment. I understand and agree that my Employment will be
"at-will". This means that the Company has the right to and can terminate my
Employment at any time, with or without cause, and without notice, and I can
terminate my Employment at any time, with or without cause, and without notice.
There is no promise that my Employment will continue for a specific period of
time,
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duration or term and there is no promise that my employment will be terminated
only under particular circumstances. NO POSITION WITHIN THE COMPANY IS
CONSIDERED PERMANENT. This Section 4 constitutes the entire agreement between me
and the Company regarding the term of my Employment.
5. Vacations. The following is the vacation policy of the Company applicable to
me.
a. My paid vacation time ("Vacation Time") will accrue on the following
basis: (i) .0625 of a vacation day for each full working day worked at the
Company during each Working Year until such Vacation Time is modified by the
Company. A "Working Year" begins on the first day of my Employment and ends 365
continuous days thereafter.
b. If I do not take any Vacation Time within 180 days from the end of each
Working Year of my Employment, the Company will require that I take my accrued
Vacation Time and will assign me Vacation Time that must be used by me. I am
required to take Vacation Time within the 180 day period described in Section
5.b because a stacking of accrued Vacation Time beyond one Working Year into an
extended vacation may be a hardship on the Company.
c. I will give advance written notice of the dates my Vacation Time is to
begin and end by completing the Company's Vacation Request Form then in effect
("Vacation Request") and submitting it to my supervisor, no less than 60 days
before my proposed Vacation Time will begin. I will be given a written receipt
for the Vacation Request and my supervisor will review my Vacation Request with
the Company's payroll supervisor. If my supervisor and the payroll supervisor
are unable to agree mutually to approve the Vacation Request, my Vacation
Request shall be forwarded to the Chief Executive Officer or President of the
Company for review (my supervisor, the payroll supervisor, and/or the Chief
Executive Officer or President shall be referred to herein as the "Designated
Persons"). The Designated Persons can, in their discretion, turn down my request
for the proposed dates of Vacation Time in my Vacation Request, but the
Designated Persons must provide me with alternative dates which I must use
instead.
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The Designated Persons will provide me with a written acceptance or rejection of
the Vacation Request no more than 30 days after I present it to my supervisor.
6. Health/Life/Welfare Plans.
a. I will be eligible for coverage under the Company's health/life/welfare
plans ("plans"), as may be amended from time-to-time, on the thirty-first
consecutive day of my Employment. Even though I will be eligible for the plans
on the thirty-first consecutive day of my Employment, the actual date coverage
would go into effect on the plans, as respects me or my dependents eligible for
coverage, is at the sole discretion of the plans' provider(s) (i.e., the
insurance company or plans' trust).
b. Once I am covered by the plans I will be covered until the
earlier of the following:
i. The date my Employment ceases, subject to Federal and State laws
and regulations regarding the termination date of such coverage, or
ii. Coverage for me or the Companies under the plans is terminated
by the insurance company or other organization providing these benefits, or
iii. The insurance company or other organization providing these
benefits refuses to cover me under any of the plans.
6.3 The Company will reimburse me for the cost of premiums for continuation of
benefits for health insurance coverage for me under a health insurance policy
issued under which I am currently insured for a period of two months commencing
for the month of March, 1997. I will not receive any reimbursement for the costs
of premiums for continuation of benefits for health insurance coverage for my
dependents
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7. Sick Time.
a. If I do not work because of illness, sickness, disease, accident or
disability, at option of the Company, the Company, in its sole discretion, may
require me to bring a written notice from my physician, addressed to the
Company, on the day I return to work (i) indicating the reason I was unable to
work on the days that I missed work and stating "I have determined that (my
name) was too ill, sick, diseased, injured or disabled to report to work and
perform his duties from (insert date) to (insert date)", and (ii) stating that I
am now able to resume the duties I performed and work the number of hours I was
employed to work prior to such absence. I consent to the disclosure by my
physician to the Company of such medical information as the Company may be
legally entitled to obtain regarding my ability to perform my job.
b. If sick time pay ("Sick Time") is provided by the Company, it is only
payable to me for the times when I am too ill, sick, diseased, injured or
disabled to do the work which I was then employed by the Company to do.
c. Currently, the Company provides me with six (6) Sick Time days during
my Working Year. The Sick Time accrues at one-half day per each two consecutive
pay periods. At the end of any Working Year, all accrued unused Sick Time is
transferred to the next concurrent Working Year. No more than six (6) Sick Time
days may be used in any Working Year. If unused Sick Time days are carried over
from one Working Year to the next concurrent Working Year, then the amount of
Sick Time days I can accrue in that next concurrent Working Year shall be
limited to the difference between the unused Sick Time days carried forward to
the next concurrent Working Year and six (6) days.
d. The Company reserve the right to eliminate Sick Time upon 30 days'
notice to its employees.
d. Normal visits to my doctor or dentist, which are not due to illness,
sickness, disease, accident or disability of a nature which prevented me from
performing the work which I was then
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employed by the Company to do, shall not be considered Sick Time and I shall
prearrange such visit with my supervisor.
8. Unpaid Absences. Any absence from work for any reason that is not expressly
compensated pursuant to this Agreement will result in a deduction from my salary
compensation, for the appropriate pay period, of an amount equal to the salary
compensation I would have been paid for the time of such absence and, in the
Company's discretion, I may not be allowed to make up time in this regard.
Nothing herein shall operate to authorize an unpaid absence.
9. Cellular Telephone, Travel Expectations.
9.1 Cellular Telephone Expenses. I shall be reimbursed for cellular
telephone expenses related to the business of the Company.
9.2 Travel Required in Connection with Duties. I understand that my duties
as an employee shall require that I travel during the term of my employment with
the Company. The areas in which I may travel and the frequency of my travel to
perform my duties as an employee may be changed from time to time in the sole
discretion of the Company.
10. Proprietary Information. I agree to be bound by the terms of the Proprietary
Information Agreement and exhibits thereto, which are attached as Exhibit "A"
and incorporated by this reference ("Proprietary Agreement"), and, by the rules
of confidentiality promulgated by the Company from time to time and applicable
to employees of the Company.
11. Outside Activities. Unless I receive official notification to the contrary
in writing from either the Chairman of the Board and Chief Executive Officer of
the Board or President of the Company ("Official Notice"), the Company does not
now nor will it in the future sponsor any kind of event or activity for
employees or others, including, without limitation any athletic events. Any
participation in an activity by any officer, manager or director of the Company
does not in any way signify or imply a change to the foregoing. I assume
personal risk for any injury or loss associated with any activity or event,
whether I, or my dependents
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are participants or spectators, unless I have received Official Notice that such
activity or event is sponsored by the Company, in which case the activity or
event shall be subject to the terms and conditions of that Official Notice.
12. No Promises or Representations With Respect to Career, Advancement, Stock
Ownership and other Employment Issues.
a. No promises of a career opportunity at the Company have been made to
me.
b. No promises of future increases in Salary Compensation, or other
compensation payable by the Company have been made to me.
c. No promises of being able to obtain ownership in the Company have been
made to me.
d. No promises of sharing the profits of the Company have been made to me.
e. No promises of advancement in the Company have been made to me.
f. No promises of a review of my work and/or performance at the Company
have been made to me, but the Company reserve the right to do so at any time.
13. Constitutional Rights and Offensive Conduct. The Company has advised me
that it does not condone or approve any matter or thing, written or oral:
a. that denigrates any person, creed, color, sex, race, religion, national
origin, personal persuasion, derivation or political belief;
b. or anything else that, to the reasonable employer or employee, would be
considered offensive.
14. Consequences of Breach by Employee. Any breach by me of the terms and/or
conditions of employment set forth in this Agreement
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or the Policies and Procedures, may result in discipline up to and including
termination of my Employment. Timely performance of my duties of Employment is
very important to the Company.
15. References. If and when the Company is asked for references of any kind on
prior or current employees, including me, the Company may withhold any
references for any reason.
16. Conditions of Offer. This Agreement and the terms and conditions described
in it are subject to (i) my first completing, signing and submitting an
Application for Employment to the Company, and (ii) the receipt of the
following, which the Company may then deem acceptable: my references and
background information received from any present or past employer or supervisor,
educational institution, law enforcement agency, state and/or federal
administrator, credit bureau, collection agency, military branch, the National
Personnel Records Center and/or for the purpose of obtaining my motor vehicle
history, credit history and/or criminal history. I hereby release any person
and/or entity from any and all liability relating to their furnishing any such
information to the Company; provided, that such information relating to me is
factually correct.
17. Modifications to this Agreement.
a. No promises or changes in my Employment status or concerning any of the
terms and conditions of this Agreement or any other matter affecting or relating
to my relationship with the Company have been be made to me and I agree that no
such promises, or changes are valid unless they are made to me in writing and
signed by the Chairman of the Board and Chief Executive Officer or President of
the Company, or the person designated in writing by either of them to make such
promises or changes.
b. This Agreement and the terms and conditions described in it cannot be
changed orally or by any conduct of either me or the Company or any course of
dealings between me or another and the Company. Oral agreements are not binding
on the Company. This Agreement is a fully-integrated agreement that stands on
its own and requires no other document to interpret its meaning, and is binding
by itself and covers all the issues raised within it.
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18. Worker's Compensation Insurance. I have been informed that the Company
carries Workers' Compensation Insurance, as required by law.
19. Miscellaneous. If my Employment changes from the Company to any subsidiary
of the Company, then all of the above terms and conditions remain in force with
respect to my Employment by the entity for whom I previously worked and by the
entity for whom I am then working. If any term or condition, or any part of a
term or condition, of this Agreement or the Policies and Procedures shall prove
to be invalid, void or illegal, it shall in no way affect, impair or invalidate
any of the other terms or conditions of this Agreement or the Policies and
Procedures, which shall remain in full force and effect. The captions to this
Agreement are for purposes of reference only and will be ignored in interpreting
or construing the meaning of this Agreement. Any waiver by the Company of any
breach by me of any term or condition of this Agreement or the Policies and
Procedures shall not be construed as a waiver of any subsequent breach by me of
this Agreement or the Policies and Procedures. I acknowledge that I have
received a copy of this Agreement.
20. Arbitration. Any dispute between me and the Company relating to this
Agreement, the Policies and Procedures or my Employment shall be resolved by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, except as otherwise mandated by law or
governmental regulation. Any such arbitration shall occur in San Francisco,
California. The fees and expenses of the arbitrator for any arbitration under
this Agreement shall be paid by the Company.
21. Governing Law. This Agreement shall be governed by the laws of the State of
California.
22. Severability. If any provision of this Agreement is held to be illegal,
invalid, or unenforceable, such provision shall be full, severable, and this
Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision were never a part of this Agreement; and the remaining
provisions of this Agreement shall remain in full force and effect and shall not
be
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affected by the illegal, invalid, or unenforceable provision or by its
severance. In lieu of any such provision that is illegal, invalid or
unenforceable, there shall be added automatically as part of this Agreement, a
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
23. Headings. The headings for the various sections and provisions of this
Agreement are solely for the purpose of ease of reference for the parties and
will not be considered in any manner as affecting the construction or
interpretation of this Agreement.
I have read the foregoing provisions of this Agreement, consisting of this and
the preceding nine pages and I fully understand and agree to the terms and
conditions of this Agreement as a condition to my employment by the Company.
/s/ Greg Saunders Dated: March 10,1997
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Gregory S. Saunders
ACCEPTED and AGREED
NATIONAL INSURANCE GROUP
By: /s/ Mark A. Speizer Dated: March 10, 1997
---------------------------
Mark A. Speizer
Chairman and Chief Executive Officer
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Exhibit 10.28
NATIONAL INSURANCE GROUP
401(k) PLAN
BY: /s/ ROBERT P. BARBAROWICZ
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(SIGNATURE)
ROBERT P. BARBAROWICZ
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(NAME PRINTED OR TYPED)
TITLE: EXECUTIVE VICE PRESIDENT,
SECRETARY
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AND GENERAL COUNSEL
DATE ADOPTED: August 28, 1996, Effective as of July 1, 1996
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TABLE OF CONTENTS
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ARTICLE I STATEMENT OF PURPOSE AND INTENTIONS
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1.1 Purpose........................................................................1
1.2 Intent to Qualify..............................................................1
ARTICLE II DEFINITIONS
2.1 Anniversary Date...............................................................2
2.2 Annuity Starting Date..........................................................2
2.3 Beneficiary....................................................................2
2.4 Break in Service Year..........................................................2
2.5 Code...........................................................................2
2.6 Company........................................................................2
2.7 Compensation...................................................................2
2.8 Date of Employment.............................................................3
2.9 Date of Re-employment..........................................................3
2.10 Earned Income..................................................................3
2.11 Effective Date.................................................................3
2.12 Elective Compensation..........................................................4
2.13 Employee.......................................................................4
2.14 Employer.......................................................................5
2.15 Hour of Service................................................................6
2.16 Individual Accounts............................................................7
2.17 Insurance Company..............................................................7
2.18 Limitation Year................................................................7
2.19 Normal Retirement Age and Normal Retirement Date...............................8
2.20 Owner-Employee.................................................................8
2.21 Participant....................................................................8
2.22 Plan...........................................................................8
2.23 Plan Administrator.............................................................8
2.24 Plan Year......................................................................8
2.25 Preliminary Service............................................................8
2.26 Qualified Matching Contributions ("QMAC")......................................8
Qualified Nonelective Contributions ("QNC")....................................8
2.27 Required Beginning Date........................................................8
2.28 Retirement and Retirement Date.................................................9
2.29 Self-Employed Individual.......................................................9
2.30 Service........................................................................9
2.31 Total and Permanent Disability.................................................9
2.32 Trustees.......................................................................9
2.33 Vested Benefit.................................................................9
2.34 Years of Service..............................................................10
ARTICLE III PARTICIPATION
3.1 Commencement of Participation.................................................11
3.2 Minimum Participation Standards...............................................11
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3.3 Preliminary Service...........................................................11
3.4 Active Participation; Inactive Participation..................................12
3.5 Cessation of Participation....................................................12
3.6 Participation on Resumption of Employment.....................................12
ARTICLE IV CONTRIBUTIONS
4.1.1 Basic Contributions: Amount..................................................13
4.1.2 Basic Contribution Accounts...................................................13
4.1.3 Basic Contributions: Allocations.............................................14
4.1.4 Basic Contributions: Vesting.................................................14
4.1.5 Forfeitures...................................................................15
4.2.1 Elective Contributions: Amount...............................................15
4.2.2 Elective Contribution Account.................................................18
4.2.3 Elective Contributions: Allocations..........................................18
4.2.4 Elective Contributions: Vesting..............................................18
4.2.5 Elective Contributions: Withdrawals..........................................18
4.3.1 Supplemental Contributions: Amount...........................................20
4.3.2 Supplemental Contribution Accounts............................................20
4.3.3 Supplemental Contributions: Allocations......................................21
4.3.4 Supplemental Contributions: Vesting..........................................21
4.4.1 Rollover Contribution: Amount................................................21
4.4.2 Rollover Contribution Account.................................................21
4.4.3 Rollover Contributions: Allocation...........................................22
4.4.4 Rollover Contributions: Vesting..............................................22
ARTICLE V REQUIRED NON-DISCRIMINATION TESTING
5.1.1 Limitation on Additions.......................................................23
5.1.2 Suspense Account..............................................................26
5.2.1 Top-Heavy Provisions: Application............................................26
5.2.2 Top-Heavy Determination.......................................................27
5.2.3 Special Rules for Top-Heavy Plans.............................................29
5.3 Actual Deferral Percentage Test...............................................30
5.4 Average Contribution Percentage Test..........................................33
5.5 Multiple Use of Alternative Limitation........................................37
ARTICLE VI ADMINISTRATION OF PLAN ASSETS
6.1.1 The Investment Fund...........................................................38
6.1.2 Employee Directed Investments.................................................38
6.2 Account Adjustments...........................................................39
6.3 Distribution Adjustments......................................................39
6.4 Expenses......................................................................39
ARTICLE VII DISTRIBUTIONS
7.1 Termination of Employment (Including Disability) Before Retirement............40
7.2 Death Benefits................................................................40
7.3 Retirement....................................................................43
7.4 Form of Retirement Benefit....................................................43
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7.5 Retirement Benefits: Election of Forms and Commencement of Payments .........44
7.6 Loans to Participants.........................................................48
ARTICLE VIII GENERAL PROVISIONS
8.1.1 Plan Modification: Authority.................................................52
8.1.2 Plan Modification: Merger....................................................52
8.1.3 Plan Modification: Termination...............................................52
8.2.1 Duties: Plan Administrator...................................................52
8.2.2 Duties: Employer.............................................................53
8.3 Benefit Claims Procedure......................................................53
8.4 Review Procedure..............................................................53
8.5 Qualification of the Plan and Conditions of Contributions.....................54
8.6 Beneficiaries.................................................................54
8.7 Spendthrift Clause............................................................55
8.8 Owner-Employees: Other Trades or Businesses..................................55
8.9 Annuities.....................................................................56
8.10 Limitations of the Employer's Liability.......................................56
8.11 Non-Guarantee of Employment...................................................56
8.12 Applicable Law................................................................56
ARTICLE IX DIRECT ROLLOVERS
9.1 General Rule..................................................................57
9.2 Definitions...................................................................57
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ARTICLE I
STATEMENT OF PURPOSE AND
INTENTIONS
1.1 Purpose
The EMPLOYER adopts this PLAN as a defined contribution retirement
plan of the profit sharing type with a cash or deferred arrangement
to provide retirement benefits and incidental benefits to certain
EMPLOYEES who qualify for such benefits as more particularly provided
herein.
1.2 Intent to Qualify
It is the EMPLOYER'S intent that this PLAN be a qualified plan in the
meaning of sec. 401 of the Internal Revenue Code of 1986, as amended,
that any trust that may become part hereof be exempt from tax under
sec. 501(a) of the CODE, and that contributions made by the EMPLOYER
be deductible under sec. 404 of the CODE. This PLAN shall be
interpreted, applied and administered in a manner consistent with
this intent to qualify. All amounts contributed to, accumulated
and/or held pursuant to this PLAN shall not be diverted to or used
for other than the exclusive benefit of the PARTICIPANTS or their
beneficiaries until after such amounts have been distributed from
this PLAN. In the event that the portion of this PLAN comprising the
qualified cash or deferred arrangement fails to qualify under the
provisions of sec. 401(k) of the CODE, the PLAN as a whole shall
nonetheless be interpreted so as to qualify under sec. 401(a) of the
CODE.
Art. I 1
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ARTICLE II
DEFINITIONS
For the purposes of this Plan, when the following terms appear in this Plan in
BOLDFACE type, they shall have the meanings indicated in this Article unless a
different meaning is clearly required by the context.
Whenever required by the context, masculine pronouns shall include the feminine,
and singular the plural.
2.1 ANNIVERSARY DATE means each January 1.
2.2 ANNUITY STARTING DATE means the first day of the first period for which
an amount is payable as an annuity or any other form.
2.3 BENEFICIARY is defined in Section 8.6, except as specifically provided
to the contrary elsewhere in this PLAN.
2.4 BREAK IN SERVICE YEAR means a twelve-consecutive-month period
commencing on an ANNIVERSARY DATE (or, for the purposes of determining
an EMPLOYEE'S PRELIMINARY SERVICE, each Preliminary Computation Period,
as described in Article III) and during which an EMPLOYEE (or former
EMPLOYEE) is credited with not more than 500 HOURS OF SERVICE.
2.5 CODE means the Internal Revenue Code of 1986, as amended, and all
regulations promulgated thereunder.
2.6 COMPANY means National Insurance Group, a California corporation.
2.7 COMPENSATION means wages, salary, and/or other remuneration that is
receivable by an individual during a PLAN YEAR in exchange for SERVICE
and that is required to be reported as income on the individual's Form
W-2 for federal income tax withholding purposes under CODE sec.
3401(a). COMPENSATION also means an individual's EARNED INCOME, if any,
attributable to SERVICE performed during the PLAN YEAR.
In addition, COMPENSATION shall include the following amounts:
(a) all elective deferrals (as defined by CODE sec. 402(g)(3))
made by the PARTICIPANT during the PLAN YEAR pursuant to a
salary reduction agreement with the EMPLOYER, including those
described by Section 4.2.1 of this PLAN; and
(b) all COMPENSATION accrued by the PARTICIPANT during the PLAN
YEAR but which is not then included as taxable income of the
PARTICIPANT pursuant to a "cafeteria" or other such plan
maintained by the EMPLOYER according to CODE sec. 125.
In addition to other applicable limitations set forth in the PLAN, and
notwithstanding any other provision of the PLAN to the contrary, for
PLAN YEARS beginning on or after January 1, 1994, the annual
COMPENSATION of each EMPLOYEE taken into account under the PLAN shall
not exceed the OBRA '93 annual compensation limit. The OBRA '93
Art. II 2
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annual compensation limit is $150,000, as adjusted by the
Commissioner for increases in the cost of living in accordance with
section 401(a)(17)(B) of the Internal Revenue Code. The
cost-of-living adjustment in effect for a calendar year applies to
any period, not exceeding 12 months, over which COMPENSATION is
determined (determination period) beginning in such calendar year. If
a determination period consists of fewer than 12 months, the OBRA '93
annual compensation limit will be multiplied by a fraction, the
numerator of which is the number of months in the determination
period, and the denominator of which is 12.
For PLAN YEARS beginning on or after January 1, 1994, any reference
in this PLAN to the limitation under section 401(a)(17) of the CODE
shall mean the OBRA '93 annual compensation limit set forth in this
provision.
If COMPENSATION for any prior determination period is taken into
account in determining an EMPLOYEE'S benefits accruing in the current
PLAN YEAR, the COMPENSATION for the prior determination period is
subject to the OBRA '93 annual compensation limit in effect for that
prior determination period. For this purpose, for determination
periods beginning before the first day of the first PLAN YEAR
beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
In applying this limit, the family aggregation rules of CODE sec.
414(q)(6) shall apply, except that in applying such rules, the term
"family" shall include only the spouse of the EMPLOYEE and any lineal
descendants of the EMPLOYEE who have not attained age 19 before the
close of the PLAN YEAR. In addition, if this limit applies to a
family unit, then for the purposes of this PLAN, each affected family
member shall be credited with an amount of COMPENSATION on a pro rata
basis, so that such credited amount, when compared to the adjusted
compensation limit, shall have the same direct proportion that exists
in comparing that person's actual COMPENSATION to the sum of all that
family's affected members' COMPENSATION.
2.8 DATE OF EMPLOYMENT means the date on which an EMPLOYEE has his first
HOUR OF SERVICE.
2.9 DATE OF RE-EMPLOYMENT means the first date as of which an EMPLOYEE
has an HOUR OF SERVICE after his most recent termination of SERVICE,
EXCEPT that for the purposes of determining PRELIMINARY SERVICE, DATE
OF RE-EMPLOYMENT means the first date as of which an EMPLOYEE is
credited with an HOUR OF SERVICE after he most recently has accrued a
BREAK IN SERVICE YEAR which permits his prior PRELIMINARY SERVICE to
be disregarded.
2.10 EARNED INCOME means the net earnings from self-employment in the
trade or business with respect to which the PLAN is established, and
for which the personal services of the individual are a material
income-producing factor. For the purposes of defining EARNED INCOME,
net earnings will be determined without regard to items not included
in gross income and the deductions allocable to such items, and net
earnings will be reduced by contributions by the EMPLOYER to a
qualified plan to the extent that such contributions are deductible
under CODE sec. 404. In addition, net earnings shall be determined
with regard to the deduction allowed to the EMPLOYER by CODE sec.
164(f) for taxable years beginning after December 31, 1989.
2.11 EFFECTIVE DATE means July 1, 1996.
Art. II 3
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2.12 ELECTIVE COMPENSATION means that portion of a PARTICIPANT'S
COMPENSATION that is attributable to SERVICE performed while the
PARTICIPANT had in effect an election to have Elective Contributions
made on his behalf, pursuant to Article IV.
2.13 EMPLOYEE means a natural person who performs SERVICE for the EMPLOYER
in exchange for COMPENSATION, including any LEASED EMPLOYEE (as
described below) but excluding any independent contractor who is not
a LEASED EMPLOYEE. For the purposes of this PLAN, EMPLOYEE shall be
further described as follows.
(a) HIGHLY COMPENSATED EMPLOYEE ("HCE") means:
(1) The group of HCES includes any EMPLOYEE who during
the PLAN YEAR performs services for the EMPLOYER and
who (i) is a 5-percent owner, (ii) receives
compensation for the PLAN YEAR in excess of the sec.
414(q)(1)(B) amount for the PLAN YEAR, (iii) receives
compensation for the PLAN YEAR in excess of the sec.
414(q)(1)(C) amount for the PLAN YEAR and is a member
of the top paid group of EMPLOYEES within the meaning
of sec. 414(q)(4), or (iv) is an officer and receives
compensation during the PLAN YEAR that is greater
than 50 percent of the dollar limitation in effect
under sec. 415(b)(1)(A). If no officer satisfies the
compensation require ment during the PLAN YEAR, the
highest paid officer for such year shall be treated
as an HCE.
For purposes of determining who is an HCE,
compensation means wages, salary, and/or other
remuneration that is required to be reported as
income on the individual's W-2 for federal income tax
withholding purposes under CODE sec. 3401(a), plus
all elective deferrals as defined in CODE sec.
402(g)(3) and benefits pursuant to a plan under CODE
sec. 125 that are not currently taxable.
(2) If an EMPLOYEE is a family member of either a
5-percent owner (whether active or former) or an HCE
who is one of the 10 most HCES ranked on the basis of
compensation paid by the EMPLOYER during such year,
then the family member and the 5-percent owner or
top-ten HCE shall be aggregated. In such case, the
family member and 5-percent owner or top- ten HCE
shall be treated as a single EMPLOYEE receiving
compensation and plan contributions or benefits equal
to the sum of the compensation and benefits of the
family member and 5-percent owner or top-ten HCE. For
purposes of this section, family member includes the
spouse, lineal ascendants and descendants of the
EMPLOYEE or former EMPLOYEE, and the spouses of such
lineal ascendants and descendants.
(3) The determination of who is an HCE, including the
determination of the number and identity of EMPLOYEES
in the top paid group, the number of EMPLOYEES
treated as officers and the compensation that is
taken into account, shall be made in accordance with
the sec. 414(q) and sec. 1.414(q)-1T of the temporary
Income Tax Regulations to the extent they are not
inconsistent with the method established above.]
Art. II 4
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(b) KEY EMPLOYEE means (solely for the purposes of Section 5.2)
an EMPLOYEE who, at any time during the PLAN YEAR or 4
preceding PLAN YEARS, was:
(1) an officer of the EMPLOYER having an annual
"compensation" greater than 50% of the amount in
effect under CODE sec. 415(b)(1)(A) for any such PLAN
YEAR; or
(2) one of the ten EMPLOYEES having annual "compensation"
greater than the limitation in effect under CODE sec.
415(c)(1)(A) and owning (or considered as owning
within the meaning of CODE sec. 318) the largest
interests of the EMPLOYER; or
(3) a 5 percent owner of the EMPLOYER; or
(4) a 1 percent owner of the EMPLOYER having an annual
"compensation" of more than $150,000.
For the purposes of this PLAN, KEY EMPLOYEE shall be
described more particularly by CODE sec. 416(i)(l).
"Compensation" is defined under HIGHLY COMPENSATED
EMPLOYEE, above.
(c) LEASED EMPLOYEE means a person who is employed (either as a
common law employee or an independent contractor) by a
leasing organization (but not by the EMPLOYER) and who
performs services for the EMPLOYER on a substantially full-
time basis for a period of at least one year, where such
services are of a type historically performed by EMPLOYEES
within the business field of the EMPLOYER, and where such
services are provided pursuant to a contract between the
leasing organization and the EMPLOYER, EXCEPT that if such
person is covered under a money purchase pension plan
maintained by the leasing organization and which provides
(1) a nonintegrated employer contribution rate of at least 7
1/2% of compensation for services performed prior to January
1, 1987, and at least 10% of compensation for services
performed after December 31, 1986, with compensation being
determined according to CODE sec. 415(c)(3), but including
amounts contributed by the EMPLOYER pursuant to a salary
reduction agreement which are excludable from the EMPLOYEE'S
gross income under CODE sec. 125, 402(e)(3), 402(h), or
403(b); (2) immediate participation; and (3) full and
immediate vesting, AND if the sum of all such persons is not
more than 20% of the EMPLOYER'S "nonhighly compensated
workforce" (as defined in 26 CFR 1.414(n)-2(f)(3)(ii)), then
for the purposes of this PLAN such person is not a LEASED
EMPLOYEE, and is at that time ineligible for a benefit or
any vested interest in this PLAN.
Any provisions of this Section and this PLAN to the contrary
notwithstanding, the term "LEASED EMPLOYEE" shall be more
specifically defined by, and LEASED EMPLOYEES shall be
treated under this PLAN consistent with, CODE sec. 414(n)
and 26 CFR 1.414(n)-2.
2.14 EMPLOYER means the COMPANY, and any other person or business
organization which has adopted and maintains this PLAN on behalf of
its employees with the consent of the COMPANY.
Art. II 5
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In addition, to the extent required for this PLAN'S qualification for
special tax treatment under the CODE, and to the extent otherwise
required by applicable law, including for example the determination
of a PARTICIPANT'S PRELIMINARY SERVICE and YEARS OF SERVICE, EMPLOYER
also means any predecessor organization which previously maintained
this PLAN on behalf of its employees (but only with regard to that
period of time during which the PLAN was maintained by such
organization(s)), and any employer which, together with the EMPLOYER
(as otherwise defined in this Section ), is a member of a controlled
group of corporations in the meaning of CODE sec. 414(b), or is a
member of a group of trades or business (whether or not incorporated)
under common control in the meaning of CODE sec. 414(c), or is a
member of an affiliated service group in the meaning of CODE sec.
414(m), or is otherwise required to be aggregated by CODE sec.
414(o).
2.15 HOUR OF SERVICE means:
(a) each hour for which an EMPLOYEE is paid, or entitled to
payment, by the EMPLOYER for the performance of duties;
(b) each hour for which an EMPLOYEE is directly or indirectly
paid, or entitled to payment, by the EMPLOYER on account of
a period of time during which no duties are performed
(irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity
(including disability), layoff, jury duty, military duty or
leave of absence except with respect to payments made or due
under a plan maintained solely for the purpose of complying
with applicable workers' compensation or unemployment
compensation or disability insurance laws or which are
solely in reimbursement to the EMPLOYEE for medical or
medically-related expenses incurred by the EMPLOYEE;
however, no more than 501 HOURS OF SERVICE shall be credited
pursuant to this paragraph to an EMPLOYEE on account of any
single continuous period during which the EMPLOYEE performs
no duties (whether or not such period occurs in a single
PLAN YEAR); and
(c) each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the EMPLOYER;
however, an HOUR OF SERVICE shall not be credited under both
this paragraph and paragraph (a) or (b), above.
HOURS OF SERVICE credited under paragraphs (b) and (c), above, shall
be credited in accordance with Department of Labor Regulations found
at 29CFR sec. 2530.200b-2(b). HOURS OF SERVICE shall be credited to
the appropriate PLAN YEAR in accordance with 29CFR sec.
2530.200b-2(c).
HOURS OF SERVICE included pursuant to paragraph (a) shall be
determined according to records of employment maintained by the
EMPLOYER. If such records do not provide an adequate basis for
determining the actual number of HOURS OF SERVICE accrued by a
particular EMPLOYEE (e.g. a salaried EMPLOYEE), then HOURS OF SERVICE
under paragraph (a) shall be credited to the EMPLOYEE on a weekly
basis and the EMPLOYEE shall be credited with 45 HOURS OF SERVICE for
every week in which he has accrued at least one HOUR OF SERVICE as
otherwise described in paragraph (a).
Special Rule for Maternity or Paternity Absences
Art. II 6
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If an EMPLOYEE is absent from work due to
(a) the pregnancy of the EMPLOYEE,
(b) the birth of a child to the EMPLOYEE,
(c) the placement of a child with the EMPLOYEE pursuant to the
EMPLOYEE'S adoption of the child, or
(d) the care of such child described in (b) or (c) above
immediately following its birth or placement,
the EMPLOYEE shall nonetheless be credited with the number of HOURS
OF SERVICE which normally would have been credited to the EMPLOYEE
but for said absence (or, if the PLAN ADMINISTRATOR is unable to
determine said number, with eight (8) HOURS OF SERVICE for each
regularly scheduled workday the EMPLOYEE is absent), to a maximum of
501 HOURS OF SERVICE,
PROVIDED that this special crediting of HOURS OF SERVICE occurs
during only one PLAN YEAR, and
PROVIDED that the PLAN YEAR in which such HOURS OF SERVICE are
credited is the PLAN YEAR in which the absence begins, unless such
crediting would not be necessary to avoid a BREAK IN SERVICE YEAR in
said PLAN YEAR, in which case such HOURS OF SERVICE shall be credited
as they accrue in the PLAN YEAR immediately following the PLAN YEAR
in which the absence begins, and
PROVIDED that the crediting of such HOURS OF SERVICE shall be solely
for the purpose of avoiding a BREAK IN SERVICE YEAR, and shall not
operate to increase any EMPLOYEE'S or former EMPLOYEE'S vested
percentage or retirement benefit, nor shall the crediting have any
other operative effect regarding this PLAN, and
PROVIDED that, under rules established by the PLAN ADMINISTRATOR, the
EMPLOYEE may be required to provide to the PLAN ADMINISTRATOR written
certification from the EMPLOYEE'S attending doctor or other
professional attendant at birth or representative of the relevant
adoption agency to establish that the absence from work is for the
reasons referred to above.
2.16 INDIVIDUAL ACCOUNTS means, for any PARTICIPANT, those accounts which
are both listed below and maintained pursuant to this PLAN on his
behalf.
(a) Basic Contribution Account
(b) Elective Contribution Account
(c) Rollover Contribution Account
(d) Supplemental Contribution Account
Art. II 7
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2.17 INSURANCE COMPANY means a legal reserve life insurance company,
licensed to do business in the state of California, with which the
TRUSTEES have entered into a contract to provide benefits under the
PLAN.
2.18 LIMITATION YEAR, for purposes of determining the limitation on
certain additions to the PLAN for the benefit of an EMPLOYEE as
described in Section 5.1.1, means a twelve- consecutive-month period
beginning on an ANNIVERSARY DATE.
2.19 NORMAL RETIREMENT AGE and NORMAL RETIREMENT DATE are defined in
Article VII under "RETIREMENT".
2.20 OWNER-EMPLOYEE means an EMPLOYEE who is the sole proprietor of the
business employing the EMPLOYEES, or who is a partner owning more
than 10% of the capital interest and/or the profits interest in the
partnership employing the EMPLOYEES.
2.21 PARTICIPANT means an EMPLOYEE or former EMPLOYEE who has become a
PARTICIPANT or resumed participation pursuant to Section 3.1 or 3.6
and who has not subsequently ceased to participate as provided in
Section 3.5. A PARTICIPANT may be Active or Inactive as provided in
Section 3.4.
2.22 PLAN means this National Insurance Group 401(k) Plan.
2.23 PLAN ADMINISTRATOR means one or more persons appointed by the
TRUSTEES to control and manage the operation and administration of
the PLAN. The person or persons so appointed shall constitute a named
fiduciary or fiduciaries for purposes of the Employee Retirement
Income Security Act of 1974. If no PLAN ADMINISTRATOR is appointed,
then the EMPLOYER (or the TRUSTEE(S) if the PLAN is trusteed) shall
be the PLAN ADMINISTRATOR.
2.24 PLAN YEAR means a period of time commencing on an ANNIVERSARY DATE
and ending with the day immediately preceding the next ANNIVERSARY
DATE.
2.25 PRELIMINARY SERVICE is defined in Article III.
2.26 QUALIFIED MATCHING CONTRIBUTIONS ("QMAC") means Employer
Contributions (other than Elective Contributions) made to a plan for
a PARTICIPANT on account of any EMPLOYEE Contributions or Elective
Contributions made to a plan by or on behalf of the PARTICIPANT,
PROVIDED that the amounts of the Employer Contributions are subject
to the nonforfeitability and distribution limitations of Income Tax
Reg. 26 CFR 1.401(k)-1(c) & (d) the same as Elective Contributions.
QUALIFIED NONELECTIVE CONTRIBUTIONS ("QNC")means EMPLOYER
Contributions made to a plan which are not Matching Contributions
(i.e. not made on account of any employee or Elective Contribution)
or Elective Contributions, but which are subject to the
nonforfeitability and distribution limitations of Income Tax Reg. 26
CFR 1.401(k)-1(c) & (d) the same as Elective Contributions.
2.27 REQUIRED BEGINNING DATE
(a) General Rule. REQUIRED BEGINNING DATE means, for any
PARTICIPANT, April 1 of the calendar year following the
calendar year in which the PARTICIPANT attains age 70 1/2.
Art. II 8
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(b) Transition Rules: The REQUIRED BEGINNING DATE of any
PARTICIPANT who attained age 70 1/2 before January 1, 1988,
shall be determined according to (1) or (2) below:
(1) The REQUIRED BEGINNING DATE of a PARTICIPANT who is
not a 5% owner is April 1 of the calendar year
following the later of:
(A) the calendar year in which the PARTICIPANT
attained age 70 1/2, or
(B) the calendar year in which the PARTICIPANT
retires.
(2) The REQUIRED BEGINNING DATE of any PARTICIPANT who is
a 5% owner during any year beginning after December
31, 1979, is April 1 of the calendar year following
the later of:
(A) the calendar year in which the PARTICIPANT
attained age 70 1/2, or
(B) the earlier of
(i) the calendar year with or within which
ends the PLAN YEAR in which the
PARTICIPANT becomes a 5% owner, or
(ii) the calendar year in which the
PARTICIPANT retires.
(c) The REQUIRED BEGINNING DATE of any PARTICIPANT who is not a
5% owner, who attained age 70 1/2 during 1988, and who did
not retire as of January 1, 1989, is April 1, 1990.
(d) 5% owner, for purposes of this Section , means a PARTICIPANT
who is a 5% owner within the meaning of CODE sec. 416(i)
(except without regard to whether the PLAN is actually
top-heavy) at any time during the PLAN YEAR ending with or
within the calendar year in which the PARTICIPANT attains
age 66 1/2, or any subsequent PLAN YEAR.
2.28 RETIREMENT and RETIREMENT DATE are defined in Article VII under
"RETIREMENT".
2.29 SELF-EMPLOYED INDIVIDUAL means, with respect to any taxable year, an
individual who has EARNED INCOME attributable to SERVICE performed
during that taxable year, and also means an individual who would have
had such EARNED INCOME but for the fact that the trade or business of
the EMPLOYER and with regard to which the PLAN is maintained had no
net profits for the taxable year.
2.30 SERVICE means employment of the EMPLOYEE by the EMPLOYER for the
performance of labor or duties by the EMPLOYEE on behalf of the
EMPLOYER and for which the EMPLOYEE is to be compensated by the
EMPLOYER.
2.31 TOTAL AND PERMANENT DISABILITY means a physical or mental condition
that in the opinion of the PLAN ADMINISTRATOR precludes a person from
employment for which he is qualified because of his experience,
training, and education, and that is expected to continue for not
less than 12 months. The PLAN ADMINISTRATOR'S opinion regarding the
degree and permanence of the disability shall be supported by medical
evidence.
Art. II 9
<PAGE> 14
2.32 TRUSTEES means those persons or the organization with which the
EMPLOYER has entered into a trust agreement to provide benefits under
the PLAN.
However, at any time that the PLAN is not trusteed, "TRUSTEES" shall
mean the COMPANY.
2.33 VESTED BENEFIT means, at any time, the sum of the PARTICIPANT'S
vested INDIVIDUAL ACCOUNT balances.
2.34 YEARS OF SERVICE
(a) General Rule
Subject to the exclusions set forth in (b) below, a
PARTICIPANT'S period of employment taken into account to
determine his YEARS OF SERVICE for the purposes of this PLAN
shall be measured as follows.
A PARTICIPANT shall be credited with one YEAR OF SERVICE for
each twelve-consecutive-month period which commenced on an
ANNIVERSARY DATE on or after the EFFECTIVE DATE and during
which the PARTICIPANT accrued at least 1,000 HOURS OF
SERVICE.
In addition, if the PARTICIPANT was an EMPLOYEE on the
EFFECTIVE DATE, he shall also be credited with one YEAR OF
SERVICE for each twelve-consecutive-month period which
commenced on an ANNIVERSARY DATE prior to the EFFECTIVE DATE
and during which the PARTICIPANT accrued at least 1,000
HOURS OF SERVICE.
(b) Exclusions
If a PARTICIPANT or former PARTICIPANT accrues a BREAK IN
SERVICE YEAR, all YEARS OF SERVICE attributable to his
employment prior to that BREAK IN SERVICE YEAR shall
thereafter be disregarded unless either
(1) his Vested Percentage is greater than zero at the
time the BREAK IN SERVICE YEAR has accrued, or
(2) the number of his consecutive BREAK IN SERVICE YEARS
is less than (A) or (B), whichever is greater, where
(A) equals 5, and
(B) equals the aggregate number of his YEARS OF
SERVICE before the BREAK IN SERVICE YEARS, not
taking into account YEARS OF SERVICE previously
disregarded because of prior BREAK IN SERVICE
YEARS.
In addition, if a PARTICIPANT or former PARTICIPANT has at
least five consecutive BREAK IN SERVICE YEARS, all YEARS OF
SERVICE attributable to his employment subsequent to said
five consecutive BREAK IN SERVICE YEARS shall thereafter be
disregarded for purposes of determining his vested interest
in the amount which had been allocated to his Basic
Contribution Account (pursuant to Section 4.1.3) prior to
the period of such five consecutive BREAK IN SERVICE YEARS.
Art. II 10
<PAGE> 15
ARTICLE III
PARTICIPATION
3.1 Commencement of Participation
An EMPLOYEE shall commence participation in the PLAN on the first
Entry Date on which he meets the PLAN'S Minimum Participation
Standards.
The Entry Dates shall be the EFFECTIVE DATE, and thereafter the first
day of each calendar quarter (i.e. each January 1, April 1, July 1,
and October 1).
Notwithstanding the above, the PRELIMINARY SERVICE requirement set
forth in Section 3.2(b) herein shall be waived with respect to each
EMPLOYEE employed on July 1, 1996, and each such EMPLOYEE shall
commence participation in the PLAN on July 1, 1996.
3.2 Minimum Participation Standards
An EMPLOYEE meets the PLAN'S Minimum Participation Standards at any
time when he satisfies the following conditions:
(a) He is an EMPLOYEE.
(b) He is credited with at least three (3) months of PRELIMINARY
SERVICE.
(c) He is at least twenty-one (21) years of age.
3.3 PRELIMINARY SERVICE
An EMPLOYEE shall be credited with at least three (3) months of
PRELIMINARY SERVICE for any three-consecutive-month period during
which he was continuously employed as an EMPLOYEE. However, in any
event, an EMPLOYEE shall be credited with a year of PRELIMINARY
SERVICE for each complete Preliminary Computation Period in which he
has not less than 1,000 HOURS OF SERVICE, whether or not he was
continuously employed during the Preliminary Computation Period.
Preliminary Computation Periods shall have a duration of twelve
consecutive months. Each EMPLOYEE'S initial Preliminary Computation
Period shall commence as of his DATE OF EMPLOYMENT (or, after a BREAK
IN SERVICE YEAR that permits his prior PRELIMINARY SERVICE to be
disregarded, his DATE OF RE-EMPLOYMENT). Thereafter, the Preliminary
Computation Periods shall commence as of each ANNIVERSARY DATE,
beginning with the first ANNIVERSARY DATE following the EMPLOYEE'S
DATE OF EMPLOYMENT (or DATE OF REEMPLOYMENT, if applicable).
If an EMPLOYEE accrues a BREAK IN SERVICE YEAR, then his PRELIMINARY
SERVICE attributable to his employment prior to that BREAK IN SERVICE
YEAR shall thereafter be disregarded unless either
Art. III 11
<PAGE> 16
(a) his Vested Percentage is greater than zero at the time the
BREAK IN SERVICE YEAR accrues, or
(b) the number of his consecutive BREAK IN SERVICE YEARS is less
than (1) or (2), whichever is greater, where
(1) equals 5, and
(2) equals the aggregate number of his Years of
PRELIMINARY SERVICE before the BREAK IN SERVICE
YEARS, not taking into account Years of PRELIMINARY
SERVICE previously disregarded because of prior BREAK
IN SERVICE YEARS.
3.4 Active Participation; Inactive Participation
Once an EMPLOYEE has commenced participation (or if he subsequently
ceased to participate, once he has resumed participation), he shall
be an Active PARTICIPANT with respect to each HOUR OF SERVICE accrued
while he is an EMPLOYEE. At any time thereafter at which he is not an
EMPLOYEE, but before his participation has ceased, he shall be an
Inactive PARTICIPANT.
3.5 Cessation of Participation
A PARTICIPANT shall cease to participate in this PLAN (without regard
to his status as an EMPLOYEE) as of the first date on which he has
most recently terminated his employment as an EMPLOYEE and also has
no rights (present or contingent) to any benefit under this PLAN.
3.6 Participation on Resumption of Employment
A former EMPLOYEE who participated during the period of his prior
employment and who does not have BREAK IN SERVICE YEARS which permit
his PRELIMINARY SERVICE earned during his prior employment to be
disregarded shall resume participation as of his first HOUR OF
SERVICE upon resumption of employment as an EMPLOYEE.
Any other former EMPLOYEE shall commence participation as of the
first Entry Date which occurs on or after the date of his resumption
of employment as an EMPLOYEE and as of which he has satisfied the
Minimum Participation Standards described in Section 3.2.
Art. III 12
<PAGE> 17
ARTICLE IV
CONTRIBUTIONS
4.1.1 Basic Contributions: Amount
For each PLAN YEAR, the EMPLOYER may contribute amounts to the PLAN.
These amounts shall be called Basic Contributions, and shall be
determined according to the following provisions.
(a) Basic Matching Contribution
The EMPLOYER may contribute amounts as a match of Elective
Contributions for the PLAN YEAR. The amount of the match
will equal such amount as the EMPLOYER deems appropriate
EXCEPT that a PARTICIPANT'S Elective Contributions in excess
of four percent (4%) of the PARTICIPANT'S ELECTIVE
COMPENSATION for each calendar quarter shall not be taken
into account.
For the purposes of this Section , the amount of Elective
Contributions to be matched shall be determined without
regard to any withdrawals of Elective Contributions that
were made during that PLAN YEAR (see Section 4.2.5).
(b) Basic Top-Heavy Contribution
If a PARTICIPANT is to be credited with some additional
amount pursuant to the "top-heavy" provisions of Section 5.2
of this PLAN, such additional amount shall be contributed
and credited as an additional portion of the Basic
Contribution for that PLAN YEAR.
Any of the provisions of this Section to the contrary
notwithstanding, no amounts may be contributed to the PLAN as Basic
Contributions in excess of the maximum amount that the EMPLOYER may
deduct from its net income subject to federal income taxation for the
EMPLOYER'S taxable year on account of which such contributions have
been made plus any amount which may be currently contributed and
"carried over" for succeeding taxable years pursuant to CODE sec.
404(a)(3)(A)(ii) (assuming that the EMPLOYER is subject to federal
income taxation), nor shall such amounts exceed the maximum amount
which may be allocated consistently with the limitations stated in
Section 5.1.1.
Basic Contributions shall be allocated among the PLAN'S PARTICIPANTS
pursuant to Section .1.3 in a uniform and nondiscriminatory manner.
4.1.2 Basic Contribution Accounts
Each PARTICIPANT shall have maintained on his behalf a Basic
Contribution Account, which shall be adjusted as provided in Article
VI and which shall be closed when the PARTICIPANT is entitled to no
further benefits under the terms of the PLAN.
Art. IV 13
<PAGE> 18
4.1.3 Basic Contributions: Allocations
(a) Basic Matching Contributions: Allocations
As of the date it is received by the PLAN and all necessary
information to complete the allocation is available, a
portion of the Basic Contribution for the calendar quarter,
if any, shall be allocated to the Basic Contribution Account
of each PARTICIPANT who is allocated an Elective
Contribution for that calendar quarter.
Each such PARTICIPANT shall be allocated a portion of that
Basic Contribution, which portion shall equal a uniform
percentage (for example, 10%) of his Elective Contributions
for the calendar quarter, EXCEPT that a PARTICIPANT'S
Elective Contributions in excess of four percent (4%) of the
PARTICIPANT'S ELECTIVE COMPENSATION for the calendar quarter
shall not be taken into account.
(b) Also, as of the date the contribution is received by the
PLAN, each PARTICIPANT who is entitled to be credited with
an additional amount of Basic Contribution pursuant to
Section 5.2 of this PLAN shall have such amount credited to
his Basic Contribution Account.
4.1.4 Basic Contributions: Vesting
(a) At any time, each PARTICIPANT'S interest in his Basic
Contribution Account balance (EXCEPT in Basic Matching
Contributions that are forfeited because they relate to
excess deferrals, excess contributions, or excess aggregate
contributions) shall be stated in terms of his Vested
Percentage, which shall be determined from the following
schedule according to his YEARS OF SERVICE (unless the
PLAN'S Top-Heavy Provisions (Section 5.2) become effective,
in which case the vesting schedule stated therein shall
control):
<TABLE>
<CAPTION>
YEARS OF SERVICE Vested Percentage
==================================== ===================================
<S> <C>
Less than 4 0%
4 or more 100%
==================================== ===================================
</TABLE>
(b) Subsection (a) above notwithstanding, any PARTICIPANT'S
Vested Percentage automatically shall be 100% upon the
occurrence of any of the following events:
(1) his death while an EMPLOYEE;
(2) his termination of employment as an EMPLOYEE due to
his having incurred TOTAL AND PERMANENT DISABILITY
while an EMPLOYEE; or
(3) his attainment of NORMAL RETIREMENT AGE.
(c) Under no circumstances shall any amendment of this PLAN
reduce any PARTICIPANT'S Vested Percentage regarding any
benefits accrued under this PLAN as of the adoption date (or
effective date, if later) of such amendment. With regard to
the effect of such an amendment on subsequently accrued
benefits, for each PARTICIPANT whose Vested Percentage under
the PLAN as amended would at any
Art. IV 14
<PAGE> 19
future time be less than it would be if determined without
regard to such amendment, then provided that the PARTICIPANT
had completed at least three YEARS OF SERVICE as of the
adoption date (or effective date, if later) of the amend-
ment, such PARTICIPANT may irrevocably elect in a writing
delivered to the PLAN ADMINISTRATOR during the election
period described below to have his Vested Percentage in his
subsequently accrued benefits under this PLAN determined
without regard to such amendment.
For the purpose of this Section , the election period within
which such election may be delivered to the PLAN
ADMINISTRATOR shall begin as of the adoption date of the
amendment, and shall end on the sixtieth day after the
latest of:
(1) the adoption date of the amendment;
(2) the effective date of the amendment; or
(3) the date on which the PARTICIPANT received written
notice of the amendment from the EMPLOYER or PLAN
ADMINISTRATOR.
4.1.5 Forfeitures
(a) On the date as of which a PARTICIPANT accrues the fifth of
five (5) consecutive BREAK IN SERVICE YEARS, if the balance
credited to his Basic Contribution Account exceeds his
vested interest in that Account, then his rights (under this
PLAN) to such excess shall be immediately forfeited, with
the amount of such excess becoming a Forfeiture.
Basic Matching Contributions that relate to excess
deferrals, excess contributions, or excess aggregate
contributions shall be treated as Forfeitures.
Forfeitures may also result from the distribution of a
PARTICIPANT'S entire VESTED BENEFIT due to his termination
of employment as an EMPLOYEE, as further described in
Section 7.1.
(b) All Forfeitures which occur pursuant to this PLAN shall be
applied to offset expenses and Basic Contributions as such
obligations accrue.
4.2.1 Elective Contributions: Amount
(a) Elective Deferral
Each PARTICIPANT may elect to defer his receipt of
COMPENSATION that has not yet become available to him. For
each PLAN YEAR, the total amount of COMPENSATION that may
be deferred may equal not less than one percent (1%) and not
more than fifteen percent (15%) of his ELECTIVE COMPENSATION
for the PLAN YEAR.
For each PLAN YEAR, on behalf of each PARTICIPANT who has
made such an elective deferral, the EMPLOYER shall
contribute an amount to the PLAN equal to the amount of the
PARTICIPANT'S elective deferral of COMPENSATION for the PLAN
YEAR. This contribution shall be called an Elective
Contribution.
Art. IV 15
<PAGE> 20
Each Elective Contribution shall be paid to the PLAN by the
EMPLOYER as soon as reasonably practicable (in no event
later than 90 days) after it is withheld by or otherwise
paid to the EMPLOYER. In addition, each Elective
Contribution shall be paid to the PLAN by the EMPLOYER no
later than the last day of the twelve-month period
immediately following the PLAN YEAR with respect to which
the contribution is made.
(b) Election
A PARTICIPANT may elect to change the amount of his elective
deferrals, and therefore the amount of the Elective
Contributions made on his behalf, within the limits
prescribed in subsection (a) above. A PARTICIPANT may also
elect to cease his elective deferrals and Elective
Contributions altogether, or, having done so, may elect to
recommence them.
A PARTICIPANT'S election to commence elective deferrals may
become effective only as of the first day of any prospective
calendar quarter.
A PARTICIPANT'S election to recommence or to change the
amount of his elective deferrals may become effective only
as of the first day of any prospective month.
A PARTICIPANT'S election to cease his elective deferrals
altogether may become effective only as of the first day of
any prospective payroll period.
Any of the provisions of this subparagraph (b) to the
contrary notwithstanding, any election described by this
subparagraph (b) regarding elective deferrals may become
effective only after written notice delivered to the PLAN
ADMINISTRATOR within a reasonable time prior to the
effective date of the election.
(c) Limit on Amount
The total sum of any PARTICIPANT'S elective deferrals for
any taxable year of the PARTICIPANT may not exceed the limit
prescribed by IRC Reg. 1.402(g)-1(c). (Generally, for
taxable years beginning in 1996, that limit equals $9,500,
except for adjustments made to take into account elective
deferrals made to annuity contracts under CODE sec. 403(b)).
For the purposes of this subsection (c), "elective
deferrals" has the meaning defined in IRC Reg.
1.402(g)-1(b), including (but not limited to) Elective
Contributions received by this PLAN on the PARTICIPANT'S
behalf.
For any PARTICIPANT, if this limit on elective deferrals is
exceeded, then the following corrective measures are
permitted.
(1) The PARTICIPANT may notify the PLAN ADMINISTRATOR of
the excess deferral, and may request that the PLAN
ADMINISTRATOR distribute to the PARTICIPANT an amount
not exceeding the lesser of:
(A) the amount of the excess deferral, plus all
income allocable to the excess deferral;
Art. IV 16
<PAGE> 21
(B) the sum of all amounts deferred by the
PARTICIPANT and contributed to the PLAN as
Elective Contributions on behalf of the
PARTICIPANT with regard to the affected taxable
year, net of any allocable earnings, gains or
losses attributable to such amounts; or
(C) the balance of the PARTICIPANT'S Elective
Contribution Account as of the date of
distribution, minus any amounts of withholding
that are legally required.
In addition, the amount that may be included in a
corrective distribution shall be reduced by any
excess contributions previously distributed to the
PARTICIPANT for the PLAN YEAR that began with or
within the affected taxable year of the PARTICIPANT.
To be effective for the purposes of this PLAN, the
PARTICIPANT'S notice and request must be in writing
and delivered to the PLAN ADMINISTRATOR prior to the
first April 15 following the close of the affected
taxable year of the PARTICIPANT.
To the extent that the PARTICIPANT has excess
deferrals for the taxable year calculated by taking
into account only elective deferrals under this PLAN
and other plans of the EMPLOYER, and absent actual
notification by the PARTICIPANT, the PARTICIPANT
shall be deemed to have provided the notice described
above in this subsection.
(2) A corrective distribution of excess deferrals and
allocable income may be made during the affected
taxable year of the PARTICIPANT only if all of the
following conditions are satisfied.
(A) The PARTICIPANT has designated the amount of
the distribution as being attributable to an
excess deferral. (Because subsection (1)
above limits the amount of the corrective
distribution to not more than the amount of
excess deferrals calculated by taking into
account only elective deferrals under this
PLAN and other plans of the EMPLOYER, and
absent an actual designation by the
PARTICIPANT, the PARTICIPANT shall be deemed
to have provided the designation described
above in this subsection.)
(B) The corrective distribution is made after
the date on which the PLAN received the
excess deferral.
(C) The PLAN has designated the amount of the
distribution as being attributable to an
excess deferral.
(3) Not later than the first April 15 following the close
of the affected taxable year of the PARTICIPANT, and
after receipt of the PARTICIPANT'S written notice and
request, the PLAN ADMINISTRATOR may make the
appropriate corrective distribution, consistent with
the provisions of this subparagraph (c).
Art. IV 17
<PAGE> 22
The PLAN ADMINISTRATOR may require that before the
corrective distribution is made, the PARTICIPANT must
provide to the PLAN ADMINISTRATOR additional
documentation evidencing the PARTICIPANT'S
representations regarding the excess deferrals.
The income allocable to excess deferrals for the affected
taxable year of the PARTICIPANT shall be determined
according to the IRC Reg. 1.402(g)-1(c)(5).
In the event of a corrective distribution of excess
deferrals and allocable income, the balance of the
PARTICIPANT'S Elective Contribution Account shall be reduced
accordingly.
4.2.2 Elective Contribution Account
On behalf of each PARTICIPANT who has elected to defer some portion
of his COMPENSATION pursuant to this Article IV, there shall be
maintained an Elective Contribution Account, which shall be adjusted
as provided in Article VI and which shall be closed when the
PARTICIPANT is entitled to no further benefits under the terms of
this PLAN.
4.2.3 Elective Contributions: Allocations
Any Elective Contribution received by the PLAN on behalf of a
PARTICIPANT shall be credited to the Elective Contribution Account of
that PARTICIPANT as of the date on which the contribution was
received by the PLAN.
4.2.4 Elective Contributions: Vesting
The Elective Contributions received by the PLAN on behalf of any
PARTICIPANT shall be fully vested in such PARTICIPANT and not subject
to forfeiture prior to the time they are withdrawn or distributed
pursuant to this PLAN.
4.2.5 Elective Contributions: Withdrawals
(a) At any time before his RETIREMENT DATE, a PARTICIPANT may
apply to withdraw an amount from his Elective Contribution
Account. The application must be in writing and received by
the PLAN ADMINISTRATOR. If the PARTICIPANT has attained age
59 1/2 or is not an EMPLOYEE as of the date of distribution,
the PARTICIPANT may withdraw up to the entire balance of his
Elective Contribution Account, including interest or other
earnings. Subject to the additional restrictions of this
section, any other PARTICIPANT may withdraw an amount that
does not exceed the balance of the account attributable to
Elective Contributions made on his behalf, excluding any
interest or other earnings.
(b) If the PARTICIPANT is an EMPLOYEE on the date as of which
the withdrawal is to be distributed, and if the PARTICIPANT
has not yet attained age 59 1/2 as of the date of
distribution, the PLAN ADMINISTRATOR may permit the
distribution only to the extent that the PLAN ADMINISTRATOR
reasonably believes that the distribution is necessary to
satisfy an immediate and heavy financial need of the
PARTICIPANT, taking into account all relevant facts and
circumstances.
Art. IV 18
<PAGE> 23
(1) Any of the following facts and circumstances shall
automatically be deemed by the PLAN ADMINISTRATOR to
constitute an immediate and heavy financial need of
the PARTICIPANT:
(A) expenses for medical care (as defined in CODE
sec. 213(d)) that were either previously
incurred by the PARTICIPANT, the PARTICIPANT'S
spouse, or any dependents of the PARTICIPANT
(with "dependents" being as defined by CODE
sec. 152) or that are necessary for these
persons to obtain such medical care;
(B) costs directly related to the purchase of a
principal residence for the PARTICIPANT
(excluding mortgage payments);
(C) payment of tuition and related educational fees
for the next 12 months of post-secondary
education for the PARTICIPANT, or the
PARTICIPANT'S spouse, children, or dependents
(as defined in CODE sec. 152);
(D) payments necessary to prevent the eviction of
the PARTICIPANT from the PARTICIPANT'S
principal residence, or foreclosure on the
mortgage on that residence; or
(E) any other facts and circumstances that the
Commissioner of the Internal Revenue Service
has included through the publication of revenue
rulings, notices, or other documents of general
applicability.
A financial need shall not fail to qualify as
immediate and heavy merely because such need was
reasonably foreseeable or voluntarily incurred by the
PARTICIPANT.
(2) In requesting a withdrawal due to financial need, the
PARTICIPANT shall specifically identify the facts and
circumstances which have caused the financial need
and shall state the amount needed to satisfy the
need, which may include amounts necessary to pay any
income taxes or penalties reasonably anticipated to
result from the distribution. The PARTICIPANT shall
further state that, to the extent of the amount
requested, the financial need cannot otherwise be
satisfied by:
(A) reimbursement or compensation by insurance or
otherwise;
(B) reasonable liquidation of the PARTICIPANT'S
assets, but only to the extent that such
liquidation would not in itself cause an
immediate and heavy financial need;
(C) cessation of elective deferrals or any
PARTICIPANT contributions permitted by the
PLAN;
(D) other distributions or nontaxable (at the time
of the loan) loans from this PLAN or any other
plan maintained by the EMPLOYER or any other
employer; and/or
(E) borrowing from commercial sources on reasonable
commercial terms.
Art. IV 19
<PAGE> 24
For the purposes of this subsection, the
PARTICIPANT'S resources shall be deemed to include
those assets of the PARTICIPANT'S spouse and minor
children to the extent that such assets are
reasonably available to the PARTICIPANT.
(3) Before the withdrawal may be permitted, the PLAN
ADMINISTRATOR shall receive from the PARTICIPANT any
documentation that the PLAN ADMINISTRATOR requires in
the performance of his fiduciary duty to substantiate
that the withdrawal is necessary to satisfy the
financial need identified by the PARTICIPANT. Under
no circumstances shall the PLAN ADMINISTRATOR
distribute more than the PLAN ADMINISTRATOR
reasonably believes is necessary to satisfy the
financial need identified by the Participant.
(c) The PLAN ADMINISTRATOR shall approve or deny the
PARTICIPANT'S application for such a withdrawal within a
reasonable amount of time after receipt of such application.
If approved, payment shall be made by the PLAN ADMINISTRATOR
as soon as administratively practicable, but in any event
within ninety (90) days after the PLAN ADMINISTRATOR'S
receipt of the PARTICIPANT'S application.
The PLAN ADMINISTRATOR shall also issue any denial of such
an application as soon as administratively practicable. Such
a denial shall be delivered in writing and shall state
specifically the reasons for such denial.
(d) The PLAN ADMINISTRATOR may limit the frequency of
withdrawals. Such limit shall apply uniformly to all
PARTICIPANTS.
(e) The amount of any withdrawal from an Elective Contribution
Account pursuant to this Section shall be charged against
that Account as of the date that the withdrawal is
distributed from the PLAN.
Absent written directions from the PARTICIPANT to the
contrary, a withdrawal shall be taken pro rata from the
PARTICIPANT'S balances in the PLAN'S investment options
(described in Section 6.1.2) as of the date of withdrawal.
4.3.1 Supplemental Contributions: Amount
For any PLAN YEAR in which the PLAN ADMINISTRATOR determines that the
average of the actual deferral ratios and/or the actual contribution
ratios of PARTICIPANTS who are HCE'S exceeds the limit determined
pursuant to Section 5.3(b) or 5.4(b), as applicable, the EMPLOYER may
make Supplemental Contributions that meet the requirements for
QUALIFIED NONELECTIVE CONTRIBUTIONS or QUALIFIED MATCHING
CONTRIBUTIONS described in Article II. Supplemental Contributions
shall be made solely for the purpose of complying with the
limitations of the applicable Section , and shall not exceed the
amount necessary to satisfy the test described therein, subject to
the limits of Section 5.1.1.
4.3.2 Supplemental Contribution Accounts
A Supplemental Contribution Account shall be maintained on behalf of
each PARTICIPANT who will be allocated a portion of the Supplemental
Contribution. The account shall be
Art. IV 20
<PAGE> 25
adjusted as provided in Article VI and shall be closed when the
PARTICIPANT is entitled to no further benefits under the terms of the
PLAN.
4.3.3 Supplemental Contributions: Allocations
As of the date on which it is received by the PLAN and all necessary
information to complete the allocation is available, a portion of the
Supplemental Contribution for the PLAN YEAR, if any, shall be
allocated to the Supplemental Contribution Account of each
PARTICIPANT who is not an HCE and who (1) is allocated an Elective
Contribution for PLAN YEAR and (2) is an EMPLOYEE on the last day of
the PLAN YEAR.
Each such PARTICIPANT shall be allocated a portion of that
Supplemental Contribution so that such portion, when compared with
the entire amount of Supplemental Contribution that is allocated to
all such PARTICIPANTS for the PLAN YEAR, shall bear the same direct
proportion that the PARTICIPANT'S COMPENSATION for that PLAN YEAR
bears to the aggregate COMPENSATION of all such PARTICIPANTS for
that PLAN YEAR.
4.3.4 Supplemental Contributions: Vesting
At any time, a PARTICIPANT'S interest in his Supplemental
Contribution Account shall be fully vested and not subject to
forfeiture prior to the withdrawal or distribution of such balance
pursuant to this PLAN.
4.4.1 Rollover Contribution: Amount
The PLAN ADMINISTRATOR may accept Rollover Contributions from or on
behalf of a PARTICIPANT.
As used herein, Rollover Contribution means all or a portion of an
"eligible rollover distribution" described in CODE sec. 402(c), or an
amount paid or distributed out of an individual retirement account or
individual retirement annuity described in CODE sec.
408(d)(3)(A)(ii).
The PLAN ADMINISTRATOR may require such assurance and proofs of fact
from the PARTICIPANT as may be necessary to determine whether an
amount the PARTICIPANT desires to contribute is a Rollover
Contribution as defined herein. He may further require the
PARTICIPANT to agree to indemnify the PLAN for any adverse
consequences which may follow if a contribution proves not to have
been a Rollover Contribution. An EMPLOYEE on whose behalf a transfer
described in this Section is made shall agree to cooperate fully with
the PLAN ADMINISTRATOR in effecting any and all corrective measures
which may be required by an agency of the federal government to
prevent the PLAN'S disqualification as a result of the transfer.
4.4.2 Rollover Contribution Account
For the benefit of any PARTICIPANT on whose behalf the PLAN has
accepted any Rollover Contribution, there shall be maintained a
Rollover Account. Rollover Accounts shall be adjusted as provided in
Article VI, and shall be closed when the balances of such accounts,
including allocable earnings, gains and losses, have been distributed
pursuant to this PLAN.
Art. IV 21
<PAGE> 26
4.4.3 Rollover Contributions: Allocation
Any Rollover Contribution received by the PLAN pursuant to this
Article IV shall be credited as it is received to the Rollover
Account(s) of the PARTICIPANT on whose behalf it was received.
4.4.4 Rollover Contributions: Vesting
The Rollover Contributions received by the PLAN on behalf of any
PARTICIPANT shall be fully vested in such PARTICIPANT and not subject
to forfeiture prior to the time they are distributed pursuant to this
PLAN.
Art. IV 22
<PAGE> 27
ARTICLE V
REQUIRED NON-DISCRIMINATION TESTING
5.1.1 Limitation on Additions
(a) The Annual Additions to this PLAN for the benefit of a
PARTICIPANT in a LIMITATION YEAR are the sum of:
(1) Allocations to his Elective Contribution Account for
the LIMITATION YEAR, directly or indirectly, of the
Elective Contributions to the PLAN; and
(2) Allocations to his Basic Contribution Account for the
LIMITATION YEAR, directly or indirectly, of the Basic
Contributions to the PLAN; and
(3) Allocations to his Supplemental Contribution Account
for the LIMITATION YEAR, directly or indirectly, of
any Supplemental Contributions to the PLAN; and
(4) Allocations to any individual medical account
maintained on behalf of the PARTICIPANT by the
EMPLOYER pursuant to a pension or annuity plan, as
described in Sections 415(l)(1) and 419A(d)(2) of the
CODE.
Contributions shall not fail to be Annual Additions to this
PLAN merely because such contributions are excess
contributions or excess aggregate contributions, or merely
because such excess contributions or excess aggregate
contributions are distributed. Excess deferrals are Annual
Additions only if they are not distributed as provided in
Article IV.
(b) A PARTICIPANT'S Maximum Annual Addition for a LIMITATION
YEAR is the lesser of:
(1) 25% of the PARTICIPANT'S compensation for the
LIMITATION YEAR; or
(2) the greater of:
(A) $30,000; or
(B) 25% of the defined benefit dollar limitation
set forth in Section 415(b)(1)(A) of the CODE
as in effect for the LIMITATION YEAR or such
other amount as the Secretary of the Treasury
or his delegate may from time to time authorize
pursuant to Section 415(d) of the CODE.
(c) Any provisions of this PLAN to the contrary notwithstanding,
the Annual Additions to this PLAN for the benefit of a
PARTICIPANT in a LIMITATION YEAR shall in no event exceed
the PARTICIPANT'S Maximum Annual Addition for that
LIMITATION YEAR.
If allocations pursuant to Article IV would otherwise result
in the limitation in the preceding sentence being exceeded
for a PARTICIPANT in a LIMITATION YEAR because of the
allocation of Forfeitures, if any, or because of a
reasonable error
Art. V 23
<PAGE> 28
in estimating a PARTICIPANT'S annual compensation, or
because of a reasonable error in determining the amount of
elective deferrals (within the meaning of CODE sec.
402(g)(3), or because of any other facts and circumstances
which the Internal Revenue Service finds to be appropriate
consistent with sec. 415 of the CODE and regulations
promulgated thereunder, then the PLAN ADMINISTRATOR shall
reduce that PARTICIPANT'S Annual Additions, but only to the
extent that the sum of such Additions no longer exceeds his
Maximum Annual Additions.
This reduction of the PARTICIPANT'S Annual Additions shall
be accomplished by reducing the allocation (if any) to the
PARTICIPANT'S INDIVIDUAL ACCOUNTS of each of the allocated
amounts described below according to the order in which they
are listed. Each such amount shall be completely exhausted
before the next listed allocation is reduced.
The allocations to be reduced (and the order in which they
shall be reduced) shall be as follows:
(1) Elective Contributions and, if the PARTICIPANT is an
HCE, related Basic Matching Contributions
(2) Basic Matching Contributions not described above
(3) Supplemental Contributions
The amount by which an Elective Contribution is reduced
shall be distributed to the PARTICIPANT on whose behalf it
was received as soon as administratively practicable, and
shall include any earnings and gains that have been
allocated and which are attributable to that returned
amount.
The remaining surplus amounts created by the reductions
described above shall be held in a Suspense Account
established and administered pursuant to Section 5.1.2.
(d) For purposes of this Section, compensation means a
PARTICIPANT'S wages, salary, and/or other remuneration that
is required to be reported as income on the individual's
Form W-2 for federal income tax withholding purposes under
CODE sec. 3401(a).
For any SELF-EMPLOYED INDIVIDUAL, compensation means EARNED
INCOME.
For the purposes of this Section, the total amount of
compensation that is actually paid or made available to a
PARTICIPANT within a LIMITATION YEAR shall be the amount of
that PARTICIPANT'S compensation taken into account regarding
that LIMITATION YEAR.
(e) Additional Limitation in the Case of Defined Benefit PLAN
and Defined Contribution PLAN for Same EMPLOYEE
(1) In any case where a PARTICIPANT has at any time
participated in a defined benefit plan maintained by
the EMPLOYER, the limitation imposed by this Section
(without regard to this Additional Limitation) shall
be reduced to the
Art. V 24
<PAGE> 29
extent necessary to prevent the PARTICIPANT'S
Combination Ratio from exceeding 1.0 in any
LIMITATION YEAR. A PARTICIPANT'S Combination Ratio is
the sum of his Defined Benefit Fraction and his
Defined Contribution Fraction.
(2) A PARTICIPANT'S Defined Benefit Fraction for a
LIMITATION YEAR is a fraction -
(A) the numerator of which is his projected annual
benefit (as defined in sec. 415(e) of the CODE
and regulations thereunder) to which the
PARTICIPANT would be entitled under the defined
benefit plan as of the close of the LIMITATION
YEAR;
(B) the denominator of which is the lesser of:
(i) the product of 1.25 (or, if the PLAN is
top-heavy as determined under the
provisions of Section 5.2, 1.0)
multiplied by the dollar limitation in
effect under sec. 415(b)(1)(A) of the
CODE for such LIMITATION YEAR, or
(ii) the product of 1.4 multiplied by the
amount which may be taken into account
under sec. 415(b)(1)(B) of the CODE with
respect to such PARTICIPANT for such
LIMITATION YEAR.
(3) A PARTICIPANT'S Defined Contribution Fraction for a
LIMITATION YEAR is a fraction -
(A) the numerator of which is the sum of the Annual
Additions (as defined in this Section ) to the
PARTICIPANT'S account for the PARTICIPANT'S
benefit as of the close of the LIMITATION YEAR
and for all prior LIMITATION YEARS; and
(B) the denominator of which is the sum of the
lesser of the following amounts determined for
such LIMITATION YEAR and for each prior
LIMITATION YEAR of service with the EMPLOYER:
(i) the product of 1.25 (or, if the PLAN is
top-heavy as determined under the
provisions of Section 5.2, 1.0)
multiplied by the dollar limitation in
effect under sec. 415(c)(1)(A) of the
CODE for such LIMITATION YEAR
(determined without regard to sec.
415(c)(6) of the CODE), or
(ii) the product of 1.4 multiplied by the
amount which may be taken into account
under sec. 415(c)(1)(B) of the CODE (or
subsection (c)(7) or (8), if applicable)
with respect to such PARTICIPANT for
such LIMITATION YEAR.
(4) For purposes of this Additional Limitation, EMPLOYEE
contributions to any defined benefit plan maintained
by the EMPLOYER, whether mandatory or voluntary,
shall be treated as a separate defined contribution
plan maintained by the EMPLOYER.
Art. V 25
<PAGE> 30
(5) If an additional limitation is applicable, it shall
be imposed in this PLAN before any reduction in the
limitation on benefits payable under any defined
benefit plan, unless the applicable defined benefit
plan provides expressly to the contrary.
(f) Aggregation of PLANS
For purposes of this Section, all qualified defined
contribution plans (without regard to whether a plan has
been terminated) ever maintained by the EMPLOYER will be
treated as part of this PLAN, and all qualified defined
benefit plans (without regard to whether a plan has been
terminated) ever maintained by the EMPLOYER will be treated
as one defined benefit plan.
EMPLOYEE contributions (whether mandatory or voluntary) to a
qualified defined benefit plan maintained by the EMPLOYER
shall be treated as a defined contribu tion plan maintained
by the EMPLOYER.
Any qualified defined benefit or defined contribution plan
maintained by any member of a controlled group of
corporations or group of trades or businesses (whether or
not incorporated) under common control (within the meaning
of sec. 414(b) and (c) of the CODE as modified by sec.
415(h)) of which the EMPLOYER is a member shall be treated
as a plan maintained by the EMPLOYER.
5.1.2 Suspense Account
For any PLAN YEAR, any surplus amounts created by reductions
described in Section 5.1.1(c) and not returned to a PARTICIPANT shall
be held unallocated in a Suspense Account.
Any provisions of this PLAN to the contrary notwithstanding, any
amounts held in a Suspense Account shall be applied toward EMPLOYER
contributions and PLAN expenses as such obligations accrue, with the
EMPLOYER making no further contributions to the PLAN until such time
as the Suspense Account balance has been exhausted.
No amounts held in a Suspense Account may be distributed to any
PARTICIPANT at any time prior to termination of the PLAN. If there
are amounts held in a Suspense Account at a time when the PLAN is
terminated, such amounts shall be reallocated to PARTICIPANTS in
proportion to their COMPENSATION for that PLAN YEAR but not in excess
of each PARTICIPANT'S Maximum Annual Addition for the PLAN YEAR. Any
amounts that cannot be reallocated may revert to the EMPLOYER
according to Section 8.1.3.
5.2.1 Top-Heavy Provisions: Application
The provisions of Sections 5.2.1 - 5.2.3 shall become effective only
if, as of the first day of the applicable PLAN YEAR, the PLAN is
top-heavy pursuant to the Test described in Section 5.2.2.
Art. V 26
<PAGE> 31
5.2.2 Top-Heavy Determination
(a) Definitions
(1) Aggregation Group.
(A) Required Aggregation Group means
(i) each and every plan of the EMPLOYER in
which a KEY EMPLOYEE is a PARTICIPANT
during the PLAN YEAR containing the
Determination Date or any of the four
preceding PLAN YEARS, including any plan
that has subsequently terminated, and
(ii) each other plan of the EMPLOYER which
enables any plan described in subsection
(i) above to meet the participation and
nondiscrimination requirements of the
CODE, including (but not limited to) the
requirements of CODE sections 401(a)(4)
and 410.
(B) Permissive Aggregation Group means a Required
Aggregation Group or a plan described in
subsection (A)(i) above together with any other
plan of the EMPLOYER which is not required to
be included in an Aggregation Group under
subsection (A)(ii) above but which may be so
included if such group would continue to meet
the participation and nondiscrimination
requirements of the Internal Revenue CODE.
(C) Top-Heavy Group means any Required Aggregation
Group found to be top-heavy pursuant to
subsection (b) of this Section 5.2.2.
(2) Compensation means compensation as defined in Section
5.1.1(d).
(3) Determination Date means
(A) in the case of the first PLAN YEAR, the last
day of such PLAN YEAR;
(B) in all other cases, the last day of the
preceding PLAN YEAR.
(4) Non-KEY EMPLOYEE means any EMPLOYEE who is not a KEY
EMPLOYEE.
(5) Present Value of Accrued Benefits means, for this
PLAN, the sum of
(A) the account balances attributable to Basic and
Elective Contributions and Supplemental
Contributions as of the most recent Valuation
Date occurring within a twelve-month period
ending on the Determination Date, and
(B) an adjustment for certain contibutions due
as of the Determination Date, as required by
CODE sec. 416.
If this PLAN is a member of an Aggregation Group,
Present Value of Accrued Benefits shall mean the sum
of the account balances of all EMPLOYER and
nondeductible EMPLOYEE Contribution Accounts
maintained for the PARTICI-
Art. V 27
<PAGE> 32
PANT pursuant to all defined contribution plans that
belong to the group and of which he is a member and
also the sum of the present values of the vested
accrued benefits due the PARTICIPANT pursuant to all
defined benefit plans that belong to the group and of
which the PARTICIPANT is a member.
(6) Valuation Date means the last date in each PLAN YEAR
on which account balances are valued.
(b) Top-Heavy Test
The PLAN (or Aggregation Group) shall be top-heavy for each
PLAN YEAR if, as of the Determination Date, the PLAN'S (or
Aggregation Group's) top-heavy ratio for the PLAN YEAR
exceeds sixty percent (60%). The top-heavy ratio is the
Present Value of Accrued Benefits of all KEY EMPLOYEES over
the Present Value of Accrued Benefits of all EMPLOYEES,
excluding former Key EMPLOYEES. Calculation of the
top-heavy ratio shall be made in accordance with sec. 416 of
the CODE (with specific reference to CODE sec. 416(g)(3))
and shall take into account the following amounts:
(1) Present Value of Accrued Benefits as described in
subsection (a)(5) above; and
(2) The amount of all distributions to PARTICIPANTS or
their BENEFICIARIES during the PLAN YEAR that
includes the Determination Date and also during the
four preceding PLAN YEARS pursuant to this PLAN or
pursuant to a terminated plan which if it had not
been terminated would have been required to be
included in an Aggregation Group, EXCEPT
(A) any rollover to this PLAN initiated by
the EMPLOYEE; and
(B) any transfer to this PLAN from a qualified
plan maintained by an unrelated employer;
and
(C) any distribution which occurred after the
Valuation Date but prior to the
Determination Date to the extent that such a
distribution has been included in the
calculation of the Present Value of Accrued
Benefits.
However, calculation of the top-heavy ratio for any PLAN
YEAR shall not take into account the Present Value of
Accrued Benefits or the amount of all distributions made to
any individual who has not performed services for the
EMPLOYER at any time during the 5-year period ending on such
PLAN YEAR'S Determination Date.
For an Aggregation Group, each plan shall initially be
tested separately, and then the plans shall be aggregated by
adding together the results for each plan as of the
Determination Dates that fall within the same calendar year.
If the Aggregation Group includes two or more defined
benefit plans, the same actuarial assumptions will be
specified within and used by such plans for the purposes of
this Section 5.2. Also, in such defined benefit plans
proportional subsidies shall be ignored and non-proportional
subsidies considered for the purposes of this Section
5.2.2(b).
Art. V 28
<PAGE> 33
For a Required Aggregation Group, each PLAN shall be tested
by determining the Present Value of Accrued Benefits for
non-Key EMPLOYEES (1) pursuant to the method, if any, that
uniformly applies for accrual purposes under all plans
maintained by the affiliated EMPLOYERS; or (2) if there is
no such method, as if such Accrued Benefits accrued not more
rapidly than the slowest accrual rate permitted under the
fractional accrual rates of Section 411(b)(1)(C) of the
CODE.
5.2.3 Special Rules for Top-Heavy PLANS
(a) Application of Special Rules
(1) If, after application of the top-heavy test described
in Section 5.2.2(b), this PLAN is found not to be
top-heavy, then the special rules set forth below
shall not apply to this PLAN. In that event, the
other applicable provisions in this PLAN will govern.
(2) If, after application of the top-heavy test in
Section 5.2.2(b), this PLAN is found to be top-heavy,
then the following special rules shall govern.
(b) Vesting Schedule
(1) At any time, a PARTICIPANT'S vested interest in his
Basic Contribution Account balance shall be stated in
terms of his Vested Percentage, which shall be
determined from the following schedule, according to
his YEARS OF SERVICE:
YEARS OF SERVICE Vested Percentage
==================================== ===================================
Less than 3 0%
3 or more 100%
==================================== ===================================
However, this Vesting Schedule shall not apply to the
Basic Contribution Account balance of any PARTICIPANT
who does not have an HOUR OF SERVICE after the PLAN
became top-heavy.
(2) If this Vesting Schedule becomes applicable, then it
shall apply to each PARTICIPANT'S entire Basic
Contribution Account balance under this PLAN. In
addition, such Vesting Schedule shall remain in
effect in all future PLAN YEARS, even those in which
the PLAN is not top-heavy.
(c) Minimum Contribution
(1) For each PLAN YEAR in which the PLAN is top-heavy,
each non-KEY EMPLOYEE who is a PARTICIPANT and who
has not separated from SERVICE at the end of the PLAN
YEAR, including any PARTICIPANT who failed to
complete 1,000 HOURS OF SERVICE, and any who did not
make an Elective Contribution pursuant to Section
4.2.1, shall accrue not less than the minimum
contribution described below.
Art. V 29
<PAGE> 34
(2) The sum of the EMPLOYER'S contributions and any
forfeitures allocated to the INDIVIDUAL ACCOUNTS of
each such PARTICIPANT for each PLAN YEAR in which the
PLAN is top-heavy must equal not less than
(A) at least three percent (3%) of each such
PARTICIPANT'S compensation for that PLAN YEAR;
or
(B) if the highest percentage of compensation
provided on behalf of KEY EMPLOYEES who are
PARTICIPANTS for that PLAN YEAR is less than
three percent (3%), then not less than the same
percentage of such compensation for that PLAN
YEAR for each non-KEY EMPLOYEE PARTICIPANT as
the largest percentage of such compensation
provided on behalf of KEY EMPLOYEE PARTICIPANTS
for that PLAN YEAR.
(3) Any provisions of subsection (2) above to the
contrary notwithstanding, for each PLAN YEAR in which
the EMPLOYER maintains both a defined benefit plan
and a defined contribution plan and both plans are
top-heavy, each non-KEY EMPLOYEE who is a PARTICIPANT
in both such PLANS shall be credited with not less
than a portion of the sum of the EMPLOYER'S contribu-
tions and forfeitures made under the terms of this
PLAN for that PLAN YEAR equal to five percent (5%) of
his compensation.
In determining the minimum contribution or benefit that is
required for non-KEY EMPLOYEES by this Section , Elective
Contributions and matching contributions, if any, that are
allocated to KEY EMPLOYEES shall be taken into account.
However, to the extent that matching contributions made on
behalf of non-KEY EMPLOYEES are taken into account in
meeting the Actual Deferral Percentage Test and/or the
Actual Contribution Percentage Test described in Article V,
such contributions may not additionally be credited as part
of any minimum contribution or benefit required by this
Section . Elective Contributions made on behalf of non- KEY
EMPLOYEES may not be credited as part of any minimum
contribution or benefit required by this Section .
If the EMPLOYER is required to contribute an additional
amount to the PLAN on behalf of a PARTICIPANT as a result of
the operation of this Article, that amount shall be credited
to a Basic Contribution Account established and maintained
on his behalf.
5.3 Actual Deferral Percentage Test
(a) For each PLAN YEAR, the PLAN ADMINISTRATOR shall perform (or
have performed) an Actual Deferral Percentage Test in order
to ensure that the PLAN'S cash or deferred arrangement
satisfies the requirements of CODE sec. 401(k)(3) and does
not impermissibly discriminate in favor of PARTICIPANTS who
are HIGHLY COMPENSATED EMPLOYEES ("HCE'S").
The Actual Deferral Percentage ("ADP") Test shall compare
the ADP of those PARTICIPANTS who are HCE'S with the ADP of
those PARTICIPANTS who are not HCE'S.
Art. V 30
<PAGE> 35
For any group of PARTICIPANTS, the group's ADP equals the
average (expressed as a percentage) of the actual deferral
ratios of that group's PARTICIPANTS, with each PARTICIPANT'S
actual deferral ratio calculated separately.
For any PLAN YEAR, a PARTICIPANT'S actual deferral ratio
consists of the amount of the PARTICIPANT'S Elective
Contribution for the PLAN YEAR (subject to the limitations
of the following paragraph) plus, at the discretion of the
PLAN ADMINISTRATOR, the amount of any QUALIFIED MATCHING
CONTRIBUTIONS ("QMAC'S") and QUALIFIED NONELECTIVE
CONTRIBUTIONS ("QNC'S") that are treated as Elective
Contributions and included in the ADP testing by the PLAN
ADMINISTRATOR, with such sum expressed as a percentage of
his COMPENSATION.
For purposes of this Section 5.3, in any PLAN YEAR, the PLAN
ADMINISTRATOR may elect to use compensation as described in
Section 5.1.1(d) or "compensation" as described in the
definition of HCE in Article II, instead of COMPENSATION,
for every PARTICIPANT. Also, the PLAN ADMINISTRATOR may
elect to limit COMPENSATION (or the applicable alternative)
for every PARTICIPANT to COMPENSATION received while
participating in the PLAN.
However, the PLAN ADMINISTRATOR'S discretion in choosing to
include any QMAC'S or QNC'S is limited to the extent that
such inclusion satisfies the conditions and requirements set
forth in 26 CFR 1.401(k)-1(b)(5).
In determining a PARTICIPANT'S actual deferral ratio, the
PARTICIPANT'S Elective Contributions may be taken into
account only to the extent that they satisfy the following
conditions.
(1) The Elective Contribution must be allocated to an
account maintained on behalf of the PARTICIPANT as of
a day within the plan year being considered. For the
purpose of this provision, an Elective Contribution
shall be considered allocated as of a date within a
plan year only if both:
(A) the allocation is not contingent upon the
PARTICIPANT'S participation in a plan or
performance of service on any date subsequent
to the date of allocation; and
(B) the amount of the Elective Contribution is
actually paid to the plan pursuant to which the
Elective Contribution is made no later than the
end of the twelve-consecutive-month period
immediately following the plan year to which
the contribution relates.
(2) The Elective Contribution relates to COMPENSATION
that either:
(A) would have been received by the PARTICIPANT in
the plan year but for the PARTICIPANT'S
election to defer that COMPENSATION, or
(B) is attributable to service performed by the
PARTICIPANT in the plan year and, but for the
PARTICIPANT'S election to defer, would have
been received by the PARTICIPANT within two and
one-half months after the close of the plan
year.
Art. V 31
<PAGE> 36
In addition, if with reference to a PLAN YEAR the
PARTICIPANT was an HCE and also participated in more than
one cash or deferred arrangement sponsored by the EMPLOYER,
then all such cash or deferred arrangements shall be
aggregated and treated as one arrangement for the purposes
of determining the PARTICIPANT'S actual deferral ratio for
that PLAN YEAR. If these arrangements have different plan
years, these arrangements' plan years that end with or
within the same calendar year shall be aggregated and
treated for ADP purposes as a single arrangement and single
plan year. However, the preceding provisions to the contrary
notwithstanding, contributions and allocations under plans
described by CODE sec. 4975(e)(7) (i.e. "ESOP's") shall not
be aggregated.
(b) For each PLAN YEAR, the ADP for the group of Eligible
PARTICIPANTS who are HCES for that PLAN YEAR shall not
exceed the greater of (1) or (2), where
(1) equals 125% of the ADP for the group of Eligible
PARTICIPANTS who are non-HCES for that PLAN YEAR; and
(2) equals the lesser of (A) and (B), where
(A) equals 200% of the ADP for the group of
Eligible PARTICIPANTS who are non-HCES for that
PLAN YEAR; and
(B) equals the ADP for the group of Eligible
PARTICIPANTS who are non- HCES for that PLAN
YEAR, plus 2 percentage points (or such other
amount as may be prescribed by the Secretary of
the Treasury).
For the purposes of this subsection, "Eligible PARTICIPANTS"
means those PARTICIPANTS who during the PLAN YEAR were
eligible to have elected to defer some portion of their
COMPENSATION for that PLAN YEAR so as to receive an Elective
Contribution, regardless of whether such an election was
actually made.
(c) If for a PLAN YEAR the ADP limits of subsection (b) above
are exceeded, the amount of excess contributions to be
attributed to each HCE shall be determined by the following
leveling method.
The PLAN ADMINISTRATOR shall reduce the amount of Elective
Contributions that are allocated pursuant to the PLAN for
that PLAN YEAR on behalf of the HCE with the highest actual
deferral ratio. This reduction shall be made only to the
extent required to (1) enable the PLAN to meet the ADP
limits, or (2) cause the HCE'S actual deferral ratio to
equal the actual deferral ratio of the HCE with the next
highest actual deferral ratio, whichever occurs first.
This process shall be repeated by the PLAN ADMINISTRATOR
until the ADP test limits of subsection (b) above have been
met.
For each PLAN YEAR, the amount of excess contributions, if
any, for each HCE shall equal the sum of the HCE'S Elective
Contributions, plus any QUALIFIED NONELECTIVE CONTRIBUTIONS
and QUALIFIED MATCHING CONTRIBUTIONS that are treated as
Elective Contributions (determined prior to the application
of this subsection) in determining the HCE'S actual deferral
ratio, minus the product of
Art. V 32
<PAGE> 37
the HCE'S actual deferral ratio (determined after
application of this subsection) multiplied by the HCE'S
COMPENSATION.
(d) After the close of the PLAN YEAR to which the excess
contributions are attributable, but within twelve months
after such PLAN YEAR'S close, the PLAN ADMINISTRATOR shall
designate as such and distribute to each HCE the amount (if
any) of excess contributions (plus any earnings, gains, or
losses described in Section 6.2 attributable to such
contributions) that were made on that HCE'S behalf, minus
the sum of any excess deferrals previously distributed to
the HCE for the HCE'S taxable year ending with or within
that PLAN YEAR.
(e) Any of the provisions of this Section to the contrary
notwithstanding, in determining the actual deferral ratio of
a PARTICIPANT who is an HCE, the family aggregation rules
described in paragraph (4) of the definition in Article II
of Highly Compensated EMPLOYEE shall apply, and the actual
deferral ratio of any such family aggregate shall equal the
actual deferral ratio determined by combining the
contributions received by the PLAN on behalf of and
COMPENSATION paid to all eligible family members.
After the actual deferral ratio of such a family aggregate
has been determined, the amount of excess contributions (if
any) that were allocated on behalf of the family aggregate
shall be determined and corrected according to the
"leveling" method described in subsection (c) above. The
resulting excess contributions shall be reallocated among
those family members whose contributions were combined to
determine the actual deferral ratio of the family aggregate,
with each such member being allocated an amount of excess
contribution in proportion to the contributions of each such
member that have been combined.
(f) For the purposes of satisfying the limits specified in this
Section and in CODE sections 401(a)(4), 410(b), and
401(k), two or more cash or deferred arrange ments
may be aggregated, provided that such aggregation is
consistent with the provisions of IRC Regs.
1.401(k)-1(b)(3) and 1.401(k)-1(g)(1)(ii); for
example, cash or deferred arrangements may be
aggregated pursuant to this subsection only if the
respective plans of which they are part have the same
plan years. All elective contributions that are made
under any plan that are aggregated with this PLAN for
the purposes of CODE sec. 401(a)(4) or sec. 410(b)
(other than sec. 410(b)(2)(A)(ii) are to be treated
as if they were made under a single plan. In
addition, if any plans are permissively aggregated
with this PLAN for the purposes of CODE sec. 401(k),
the aggregated plans must also satisfy CODE secs.
401(a)(4) and 410(b) as though they were a single
plan.
5.4 Average Contribution Percentage Test
(a) For each PLAN YEAR, the PLAN ADMINISTRATOR shall perform (or
have performed) an Average Contribution Percentage Test in
order to ensure that the PLAN'S receipt and allocation of
matching contributions and/or employee contributions, if
any, satisfy the requirements of CODE sec. 401(m) and do not
impermissibly discriminate in favor of PARTICIPANTS who are
HIGHLY COMPENSATED EMPLOYEES ("HCE'S").
Art. V 33
<PAGE> 38
The Average Contribution Percentage ("ACP") Test shall
compare the ACP of those PARTICIPANTS who are HCE'S with the
ACP of those PARTICIPANTS who are not HCE'S.
For any group of PARTICIPANTS, the group's ACP equals the
average (expressed as a percentage) of the actual
contribution ratios of that group's PARTICIPANTS, with each
PARTICIPANT'S actual contribution ratio calculated
separately.
For any PLAN YEAR, a PARTICIPANT'S actual contribution ratio
consists of the sum of the following contributions (if any)
which have been received by the PLAN on the PARTICIPANT'S
behalf for that PLAN YEAR:
(1) "matching" employer contributions (within the meaning
of CODE sec. 401(m)(4)(A));
(2) employee contributions; and
(3) any Elective Contributions and QUALIFIED NONELECTIVE
CONTRIBUTIONS ("QNC'S") that the PLAN ADMINISTRATOR,
in the exercise of his sole discretion, chooses to
take into account for the purposes of ACP testing
(except that the PLAN ADMINISTRATOR'S discretion in
choosing to include any Elective Contributions and
QNC'S is limited to the extent that such inclusion
satisfies the conditions and requirements set forth
in 26 CFR 1.401(m)-1(b)(5));
with such sum expressed as a percentage of the PARTICIPANT'S
COMPENSATION.
For purposes of this Section 5.4, in any PLAN YEAR, the PLAN
ADMINISTRATOR may elect to use compensation as described in
Section 5.1.1(d) or "compensation" as described in the
definition of HCE in Article II instead of COMPENSATION, for
every PARTICIPANT. Also the PLAN ADMINISTRATOR may elect to
limit COMPENSATION (or the applicable alternative) for every
PARTICIPANT to COMPENSATION received while participating in
the PLAN.
In determining a PARTICIPANT'S actual contribution ratio,
matching contributions made on behalf of the PARTICIPANT may
be taken into account only to the extent that they satisfy
the following conditions.
(1) The matching contribution must be allocated to an
account maintained on behalf of the PARTICIPANT as of
a day within the plan year being considered.
(2) The amount of the matching contribution is actually
paid to the plan pursuant to which the matching
contribution is made no later than the end of the
twelve-consecutive-month period immediately following
the plan year to which the contribution relates.
(3) The matching contribution is made on behalf of the
PARTICIPANT on account of the PARTICIPANT'S elective
contributions or employee contributions (if any) for
the plan year to which the matching contribution
relates. Matching contributions that are forfeited
because they relate to excess deferrals, excess
contributions or excess aggregate contributions shall
not be taken into account.
Art. V 34
<PAGE> 39
(b) For each PLAN YEAR, the ACP for the group of Eligible
PARTICIPANTS who are HCES for that PLAN YEAR shall not
exceed the greater of (1) or (2), where
(1) equals 125% of the ACP for the group of Eligible
PARTICIPANTS who are non-HCES for that PLAN YEAR;
and
(2) equals the lesser of (A) and (B), where
(A) equals 200% of the ACP for the group of
Eligible PARTICIPANTS who are
non-HCES for that PLAN YEAR; and
(B) equals the ACP for the group of Eligible
PARTICIPANTS who are non-HCES for that PLAN
YEAR, plus 2 percentage points (or such other
amount as may be prescribed by the Secretary of
the Treasury).
For the purposes of this subsection, "Eligible PARTICIPANTS"
means those PARTICIPANTS who are directly or indirectly
eligible to make an employee contribution or to receive an
allocation of matching contributions (including matching
contributions derived from Forfeitures, if any) under the
terms of this PLAN for the PLAN YEAR being reviewed.
If a PARTICIPANT has "excess deferrals" according to Section
4.2.1(c) or "excess contributions" for the PLAN YEAR
according to Section 5.3, then such excess deferrals and/or
excess contributions shall be calculated and distributed
prior to determining the PARTICIPANT'S excess aggregate
contributions for the PLAN YEAR.
(c) If for a PLAN YEAR the ACP limits of subsection (b) above
are exceeded, the amount of excess aggregate contributions
to be attributed to each HCE shall be determined by the
following leveling method.
The PLAN ADMINISTRATOR shall reduce the employee
contributions and, if necessary, the matching contributions
that had been allocated pursuant to the PLAN YEAR for that
PLAN YEAR on behalf of the HCE with the highest actual
contribution ratio. This reduction shall be made only to the
extent required to (1) enable the PLAN to meet the ACP
limits, or (2) cause the HCES actual contribu tion ratio to
equal the next highest actual contribution ratio, whichever
occurs first.
This process shall be repeated by the PLAN ADMINISTRATOR
until the ACP test limits of subsection (b) above have been
met.
For each PLAN YEAR, the amount of excess aggregate
contributions, if any, for each HCE shall equal the sum of
the HCE'S employee contributions and matching contributions,
if any, plus any QUALIFIED NONELECTIVE CONTRIBUTIONS and
Elective Contributions that are treated as matching
contributions (determined prior to the application of this
subsection) in determining the HCE'S actual contribution
ratio, minus the product of the HCE'S actual contribution
ratio (determined after applica tion of this subsection)
multiplied by the HCE'S COMPENSATION.
Determinations of actual contribution ratios shall be
rounded to the nearest one-hundredth of one percent of the
PARTICIPANT'S COMPENSATION.
Art. V 35
<PAGE> 40
(d) After the close of the PLAN YEAR to which the excess
aggregate contributions are attributable, but within twelve
months after such PLAN YEAR'S close, the PLAN ADMINISTRATOR
shall designate the amount (if any) of the excess aggregate
contributions (plus any earnings, gains, or losses described
in Section 6.2 on such contributions) that are attributable
to amounts received and accumulated under the PLAN on each
HCE'S behalf.
Such excess aggregate contributions shall be forfeited, if
forfeitable. These forfeited amounts shall be reallocated to
PARTICIPANTS who are NHCES for the PLAN YEAR. Each such
PARTICIPANT shall be allocated a portion of the total
forfeited amounts so that such portion, when compared to the
total of the forfeited amounts, shall bear the same direct
proportion that the amount of Basic Matching Contribution
being allocated to the PARTICIPANT pursuant to Section
4.1.1, subsection (a), bears to the entire amount of Basic
Matching Contribution that is allocated to all such NHCE
PARTICIPANTS pursuant to Section 4.1.1(a).
If not forfeitable, the amount of the excess aggregate
contribution and any earnings, gains, or losses shall be
distributed to the HCE on whose behalf the excess aggregate
contribution was received. If such excess aggregate contribu
tions are distributed more than 2 1/2 months after the last
day of the PLAN YEAR in which such excess amounts arose, a
10% excise tax will be imposed on the EMPLOYER with respect
to these amounts.
(e) Any of the provisions of this Section to the contrary
notwithstanding, in determining the actual contribution
ratio of a PARTICIPANT who is an HCE, the family aggregation
rules described in paragraph (4) of the definition in
Article II of HIGHLY COMPENSATED EMPLOYEE shall apply, and
the actual contribution ratio of any such family aggregate
shall equal the actual contribution ratio determined by
combining the contributions received by the PLAN on behalf
of and COMPENSATION paid to all eligible family members.
After the actual contribution ratio of such a family
aggregate has been determined, the amount of excess
aggregate contributions (if any) that were allocated on
behalf of the family aggregate shall be determined and
corrected according to the "leveling" method described in
subsection (c) above. The resulting excess aggregate
contributions shall be reallocated among those family
members whose contributions were combined to determine the
actual contribution ratio of the family aggregate, with each
such member being allocated an amount of excess aggregate
contribution in proportion to the contributions of each such
member that have been combined.
(f) Any provisions of this Section to the contrary
notwithstanding, for the purposes of determining whether
this PLAN satisfies the ACP test, all employee and matching
contributions that are made under any plans that are
aggregated with this PLAN for the purposes of CODE sec.
401(a)(4) and/or 410(b) (other than CODE sec.
410(b)(2)(A)(ii)) shall be aggregated and treated as if made
under a single plan. In addition, if any plans are
permissively aggregated with this PLAN for the purposes of
ACP testing, then the aggregated plans must also satisfy
CODE secs. 401(a)(4) and 410(b) as though they were a single
plan.
Art. V 36
<PAGE> 41
Also, if a PARTICIPANT who is a HIGHLY COMPENSATED EMPLOYEE
also participates in other retirement plans sponsored by the
EMPLOYER to which employer matching contributions (as
defined in CODE sec. 401(m)(4)(A)) or employee contributions
are made, then all such contributions made on the
PARTICIPANT'S behalf shall be aggregated for the purposes of
this Section .
However, plans may be aggregated pursuant to this subsection
(f) only if they have the same plan year.
5.5 Multiple Use of Alternative Limitation
(a) Any provisions of this PLAN to the contrary notwithstanding,
if for any PLAN YEAR a multiple use of the alternative
limitation occurs with respect to two or more cash or
deferred arrangements ("CODA's") and/or plans maintained by
the EMPLOYER, such multiple use shall be corrected by
reducing the actual deferral percentage ("ADP") or actual
contribution percentage ("ACP") of HCE'S who are eligible to
participate in such CODA's and/or plans.
(b) Multiple use of the alternative limitation occurs if the
following conditions are met:
(1) one or more HCE'S are eligible to defer compensation
pursuant to a CODA subject to CODE sec. 401(k) and
sponsored by the EMPLOYER, and also are allocated
contributions pursuant to a plan subject to CODE sec.
401(m) and sponsored by the EMPLOYER; and
(2) the ADP for the group of HCE'S eligible to defer
compensation pursuant to the CODA exceeds 125% of the
ADP for the group of non-HCE'S and the ACP for the
group of HCE'S allocated contributions pursuant to
the PLAN subject to CODE sec. 401(m) exceeds 125% of
the ACP for the group of non-HCE'S; and
(3) the sum of the ADP for the group of HCE'S eligible to
defer compensation pursuant to the CODA and the ACP
for the group of HCE'S allocated contributions
pursuant to the PLAN subject to CODE sec. 401(m)
exceeds the "Aggregate Limit".
The "Aggregate Limit" is the greater of (A) and (B),
where:
(A) equals the sum of:
(i) 125% of the greater of the ADP or the
ACP for the group of non- HCE'S, and
(ii) 2 plus the lesser of the ADP or the
ACP for the group of non- HCE'S,
but not more than 200% of the
lesser of the ADP or the ACP for
the group of non-HCE'S; and
(B) equals the sum of:
(i) 125% of the lesser of the ADP or the ACP
for the group of non- HCE'S, and
Art. V 37
<PAGE> 42
(ii) 2 plus the greater of the ADP or
the ACP for the group of non-
HCE'S, but no more than 200% of the
greater of the ADP or the ACP for
the group of non-HCE'S.
(c) So that there is no multiple use of the alternative
limitation, all HCE'S who were eligible to have deferred
compensation under the CODA and who were also allocated
contributions under an EMPLOYER-sponsored plan subject to
CODE sec. 401(m) testing shall have their ADP reduced in the
manner described in 26 CFR 1.401(k)-1(f)(2).
Art. V 38
<PAGE> 43
ARTICLE VI
ADMINISTRATION OF PLAN ASSETS
6.1.1 The Investment Fund
All funds received by the PLAN pursuant to Article IV, including
amounts deposited with the INSURANCE COMPANY under an annuity or
insurance contract, shall be credited to the trust fund. The trust
fund shall be of a suitable nature to hold the funds and to provide
the benefits payable under this PLAN.
The PLAN ADMINISTRATOR shall create and maintain adequate records to
disclose the interest in the trust fund of each PARTICIPANT or, where
appropriate, his BENEFICIARY. Such records shall be in the form of
INDIVIDUAL ACCOUNTS, and credits and charges shall be made to such
accounts in the manner herein described. These amounts shall be
maintained for accounting purposes only and shall not represent any
segregated or identifiable portion of the trust fund.
All deposits to the trust fund shall be applied for the exclusive
benefit of PARTICIPANTS and their BENEFICIARIES, except for such
reasonable expenses as may be incurred in the establishment or
operation of the PLAN and which are not otherwise paid. Except as
provided in Sections 8.1.3 and 8.5, no amounts in the trust fund, nor
any earnings attribut able thereto, may ever revert to the EMPLOYER
prior to full satisfaction of all liabilities under the PLAN.
6.1.2 EMPLOYEE Directed Investments
Amounts held in the trust fund shall be allocated among a variety of
investment options made available and selected by the TRUSTEES
pursuant to the contract with the INSURANCE COMPANY. Each PARTICIPANT
and BENEFICIARY may direct the allocation of the amounts held in the
trust fund on his behalf among these investment options.
To the extent that the PARTICIPANT or BENEFICIARY does not direct the
investment of such amounts received on his behalf, the remainder will
automatically be allocated to and invested in one of the investment
options available under the INSURANCE COMPANY contract and pursuant
to the TRUSTEES' direction.
Each PARTICIPANT and BENEFICIARY may elect to redirect the investment
of amounts held in the trust fund on his behalf.
Any of the above-specified directives to allocate, re-allocate,
transfer or remove funds from or among the various investment options
shall be effective for the purposes of this PLAN only prospectively
after reasonable notice to the INSURANCE COMPANY and subject to any
restrictions on the amount or timing of transfers to or from
particular investment options, according to the terms of the
INSURANCE COMPANY contract or procedures established and uniformly
applied by the PLAN ADMINISTRATOR.
Art. VI 39
<PAGE> 44
6.2 Account Adjustments
INDIVIDUAL ACCOUNTS shall be valued as of the last day of each
calendar quarter and every other day on which earnings, gains, and
losses are credited. Each Active Account shall be credited with
earnings, gains, and losses according to the terms of its underlying
investments. PLAN expenses described in Section 6.4 shall be
allocated at least once in every calendar quarter to INDIVIDUAL
ACCOUNTS existing on that allocation date. Each INDIVIDUAL ACCOUNT
shall receive an allocation of such expenses in the same proportion
that the balance of the INDIVIDUAL ACCOUNT bears to the sum of the
balances of all INDIVIDUAL ACCOUNTS. The allocation dates shall be
determined according to a uniform, consistent, and nondiscriminatory
procedure approved by the PLAN ADMINISTRATOR.
For purposes of this Section , Active Account means each INDIVIDUAL
ACCOUNT, any Suspense Account, and each other account that can accrue
earnings, gains, and losses, such as an account used for holding
Forfeitures until they can be applied as provided in Article IV.
6.3 Distribution Adjustments
The amount of any distribution from an INDIVIDUAL ACCOUNT maintained
on behalf of a PARTICIPANT pursuant to the terms of this PLAN shall
be charged against that INDIVIDUAL ACCOUNT as of the date such
distribution is made.
6.4 Expenses
For any PLAN YEAR, the EMPLOYER may pay the expenses of operating and
maintaining the PLAN. Such payment shall be in addition to and
independent of any contributions to the PLAN or assets held by the
PLAN.
Absent prompt and timely payment by the EMPLOYER, the expenses of
operating and maintaining the PLAN for the PLAN YEAR shall be
allocated to INDIVIDUAL ACCOUNTS pursuant to Section 6.2, EXCEPT that
any expenses attributable to the single sum benefit payment fee for a
distribution other than at death, TOTAL AND PERMANENT DISABILITY or
RETIREMENT shall be directly charged against that PARTICIPANT'S
INDIVIDUAL ACCOUNTS.
Art. VI 40
<PAGE> 45
ARTICLE VII
DISTRIBUTIONS
7.1 Termination of Employment (Including Disability) Before RETIREMENT
(a) If a PARTICIPANT'S employment as an EMPLOYEE is terminated due
to his TOTAL AND PERMANENT DISABILITY, or due to any other
reason except his death or RETIREMENT, he may elect to receive
his VESTED BENEFIT. To be effective for the purposes of this
PLAN, such an election must be delivered in writing to the
PLAN ADMINISTRATOR before the ANNUITY STARTING DATE that he
has selected. In the election the PARTICIPANT shall specify a
form in which the VESTED BENEFIT is to be distributed from
among the forms described in Section 7.4, and also an ANNUITY
STARTING DATE (see Section 2.2), provided that no distribution
under this Section shall be made or commence before the
PARTICIPANT'S date of termination as an EMPLOYEE, nor later
than the date which would be the PARTICIPANT'S NORMAL
RETIREMENT DATE had he not terminated such employment until
then.
(b) In any event, the PLAN ADMINISTRATOR (or TRUSTEE, as
applicable) shall distribute to the PARTICIPANT his entire
VESTED BENEFIT in a lump sum as soon as adminis tratively
practicable after the time of his termination, provided that
as of the ANNUITY STARTING DATE the PARTICIPANT'S VESTED
BENEFIT has not ever exceeded $3,500 as of the date of any
prior distribution to the PARTICIPANT. If the PARTICIPANT'S
entire VESTED BENEFIT equals zero as of the date his SERVICE
terminates, then the PARTICIPANT shall be deemed to have
received a distribution of his entire VESTED BENEFIT as of
that date of termination.
(c) Any distribution that is made to a PARTICIPANT pursuant to
this Section shall be in lieu of any and all other benefits,
present or contingent, to which the PARTICIPANT may be
entitled under the terms of this PLAN, with the difference
between amount distributed and the sum of all of his
INDIVIDUAL ACCOUNTS' balances becoming a Forfeiture as of the
ANNUITY STARTING DATE, subject to disposition pursuant to
Section 4.1.5.
However, if a distribution is made pursuant to this Section to
a PARTICIPANT whose Vested Percentage is less than 100%, the
PARTICIPANT shall have until the end of a period of five
consecutive BREAK IN SERVICE YEARS, or five years after the
first date as of which the PARTICIPANT is subsequently
reemployed by the EMPLOYER, if earlier, to resume employment
as an EMPLOYEE and repay to the PLAN the amount previously
distributed, whereupon his INDIVIDUAL ACCOUNT balances shall
be restored to the extent of the amounts repaid, plus any
amounts forfeited pursuant to Section 4.1.5, provided that in
any event such balances shall be restored to not less than the
amounts that existed immediately prior to the distribution.
7.2 Death Benefits
(a) If a PARTICIPANT who is credited with a VESTED BENEFIT dies
prior to the ANNUITY STARTING DATE of his VESTED BENEFIT, then
the PLAN shall distribute a death benefit on his behalf.
Art. VII 41
<PAGE> 46
The amount of the death benefit shall be the actuarial
equivalent of his VESTED BENEFIT (after having taken into
account any security interest in his VESTED BENEFIT that the
PLAN has as a result of any currently outstanding loan to
the PARTICIPANT).
(b) Unless the PARTICIPANT elects otherwise as provided in
subsection (d) below, if the PARTICIPANT has a "surviving
spouse" (as such term is defined in this Section below) as
of his date of death, the death benefit shall be payable to
such surviving spouse. If the PARTICIPANT has no surviving
spouse, the death benefit will be paid to the PARTICIPANT'S
designated BENEFICIARY.
If the PARTICIPANT'S VESTED BENEFIT has always had a lump
sum value of $3,500 or less as of the death benefit's
ANNUITY STARTING DATE, then that benefit shall be
distributed in the form of a lump sum, and the ANNUITY
STARTING DATE of that benefit shall be as soon as
administratively practicable (in any event, within one year)
following the PARTICIPANT'S date of death.
(c) "Surviving spouse" means a spouse to whom the PARTICIPANT
was married throughout the one-year period ending on the
earlier of:
(1) the date the PARTICIPANT'S death benefit payments
commence under the terms of this PLAN PROVIDED that
if the PARTICIPANT was married within one year of the
date his benefit payments began and he and his spouse
from such marriage were married for at least a
one-year period ending on the date of the
PARTICIPANT'S death, such PARTICIPANT and such spouse
shall be treated as having been married throughout
the one-year period ending on the date the
PARTICIPANT'S benefit payments began, or
(2) the date of the PARTICIPANT'S death.
(d) (1) Subject to paragraph (2) below, at any time a
PARTICIPANT may elect a specifically designated
non-spouse BENEFICIARY to replace his surviving
spouse as the BENEFICIARY. He may also at any time
revoke such election and make another election. Any
such election or revocation shall be in writing and
shall be effective upon receipt by the PLAN
ADMINISTRATOR.
(2) An election by a PARTICIPANT pursuant to paragraph
(1) shall not take effect unless:
(A) the PARTICIPANT'S spouse, in a writing received
by the PLAN ADMINIS TRATOR and witnessed by the
PLAN ADMINISTRATOR or a notary public,
acknowledges the effect of and consents to the
PARTICIPANT'S election; or
(B) it is established to the PLAN ADMINISTRATOR'S
satisfaction that the spousal consent described
in (A) above cannot be obtained because there
is no spouse, because the spouse cannot be
located, or because of other circumstances
which render obtaining such spousal consent
impossible.
Art. VII 42
<PAGE> 47
(e) The PARTICIPANT'S death benefit shall be distributed to the
surviving spouse or other designated BENEFICIARY in the form
of a lump sum, and the ANNUITY STARTING DATE of that benefit
shall be as soon as administratively practicable (in any
event, within one year) following the PARTICIPANT'S date of
death. However, the person to whom that benefit is to be
distributed, whether the surviving spouse or other
designated BENEFICIARY, may elect to have the death benefit
distributed in any other form of benefit described in
Section 7.4 and not precluded thereby. To be effective for
the purposes of this PLAN, such an election must be in
writing, and must be received by the PLAN ADMINISTRATOR
prior to the death benefit's ANNUITY STARTING DATE. Given
such an election, the ANNUITY STARTING DATE for the death
benefit would then occur within 90 days after receipt of
that election.
In any event, any death benefit payable pursuant to this
Section shall commence or be distributed not later than the
time period described in (1) or (2) below, as appropriate:
(1) if payable to a surviving spouse (or child of the
PARTICIPANT, as provided below), not later than
December 31 of the calendar year in which the
PARTICIPANT would have attained 70 1/2; or
(2) if payable to any other BENEFICIARY, not later than
the first anniversary of the PARTICIPANT'S death;
PROVIDED that, if said spouse or BENEFICIARY cannot be
located within the applicable time period specified above,
the PLAN ADMINISTRATOR may delay commencement or
distribution of payments for a period ending not later than
the first day of the first month beginning after the
sixtieth day following the date on which such spouse or
BENEFICIARY has been identified and located by the PLAN
ADMINISTRATOR and the PLAN ADMINISTRATOR has received any
necessary docu mentation of death.
A death benefit payable to any surviving child of the
PARTICIPANT shall be treated as if payable to the surviving
spouse for purposes of (1) above in this subsection PROVIDED
that such benefit will become payable to the surviving
spouse as of the date such child reaches age 21 or as of
such other time as prescribed by the Secretary of the
Treasury under regulations.
If a surviving spouse is eligible to receive death benefits
under this PLAN, and if that surviving spouse dies prior to
the ANNUITY STARTING DATE of those death benefits, then the
death benefits to which the deceased spouse had been
entitled shall be payable on his or her behalf within such a
time-frame as would be appro priate if the deceased spouse
had been the PARTICIPANT, with the date of death of the
surviving spouse being substituted for the PARTICIPANT'S.
However, the exceptions provided in CODE sec.
401(a)(9)(B)(iv) shall not be available regarding any
surviving spouse of the PARTICIPANT'S surviving spouse.
(f) If a PARTICIPANT dies after his VESTED BENEFIT has been
distributed in the form of a lump sum, there shall be no
benefit payable from the PLAN as a result of his death. If
his VESTED BENEFIT has been distributed in the form of an
annuity, any benefit payable as a result of his death shall
be determined solely under the terms of the annuity that was
distributed, provided that the remaining portion of such
Art. VII 43
<PAGE> 48
benefit, if any, shall be distributed to the beneficiary at
least as rapidly as provided in the terms of said annuity
but in any event consistent with CODE sec.
401(a)(9)(B).
If a PARTICIPANT dies while receiving the Payments from
Account described in Section 7.4 before his entire VESTED
BENEFIT has been distributed, his surviving spouse or
BENEFICIARY may elect in writing to the PLAN ADMINISTRATOR
to receive the previously undistributed portion of such
VESTED BENEFIT in the form of a lump sum; in any event, the
remaining portion of such benefit, if any, shall be
distributed at least as rapidly as under the terms of said
Payments from Account in effect for the PARTICIPANT at
death.
7.3 RETIREMENT
A PARTICIPANT, regardless of his status as an EMPLOYEE, shall have
attained RETIREMENT Age when he has attained age 65, which shall be
his NORMAL RETIREMENT AGE.
A PARTICIPANT who has attained RETIREMENT Age may retire by
designating in writing to the PLAN ADMINISTRATOR a RETIREMENT DATE,
which shall be his RETIREMENT benefit's ANNUITY STARTING DATE, and
which may be the first day of any month after he has attained NORMAL
RETIREMENT AGE, but not later than the latest date permitted by the
provisions of Section 7.5 regarding Commencement of Payments. This
latter date shall be the RETIRE MENT DATE of any PARTICIPANT who has
not, prior thereto, designated a RETIREMENT DATE.
If the date on which the PARTICIPANT attains NORMAL RETIREMENT AGE is
the first day of a month, that date shall be his NORMAL RETIREMENT
DATE. Otherwise, the PARTICIPANT'S NORMAL RETIREMENT DATE shall be
the first day of the first month following his attainment of NORMAL
RETIREMENT AGE.
Upon RETIREMENT, a PARTICIPANT shall commence to receive his VESTED
BENEFIT as provided in Section 7.5.
7.4 Form of RETIREMENT Benefit
(a) Unless an optional form of benefit has been selected
pursuant to subsection (b) below, the RETIREMENT benefit
payable to a PARTICIPANT at the time of his RETIRE MENT
shall be the actuarial value of his VESTED BENEFIT
distributed in the form of a Lump Sum, which is a single
payment in an amount equal to the PARTICIPANT'S VESTED
BENEFIT.
(b) A PARTICIPANT may elect to waive receipt of his RETIREMENT
benefit in the form of a Lump Sum, and instead to receive
his RETIREMENT benefit in one of the following forms.
(1) Annuity for a Period Certain - monthly income payable
for a certain period elected by the PARTICIPANT of
not more than 240 months. If the PARTICIPANT dies
after his RETIREMENT DATE, or if the PARTICIPANT'S
surviving spouse (or other BENEFICIARY designated
according to Section 7.5(b)) dies after commencement
of payments, but before the end of the certain
period, payments will commence or be continued for
the remainder of the certain period to the
PARTICIPANT'S surviving spouse or other BENEFICIARY
(or, if the
Art. VII 44
<PAGE> 49
annuity is distributed pursuant to Section 7.2, to a
BENEFICIARY designated by the PARTICIPANT'S surviving
spouse or BENEFICIARY, as applicable,) PROVIDED,
however, that the certain period elected shall not
extend beyond (1) the life expectancy of the
PARTICIPANT, (2) the life expectancies of the
PARTICIPANT and his surviving spouse or designated
BENEFICIARY, as applicable, (3) if payable pursuant
to Section 7.2, the life expectancy of the surviving
spouse or designated BENEFICIARY, as applicable, or
(4) 60 months, if by operation of Section 8.6 the
PARTICIPANT'S BENEFICIARY is his estate.
However, this optional form may be elected only if
the amount of monthly benefit payable to the
PARTICIPANT would exceed 50% of the amount he would
receive in the form of a straight life annuity.
(2) Partial Distributions - payments in an amount
specified by the PARTICIPANT, except that the amount
of each distribution may not be less than $1,000.
(c) Solely for the purposes of distributing to a PARTICIPANT his
VESTED BENEFIT where such distribution has not occurred
prior to his REQUIRED BEGINNING DATE (see Section 7.5(d)(2)
below), the PARTICIPANT may elect to receive the
distribution to commence as of his REQUIRED BEGINNING DATE
in the form of Payments from Account, rather than in one of
the forms of RETIREMENT benefit payment already provided by
this Article VII.
Payments from Account shall mean periodic payments in an
amount specified by the PARTICIPANT or his surviving spouse
or other BENEFICIARY designated according to Section 7.5(b)
continuing until such time as the PARTICIPANT'S VESTED
BENEFIT (adjusted for subsequent Net Adjustments) is
exhausted, PROVIDED however that the period over which said
payments are to be made shall not extend beyond (1) the life
expectancy of the PARTICIPANT, (2) the life expectancies of
the PARTICIPANT and his surviving spouse or other designated
BENEFICIARY, (3) if payable pursuant to Section 7.2, the
life expectancy of the surviving spouse or other designated
BENEFICIARY, or (4) 60 months, if by operation of Section
8.6 the PARTICIPANT'S BENEFICIARY is his estate.
7.5 RETIREMENT Benefits: Election of Forms and Commencement of Payments
(a) Applicability of this Section
In the case of a PARTICIPANT who will receive a distribution
pursuant to Section 7.1 due to his termination of employment
before his attainment of RETIREMENT Age, the form of the
distribution and the time of commencement of payments will
be as provided in that section. The form and time of
commencement of death benefits payable to BENEFICIARIES
shall be governed according to Section 7.2. The form and
time of commencement of any other benefits payable pursuant
to this PLAN will be determined according to this section
and Section 7.4.
In any event, all distributions required under this Section
shall be determined and made in accordance with the Income
Tax Regulations under CODE sec. 401(a)(9), including the
minimum distribution incidental benefit requirement of sec.
1.401(a)(9)-2 of the regulations.
Art. VII 45
<PAGE> 50
(b) Election
A PARTICIPANT may elect to name a person as BENEFICIARY or
to replace the person currently designated by him or this
PLAN to be his BENEFICIARY. Such an election may be revoked
and replaced with another such election. However, to be
effective for the purposes of this PLAN, any such an
election or revocation must be made in writing and received
by the PLAN ADMINISTRATOR within ninety (90) days before the
PARTICIPANT'S ANNUITY STARTING DATE, and must satisfy the
spousal consent requirements described in subsection (c)
below, and must specifically designate the form in which the
benefits shall be paid. In addition, if the election is to
replace the person currently designated by the PARTICIPANT
pursuant to this PLAN (or if there is no such designation by
the PARTICIPANT, then the person (if any) designated by this
PLAN) to be his BENEFICIARY, then the election must
specifically designate the person who is to become the
BENEFICIARY.
(c) Spousal Consent
An election by a PARTICIPANT to name a BENEFICIARY other
than his spouse or to change his BENEFICIARY shall not have
any effect for the purposes of this PLAN unless:
(1) the PARTICIPANT'S spouse, in a writing received by
the PLAN ADMINISTRATOR, acknowledges the effect of
and consents to the PARTICIPANT'S election within 90
days before the ANNUITY STARTING DATE, and the
writing is witnessed by the PLAN ADMINISTRATOR or a
notary public; or
(2) it can be established to the PLAN ADMINISTRATOR'S
satisfaction that spousal consent cannot be obtained
because there is no spouse, or because the spouse
cannot be located, or because of other circumstances
which render obtaining such spousal consent
impossible.
Any consent by a spouse (or establishment that the consent
of the spouse cannot be obtained) pursuant to this
subsection shall be effective only with respect to such
spouse.
(d) Commencement of Payments
(1) Unless a PARTICIPANT otherwise elects in a writing
received by the PLAN ADMINISTRATOR prior to the
PARTICIPANT'S ANNUITY STARTING DATE, payment of the
PARTICIPANT'S VESTED BENEFIT shall begin not later
than the 60th day after the close of the PLAN YEAR in
which occurs the latest of:
(A) the PARTICIPANT'S attainment of NORMAL
RETIREMENT AGE;
(B) the 10th anniversary of the date on which the
PARTICIPANT commenced participation in this
PLAN; or
(C) the PARTICIPANT'S termination of employment as
an EMPLOYEE,
provided that if the PARTICIPANT has failed to
provide the PLAN ADMINISTRATOR with sufficient
information as to age and marital status or any other
relevant
Art. VII 46
<PAGE> 51
information, so that the amounts of payment may not
be determined, or if the PARTICIPANT cannot be
located, then the PLAN ADMINISTRATOR may delay
commencement of payments for not more than 60 days
after the earliest date on which the amount and form
of payment may be determined under the terms of this
PLAN, or the PARTICIPANT is located. The amount of
payment in the event of such a delay shall be
retroactive to the PARTICIPANT'S RETIREMENT DATE.
Notwithstanding any provisions of this paragraph (1)
to the contrary, the failure of a PARTICIPANT and the
PARTICIPANT'S spouse to consent to the distribution
of a benefit while that benefit is immediately
distributable pursuant to this Section shall be
deemed to be an election to defer commencement of
payment of that benefit.
(2) Any provisions of this PLAN to the contrary
notwithstanding, the entire vested interest of the
PARTICIPANT in benefits under this PLAN:
(A) will be distributed to the PARTICIPANT not
later than the PARTICIPANT'S REQUIRED BEGINNING
DATE, or
(B) will be distributed, beginning not later than
the PARTICIPANT'S REQUIRED BEGINNING DATE, over
the life of the PARTICIPANT or over the lives
of the PARTICIPANT and a designated beneficiary
(or over a period not extending beyond the life
expectancy of the PARTICIPANT or the life
expectancy of the PARTICIPANT and a designated
beneficiary).
For the purpose of determining the amount to be
distributed as of the PARTICIPANT'S REQUIRED
BEGINNING DATE, his VESTED BENEFIT shall be valued as
of December 31 of the calendar year immediately
preceding his REQUIRED BEGINNING DATE.
The PARTICIPANT may elect for these required
distributions to be paid in any of the forms of
benefit described in Section 7.4, subject to any
spousal consent requirements that may apply pursuant
to this PLAN. Absent such an election, these
distributions automatically shall be payable in the
form described in Section 7.4(a).
(3) If a PARTICIPANT'S interest is to be distributed in a
form other than a Lump Sum, the following minimum
distribution rules shall apply on or after the
PARTICIPANT'S REQUIRED BEGINNING DATE.
(A) If the PARTICIPANT'S benefit is to be
distributed over (1) a period not extending
beyond the life expectancy of the
PARTICIPANT or the joint life and last
survivor expectancy of the PARTICIPANT and
the PARTICIPANT'S Beneficiary, or (2) a
period not extending beyond the life
expectancy of the Beneficiary, then the
amount required to be distributed for each
calendar year, beginning with distributions
for the first distribution calendar year,
must at least equal the quotient obtained by
dividing the PARTICIPANT'S benefit by the
applicable life expectancy.
Art. VII 47
<PAGE> 52
(B) For calendar years beginning before January 1,
1989, if the PARTICIPANT'S spouse (if any) is
not the Beneficiary, the method of distribution
selected must assure that at least 50% of the
present value of the amount available for
distribution is paid within the life expectancy
of the PARTICIPANT.
(C) For calendar years beginning after December 31,
1988, the amount to be distributed each year,
beginning with distributions for the first
distribution calendar year, shall not be less
than the quotient obtained by dividing the
PARTICIPANT'S benefit by the lesser of (1) the
applicable life expectancy, or (2) if the
PARTICIPANT'S spouse (if any) is not the
Beneficiary, the applicable divisor determined
from the table set forth in Q&A-4 of section
1.401(a)(9)-2 of the Income Tax Regulations.
Distributions after the death of the
PARTICIPANT shall be distributed using the
applicable life expectancy referenced in
subsection (3)(A) above as the relevant divisor
without regard to Regulations sec.
1.401(a)(9)-2.
(D) The minimum distribution required for the
PARTICIPANT'S first distribution calendar year
must be made on or before the PARTICIPANT'S
REQUIRED BEGINNING DATE. The minimum
distribution for other calendar years,
including the minimum distribution for the
distribution calendar year in which the
PARTICIPANT'S REQUIRED BEGINNING DATE occurs,
must be made on or before December 31 of that
distribution calendar year.
If the PARTICIPANT'S benefit is distributed in the
form of an annuity purchased from an INSURANCE
COMPANY, any such distribution shall be made in
accordance with the requirements of CODE sec.
401(a)(9) and the regulations promulgated
thereunder.
(4) Any additional amounts of VESTED BENEFIT accrued by
the PARTICIPANT after his REQUIRED BEGINNING DATE
shall be distributed annually in the form of a lump
sum consistent with the requirements of CODE sec.
401(a)(9) and applicable regulations.
(5) Once distributions have begun to a 5% owner under
this subsection, they must continue to be distributed
even if the PARTICIPANT ceases to be a 5% owner in a
subsequent year.
(6) For the purposes of this subsection, "applicable life
expectancy" means the life expectancy (or joint and
last survivor expectancy) calculated using the
attained age of the PARTICIPANT (or designated
beneficiary) as of the PARTICIPANT'S (or designated
beneficiary's) birthday in the applicable calendar
year reduced by one for each calendar year which has
elapsed since the date the life expectancy was first
calculated.
If the life expectancy is being recalculated, the
applicable life expectancy shall be the life
expectancy as so recalculated.
Art. VII 48
<PAGE> 53
The applicable calendar year shall be the first
distribution calendar year, and if the life
expectancy is being recalculated, each such
succeeding calendar year.
If annuity payments commence before the REQUIRED
BEGINNING DATE, the applicable calendar year is the
year such payments commence. If the distribution is
in the form of an immediate annuity purchased after
the PARTICIPANT'S death with the PARTICIPANT'S
remaining VESTED BENEFIT, the applicable calendar
year is the year of purchase.
(7) Unless otherwise elected by the PARTICIPANT (or
spouse, as applicable) by the time distributions are
required to begin, life expectancies shall be recal-
culated annually. If such an election has been made
by the PARTICIPANT (or spouse, as applicable), it
shall be irrevocable as to the PARTICIPANT (or
spouse) and shall apply to all subsequent years.
The life expectancy of a nonspouse beneficiary may
not be recalculated.
7.6 Loans to PARTICIPANTS
Each PARTICIPANT and BENEFICIARY may apply to obtain loans from the
PLAN according to the procedures and limits described below.
(a) Any application for a loan may only be made in writing, and
will become effective only upon receipt by the PLAN
ADMINISTRATOR. The principal amount of the loan requested
may not be less than one thousand dollars ($1,000.00).
(b) The PLAN ADMINISTRATOR may choose to grant or deny the
request in a reasonably equivalent and nondiscriminatory
manner, consistent with the requirements of section 401 (and
all other relevant provisions) of the Internal Revenue Code,
as amended. However, under no circumstances shall a loan be
made by this PLAN to any person who is or is deemed to be
(or has as a member of his immediate family) an
"owner-employee" (as defined in CODE 4975(d)) or a
"shareholder-employee" of an S Corporation (as defined in
CODE secs. 4975(d) and 1379(d)).
(c) If the request is granted and an amount is loaned to the
PARTICIPANT or BENEFICIARY (hereinafter "the Borrower"), the
resulting liability of the Borrower for repayment of the
loan to the PLAN shall be accounted through the
establishment of a Segregated Investment Fund into which the
principal amount of the loan shall be entered as of the date
on which the amount of the loan is provided to the Borrower.
Any such loan shall be treated as a directed investment by
the Borrower of PLAN assets separate and apart from the
Investment Fund of the INSURANCE COMPANY or any other assets
of the PLAN. As such, any earnings, gains or losses
attributable to the loan shall be credited only to the
Segregated Investment Fund representing that loan, and shall
in turn be allocated solely to the Borrower's Individual
Accounts.
(d) Each loan shall bear interest at a reasonable fixed rate
established by the PLAN ADMINISTRATOR with reference to the
economic conditions and interest rates being
Art. VII 49
<PAGE> 54
charged by local financial institutions for similar loans
with similar collateral as of the time when the loan request
is being processed. In addition, the PLAN ADMINISTRATOR may
require the Borrower to pay any administrative fees that are
deemed to be necessary to establish or maintain the
Segregated Investment Fund, provided that all such fees or
fee schedules shall be disclosed to the Borrower at the time
the loan is made and again prior to any modification of such
fees or schedules by the PLAN ADMINISTRATOR (which may be
enacted by the PLAN ADMINISTRATOR at any time that the PLAN
ADMINISTRATOR determines that such modification is
appropriate, in the exercise of his or her fiduciary duty),
and further provided that the ability to obtain loans from
the PLAN shall remain available to all Borrowers on a
reasonably equivalent basis.
Loans shall not be made available to HCE'S in an amount
greater than the amount made available to non-HCE'S;
however, maximum loan amounts may vary directly according to
the size of each PARTICIPANT'S vested accrued benefit under
this PLAN.
Each amount received in repayment of the loan shall be
credited to the Borrower's Segregated Investment Fund as of
the day on which it was received by the PLAN ADMINISTRATOR,
after its having first been reduced by any administrative
fees charged by the PLAN ADMINISTRATOR pursuant to the
preceding paragraph.
(e) Each loan shall be evidenced by a negotiable promissory note
signed by the Borrower within 90 days before the loan is
made, and secured by a portion of the Borrower's Vested
Benefit, with such portion equal to the amount that is
loaned to the Borrower at the time of the loan's
origination. The note shall state that in the event of the
Borrower's default on the loan, the Borrower agrees to be
bound by the provisions of this PLAN, and particularly of
this Section.
The PLAN ADMINISTRATOR, in the exercise of his sole
discretion, may require that additional security or
documentation be provided by the Borrower.
(f) Immediately after the origination of any PLAN loan to the
Borrower, the total amount of the outstanding balances of
all loans made to the Borrower from this PLAN may not exceed
the lesser of:
(1) 50% of the present value of the Borrower's vested
interest in amounts held under the PLAN on the
Borrower's behalf (determined immediately after the
loan's origination); or
(2) $50,000, reduced by the excess (if any) of:
(A) the highest outstanding balance of all loans to
the Borrower, under all qualified retirement
plans maintained by the EMPLOYER, during the
one-year period ending on the day before the
date as of which the most recent loan was made,
over
(B) the outstanding balance of all loans to the
Borrower, under all qualified retirement plans
maintained by the EMPLOYER, on the date as of
which the most recent loan was made.
Art. VII 50
<PAGE> 55
For the purposes of this subsection (f), "EMPLOYER" shall be
as defined in Article II, and in addition shall mean any
other employers which when taken together with the
EMPLOYER(S) sponsoring this PLAN are treated as a single
employer under section 414(b), (c) or (m) of the Internal
Revenue Code, as amended.
For the purposes of this subsection (f), simplified employee
pension plans shall not be regarded as qualified retirement
plans.
(g) Each loan shall be subject to substantially level
amortization with payments at least quarterly.
(h) Each loan shall be distributed (if at all) as soon as
reasonably practicable, but in any event not later than 90
days after the date on which the PLAN ADMINISTRATOR receives
the prescribed loan request.
(i) Whenever possible, loans shall be repaid to the PLAN through
periodic payroll deductions from the Borrower's COMPENSATION
(if any).
(j) With the consent of the PLAN ADMINISTRATOR, the Borrower may
at any time prepay an amount against the outstanding balance
of the loan; however, unless the entire outstanding balance
is prepaid, repayment installments must continue to be made
periodically according to the pre-arranged repayment
schedule.
Provided the PLAN ADMINISTRATOR consents, a Borrower may
refinance any loan that he has outstanding from the PLAN.
The procedures and limits applying to refinancing a loan
shall be substantially the same as those prescribed herein
for obtaining a loan.
(k) At any time before it has been completely repaid (including
principal and interest), a loan under this PLAN shall be in
default as of the earlier of:
(1) the day immediately following the date on which any
periodic installment payment required under the
Promissory Note is not received by the holder of the
Note when due;
(2) the date as of which any amount becomes distributable
to a Borrower from the PLAN, including for example
the Borrower's date of RETIREMENT, but only to the
extent that such distribution would result in the
loan balance equaling more than the Borrower's vested
interest in the PLAN'S assets after such
distribution; or
(3) the fifth anniversary of the date on which the amount
of the loan was paid from the PLAN to the Borrower.
(l) If the PLAN ADMINISTRATOR as holder of the Promissory Note
determines that a loan under this PLAN is in default, then
at the option of the PLAN ADMINISTRATOR, the Borrower may be
given a reasonable amount of time (in any event not
exceeding 60 days) to cure the default by repaying all
amounts that have become due as of that date.
Art. VII 51
<PAGE> 56
If the default results from a distribution of excess
elective deferrals (pursuant to CODE sec. 402(g)(2)), excess
contributions (pursuant to CODE sec. 401(k)(8)), or excess
aggregate contributions (pursuant to CODE sec. 401(m)(6)),
if any, then the Borrower may cure the default by repaying
to the PLAN an amount sufficient to reduce the outstanding
balance of the loan to an amount equal to not more than the
Borrower's vested interest in PLAN Assets remaining after
such distribution.
(m) In addition, as of the date of such default, the PLAN shall
immediately stop accepting elective deferrals (if any) on
that Borrower's behalf until such time as the loan is no
longer in default.
(n) If there is security for the loan available in addition to
or instead of the Borrower's vested interest in PLAN assets,
then upon default, the holder of the Promissory Note may
(but is not required to) look to that other security for
liquidation and repayment of the loan.
(o) To the extent that a default of a loan is not cured or is
not repaid through security other than the Borrower's
vested interest in the PLAN'S assets, then the PLAN
ADMINISTRATOR shall reduce the Borrower's vested
interest in the PLAN'S assets. The amount of such
reduction shall equal the outstanding balance of the
loan, including any interest that has accrued as of
that date of determination, except that if the
default has resulted from a distribution of PLAN
assets that has been made to bring the PLAN into
compliance with any of the nondiscrimination limits
and tests of the CODE (as specified e.g. in CODE
secs. 401(k), 401(m), or 415), then the amount of the
reduction shall equal only that amount which is
necessary to cure the default by reducing the
outstanding balance of the loan to an amount equal to
the Borrower's vested interest in the PLAN'S assets
as of that date of determination and after the
distribution has been made.
Any reduction in a Borrower's vested interest in PLAN assets
accomplished pursuant to this paragraph shall immediately
result in a corresponding reduction and offset of the
outstanding balance of the loan as of that date of
determination.
However, under any circumstances, a Borrower's vested
interest in the PLAN'S assets may not be reduced pursuant to
this subsection (o) sooner or to a greater extent than such
amounts become distributable consistent with the provisions
of CODE sec. 401(k), all other relevant CODE sections, and
regulations promulgated thereunder.
(p) In the event that a loan from this PLAN to a Borrower is
treated as a distribution under CODE sec. 72, and/or under
applicable Department of Labor regulations, the Borrower's
obligation to repay the loan shall remain unchanged by such
distribution treatment.
(q) When the Borrower is no longer indebted under the Promissory
Note (e.g. due to the complete repayment of the loan, or due
to recovery of the loan's security upon default), the
Borrower's Segregated Investment Fund shall then be closed.
Art. VII 52
<PAGE> 57
ARTICLE VIII
GENERAL PROVISIONS
8.1.1 PLAN Modification: Authority
The COMPANY reserves the right to amend, modify, or terminate the
PLAN at any time, provided that no amendment or modification shall
act to reduce the balances of the INDIVIDUAL ACCOUNTS of any
PARTICIPANT accrued to the time of such amendment or modification.
8.1.2 PLAN Modification: Merger
No merger, consolidation, or transfer of the assets or liabilities of
this PLAN with or to any other qualified plan shall be undertaken
unless, after such merger, consolidation, or transfer, each
PARTICIPANT would, if the PLAN then terminated, receive a benefit not
less than the benefit he would have received had the PLAN terminated
immediately prior to such merger, consolidation, or transfer.
8.1.3 PLAN Modification: Termination
Upon termination or partial termination of this PLAN, or the complete
discontinuance of contributions by the EMPLOYER (as defined in CODE
secs. 1.401-6(c) and 1.411(d)-2(d)), the rights of each affected
PARTICIPANT to benefits accrued to the date of termination or partial
termination, or the complete cessation of contributions by the
EMPLOYER, shall be fully vested to the extent funded. Distributions
due to termination shall be made in a form provided for in this PLAN
and shall meet any applicable requirements of CODE secs. 401(a)(11),
411, and 417. However, Elective Contributions shall be distributed
because of PLAN termination only if the EMPLOYER does not establish
or maintain a successor plan within the meaning of IRC Reg.
1.401(k)-(l)(d)(3) or because of other events described in IRS Reg.
1.401(k)-(l)(d)(1)(iii), (iv), and (v).
If, after the allocation of the PLAN'S assets pursuant to the PLAN'S
termination, all liabilities of the PLAN have been satisfied in full
and there remain surplus PLAN assets not necessary to satisfy the
liabilities of the PLAN, such surplus shall revert to the EMPLOYER,
consistent with the provisions of the termination amendment of this
PLAN.
8.2.1 Duties: PLAN ADMINISTRATOR
The PLAN ADMINISTRATOR has the discretionary authority to control and
manage the operation and administration of the PLAN, including the
specific duties outlined below. The PLAN ADMINISTRATOR in his sole
discretion shall make such rules, regulations, interpretations, and
computations and shall take such other actions to administer the PLAN
as he may deem appropriate. Such rules, regulations, computations,
and other actions shall be conclusive and binding upon all persons.
Duties of the PLAN ADMINISTRATOR include, but are not limited to,
determination of benefits and eligibility to participate, payment of
funds to the INSURANCE COMPANY or TRUSTEE, authorization of benefit
payments and payment of any expenses incurred in the
Art. VIII 53
<PAGE> 58
administration of the PLAN. The PLAN ADMINISTRATOR may employ such
consultants and advisors as he deems necessary or desirable for
carrying out his duties under the PLAN.
8.2.2 Duties: EMPLOYER
Duties of the EMPLOYER include, but are not limited to, payment of
funds to the INSURANCE COMPANY or TRUSTEE, in addition to payment of
any expenses incurred in the administration of the PLAN. The
EMPLOYER shall indemnify and hold harmless any fiduciary who is an
employee of the EMPLOYER from any and all claims, loss, damages,
expense (including counsel fees), and liability (including amounts
paid in settlement with the EMPLOYER'S written consent) arising from
any act or omission of the fiduciary, except when the same is
judicially determined to be done due to the gross negligence or
willful misconduct of the fiduciary.
8.3 Benefit Claims Procedure
Any PARTICIPANT in this PLAN, or his BENEFICIARY, may make a claim
for benefits due to him under this PLAN by delivering a written
application to the PLAN ADMINISTRATOR. If a claim is wholly or
partially denied, notice of the decision shall be furnished to the
claimant by the PLAN ADMINISTRATOR within 90 days after receipt of
the claim by the PLAN ADMINISTRATOR unless special circumstances
require an extension of time for processing the claim. If an
extension of time is required the PLAN ADMINISTRATOR shall furnish
the claimant with written notice of that fact, including the reason
why an extension is required and an estimated date upon which a final
decision is expected, which shall be not later than 180 days after
the claim was made. In that event, if the claim is denied in whole or
part, written notice of denial shall be given as soon as practicable,
but not later than 180 days after the claim was made.
A notice of denial of a claim shall state:
(a) the specific reason or reasons for the denial;
(b) reference to the specific PLAN provisions upon which the
denial was based; and
(c) a description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why such additional material or information
is required.
If this notice is not furnished within the time provided in this
Section, the claim shall be deemed wholly denied.
8.4 Review Procedure
In the event that a claim is denied under this PLAN, the claimant or
his authorized representative may apply in writing to the PLAN
ADMINISTRATOR within 60 days of receiving notice of the denial or, if
no written notice of denial is received within the 180-day period
prescribed in Section 8.3, within 60 days after the expiration of
said 180 day period, asking that the denial be reviewed. This time
limit may be extended by the PLAN ADMINISTRATOR if an extension
appears to be reasonable in view of the nature of the claim and the
pertinent circumstances. Upon receipt of such application, the PLAN
ADMINISTRATOR shall afford the claimant an opportunity to review
pertinent documents and to
Art. VIII 54
<PAGE> 59
submit issues and comments in writing. A decision on review shall be
rendered by the PLAN ADMINISTRATOR not later than 60 days after the
claimant's application for review unless an extension of time for
processing is required, in which case a decision will be made as soon
as possible, but not later than 120 days after the request for review
was made. If an extension of time is required, the PLAN ADMINISTRATOR
shall give the claimant written notice of that fact before the
extension period begins. A decision on review shall be in writing and
shall include specific reasons for the decision and specific
references to the PLAN provisions on which the decision is based.
If the claimant has not received written decision on review within 60
days after the request for review was received, or within 120 days if
an extension of time was required, the claim will be considered
wholly denied on review.
8.5 Qualification of the PLAN and Conditions of Contributions
This PLAN, together with any insurance or annuity contracts or trust
agreement used in conjunction with it, is intended to meet the
requirements of the Internal Revenue Service for approval as a
tax-exempt plan or trust under Section 401 of the CODE. Any amend
ments which may be necessary to meet these requirements shall be made
retroactive to the date upon which the PLAN failed to meet these
requirements.
This PLAN is adopted with the intent and on the conditions that the
Internal Revenue Service shall by ruling or determination letter
establish that the PLAN is "qualified" within the meaning of Section
401 of the CODE, that any trust which is part of this PLAN at its
adoption is exempt from taxation pursuant to Section 501 of the CODE
and that contributions to the PLAN by the EMPLOYER are deductible
pursuant to Section 404 of the CODE. If any of these conditions are
determined initially by the Internal Revenue Service not to be the
case, all contributions to this PLAN made prior to such determination
by the Internal Revenue Service shall be returned to the person or
persons who made them and the PLAN shall terminate unless the
EMPLOYER amends the PLAN to meet these conditions and such amendment
is determined by the Internal Revenue Service to meet these
conditions, PROVIDED that the application for such determination was
made by the time prescribed by law for filing the EMPLOYER'S return
for the taxable year in which the PLAN was adopted, or such later
date as the Secretary of the Treasury may prescribe.
Contributions to this PLAN are made with the intent and on the
condition that such contributions are deductible under Section 404 of
the CODE. If any contribution by the EMPLOYER is disallowed as a
deduction by the Internal Revenue Service then, to the extent the
deduction is disallowed, the contribution shall be refunded to the
EMPLOYER within one year after the disallowance of the deduction. If
any contribution by the EMPLOYER is made by a mistake of fact, such
contribution shall be refunded to the EMPLOYER within one year after
the payment of the contribution.
If a refund occurs pursuant to this Section, the amount which shall
be returned to the EMPLOYER shall be the excess of the amount which
was contributed over the amount (1) which was deductible, or (2)
which would have been contributed absent the mistake of fact (as the
case may be), without any earnings but net of any losses attributable
to such excess.
8.6 BENEFICIARIES
Art. VIII 55
<PAGE> 60
Any payments due under the PLAN to a PARTICIPANT'S BENEFICIARY shall
be paid according to the BENEFICIARY designation last filed in
writing with the PLAN ADMINISTRATOR by the PARTICIPANT. If no such
designation is made, payments shall be made in the following order of
priority:
(a) to the surviving spouse of the PARTICIPANT;
(b) if no spouse survives the PARTICIPANT, then to the children
of the PARTICIPANT in equal shares, with a share by right of
representation to the then surviving children of any
deceased child; or
(c) if neither a spouse, children nor grandchildren survive the
PARTICIPANT, then to the PARTICIPANT'S estate.
8.7 Spendthrift Clause
(a) General Rule
Subject to the exception specified in subsection (b) below,
benefits payable under this PLAN shall not be subject in any
manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment,
execution, or levy of any kind, either voluntary or
involuntary, including any such liability which is for
alimony or other payments for the support of a spouse or
former spouse, or for any other relative of the EMPLOYEE,
prior to actually being received by the person entitled to
the benefit under the terms of the PLAN except as provided
below, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise
dispose of any right to benefits payable hereunder shall be
void; also, the PLAN shall not in any manner be liable for,
nor subject to, the debts, contracts, liabilities,
engagements or torts of any person entitled to benefits
hereunder.
(b) Exception
The provisions of subsection (a) above to the contrary shall
not withstand a right to a benefit payable under this PLAN
that has been created, assigned or recognized pursuant to a
"qualified domestic relations order", as defined in CODE
sec. 414(p). Administration of the PLAN with respect to
qualified domestic relations orders shall at all times be
consistent with CODE sec. 414, regulations promulgated
thereunder, and any other provisions of state and federal
law that may be applicable. Payment of a benefit to an
alternate payee pursuant to a qualified domestic relations
order may be made prior to the time such payment could be
made to the PARTICIPANT, provided that such payment is
consistent with the provisions of this PLAN in all respects
except for the time of payment.
8.8 OWNER-EMPLOYEES: Other Trades or Businesses
If this PLAN provides contributions or benefits for one or more
OWNER-EMPLOYEES who control both the business for which this PLAN is
established and one or more other trades or businesses, this PLAN and
the plan established for the other trades or businesses must, when
looked at as a single plan, satisfy CODE secs. 401(a) and (d) for the
employees of this and all other trades or businesses.
Art. VIII 56
<PAGE> 61
If the PLAN provides contributions or benefits for one or more
OWNER-EMPLOYEES who control one or more other trades or businesses,
the employees of the other trades or businesses must be included in a
plan which satisfies CODE secs. 401(a) and (d) and which provides
contributions and benefits not less favorable than provided for
OWNER-EMPLOYEES under this PLAN.
8.9 Annuities
Any provisions of this PLAN to the contrary notwithstanding:
(a) any annuity contract distributed from this PLAN shall
contain express provisions sufficient to make such contract
nontransferable; and
(b) the terms of any annuity contract purchased and distributed
by the PLAN to a PARTICIPANT or PARTICIPANT'S spouse shall
comply and be consistent with the requirements of this PLAN.
8.10 Limitations of the EMPLOYER'S Liability
To the extent permitted by law, the liability of the EMPLOYER with
respect to any and all obligations arising from or in any way
connected with this PLAN shall be limited to amounts already
contributed.
8.11 Non-Guarantee of Employment
This PLAN shall not be considered to constitute a contract of
employment and nothing contained in the PLAN shall give any EMPLOYEE
the right to be retained in employment, nor shall anything contained
in the PLAN interfere with the EMPLOYER'S right to discharge or
retire any EMPLOYEE at any time. Participation in the PLAN shall not
give any EMPLOYEE any right or claim in any benefits except as
specifically provided in this PLAN.
8.12 Applicable Law
The provisions of this PLAN shall be governed, construed, and
administered in accordance with federal law, and to the extent that
state law is not preempted by federal law, the law of the state of
California.
Art. VIII 57
<PAGE> 62
ARTICLE IX
DIRECT ROLLOVERS
9.1 General Rule
This Article applies to distributions made on or after January 1,
1993. Notwithstanding any provision of the PLAN to the contrary that
would otherwise limit a distributee's election under this Article a
distributee may elect, at the time and in the manner prescribed by
the PLAN ADMINISTRATOR, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan specified
by the distributee in a direct rollover.
9.2 Definitions
(a) Eligible rollover distribution: An eligible rollover
distribution is any distribution of all or any portion of
the balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the distributee or the
joint lives (or joint life expectancies) of the distributee
and the distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution to
the extent such distribution is required under section
401(a)(9) of the CODE; and the portion of any distribution
that is not includable in gross income (determined without
regard to the exclusion for net unrealized appreciation with
respect to employer securities).
(b) Eligible retirement plan: An eligible retirement plan is an
individual retirement account described in Section 408(a) of
the CODE, an individual retirement annuity described in
Section 408(b) of the CODE, an annuity plan described in
Section 403(a) of the CODE, or a qualified trust described
in Section 401(a) of the CODE, that accepts the
distributee's eligible rollover distribution. However, in
the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an
individual retirement account or individual retirement
annuity.
(c) Distributee: A distributee includes an EMPLOYEE or former
EMPLOYEE. In addition, the EMPLOYEE'S or former EMPLOYEE'S
surviving spouse and the EMPLOYEE'S or former EMPLOYEE'S
spouse or former spouse who is the alternate payee under a
qualified domestic relations order, as defined in Section
414(p) of the CODE, are distributees with regard to the
interest of the spouse or former spouse.
(d) Direct rollover: A direct rollover is a payment by the
PLAN to the eligible retirement plan specified by the
distributee.
Art. IX 58
<PAGE> 63
NATIONAL INSURANCE GROUP
401(k) PLAN
FIRST AMENDMENT
WHEREAS, National Insurance Group, a California corporation ("the Company") has
adopted the National Insurance Group 401 (k) Plan ("the Plan") which became
effective July 1, 1996; and
WHEREAS, the Company has the authority to amend the Plan pursuant to Section
8.1.1 of the Plan; and
WHEREAS, the Company desires to permit Participants to change the amount of
Elective Contributions each quarter;
NOW, THEREFORE, the Plan is hereby amended pursuant to the authority stated in
Section 8.1.1 of the Plan to read as set forth on the attached page, which is
incorporated herein by reference as follows:
ARTICLE IV CONTRIBUTIONS
Section 4.2.1 Elective Contributions: Amount
For illustrative purposes, the new provisions have been underlined, but only for
the purposes of this Amendment; their final form within the Plan shall not
include the underlining.
This Amendment shall be effective July 1, 1996. It is effective with respect to
Employees who terminate employment with the Employer on or after the effective
date of the Amendment so that the rights to benefits from the Plan, if any, of
Employees who terminated employment before that date shall be determined
according to the Plan as it was on the date they terminated employment, except
as may be otherwise specifically provided in this Amendment, and except to the
extent required by law.
This Amendment is adopted on condition that the Internal Revenue Service does
not ever determine, by ruling or determination letter, that this Amendment would
result in the Plan's failure to be "qualified" in the meaning of Section 401 (a)
of the Internal Revenue Code of 1986, as amended, and exempt from taxation under
Section 501 (a) of the Code. If the Internal Revenue Service does determine that
this Amendment would disqualify the Plan and it appears that no modification to
it which would be satisfactory to the Employer would also be acceptable to the
Service, then the Amendment shall be void and of no effect.
ADOPTED this 15th day of October 1996.
NATIONAL INSURANCE GROUP,
a California corporation
By: /s/ Robert P. Barbarowicz
------------------------------
Robert P. Barbarowicz
------------------------------
Print or TYPE NAME
Title: Executive Vice President
------------------------------
<PAGE> 64
otherwise paid to the EMPLOYER. In addition, each Elective Contribution
shall be paid to the PLAN by the EMPLOYER no later than the last day of
the twelve-month period immediately following the PLAN YEAR with
respect to which the contribution is made.
(b) Election
A PARTICIPANT may elect to change the amount of his elective deferrals,
and therefore the amount of the Elective Contributions made on his
behalf, within the limits prescribed in subsection (a) above. A
PARTICIPANT may also elect to cease his elective deferrals and Elective
Contributions altogether, or, having done so, may elect to recommence
them.
A PARTICIPANT'S election to commence, recommence or to change the
amount of his elective deferrals may become effective only as of the
first day of any prospective calendar quarter.
A PARTICIPANT'S election to cease his elective deferrals altogether may
become effective only as of the first day of any prospective payroll
period.
Any of the provisions of this subparagraph (b) to the contrary
notwithstanding, any election described by this subparagraph (b)
regarding elective deferrals may become effective only after written
notice delivered to the PLAN ADMINISTRATOR within a reasonable time
prior to the effective date of the election.
(c) Limit on Amount
The total sum of any PARTICIPANT'S elective deferrals for any taxable
year of the PARTICIPANT may not exceed the limit prescribed by IRC Reg.
1.402(g)-l(c). (Generally, for taxable years beginning in 1996, that
limit equals $9,500, except for adjustments made to take into account
elective deferrals made to annuity contracts under CODE sec. 403(b)).
For the purposes of this subsection (c), "elective deferrals" has the
meaning defined in IRC Reg. 1.402(g)-l (b), including (but not limited
to) Elective Contributions received by this PLAN on the PARTICIPANT'S
behalf.
For any PARTICIPANT, if this limit on elective deferrals is exceeded,
then the following corrective measures are permitted.
(1) The PARTICIPANT may notify the PLAN ADMINISTRATOR of the
excess deferral, and may request that the PLAN ADMINISTRATOR
distribute to the PARTICIPANT an amount not exceeding the
lesser of:
(A) the amount of the excess deferral, plus all income
allocable to the excess deferral;
<PAGE> 65
PARTICIPATION AGREEMENT
For Participation by Controlled Group Members
By executing this Participation Agreement, Pinnacle Data Corporation
("Participating Employer"), elects to become a participating employer in the
National Insurance Group 401 (k) Plan (the "Plan"), as if the Participating
Employer were a signatory to that Plan. The Participating Employer accepts, and
agrees to be bound by, all of the provisions of the Plan as made by National
Insurance Group, a California corporation, the signatory Employer to the
Execution Page of the Plan.
1. The Effective Date of the Participating Employer's
participation in the designated Plan is July 1, 1996.
2. The Participating Employer's adoption of this Plan constitutes
the adoption of a new plan by the Participating Employer.
Dated this 8th day of November 1996.
Participating Employer: Pinnacle Data Corporation
By: /s/ Gerry Gauer
-------------------------------
Title: Senior Vice President
- Operations
-------------------------------
Acceptance by the signatory Employer to the Execution Page of the Plan on this
8th day of November, 1996
Signatory Employer: National Insurance Group
By: /s/ Robert P. Barbarowicz
------------------------------
Title: Executive Vice President
------------------------------
<PAGE> 66
PARTICIPATION AGREEMENT
For Participation by Controlled Group Members
By executing this Participation Agreement, Great Pacific Insurance
Company ("Participating Employer"), elects to become a participating employer in
the National Insurance Group 401 (k) Plan (the "Plan"), as if the Participating
Employer were a signatory to that Plan. The Participating Employer accepts, and
agrees to be bound by, all of the provisions of the Plan as made by National
Insurance Group, a California corporation, the signatory Employer to the
Execution Page of the Plan.
1. The Effective Date of the Participating Employer's
participation in the designated Plan is July 1, 1996.
2. The Participating Employer's adoption of this Plan constitutes
the adoption of a new plan by the Participating Employer.
Dated this 8th day of November 1996.
Participating Employer: Great Pacific Insurance Company
By: /s/ R.J. Lelieur
-------------------------------
Title: Vice President
-------------------------------
Acceptance by the signatory Employer to the Execution Page of the Plan on this
8th day of November , 1996
Signatory Employer: National Insurance Group
By: /s/ Robert P. Barbarowicz
------------------------------
Title: Executive Vice President
------------------------------
<PAGE> 67
PARTICIPATION AGREEMENT
For Participation by Controlled Group Members
By executing this Participation Agreement, Fastrac Systems, Inc.
("Participating Employer"), elects to become a participating employer in the
National Insurance Group 401 (k) Plan (the "Plan"), as if the Participating
Employer were a signatory to that Plan. The Participating Employer accepts, and
agrees to be bound by, all of the provisions of the Plan as made by National
Insurance Group, a California corporation, the signatory Employer to the
Execution Page of the Plan.
1. The Effective Date of the Participating Employer's
participation in the designated Plan is July 1, 1996.
2. The Participating Employer's adoption of this Plan constitutes
the adoption of a new plan by the Participating Employer.
Dated this 8th day of November 1996.
Participating Employer: Fastrac Systems, Inc.
By: /s/ R. J. Lelieur
-------------------------------
Title: Vice President
-------------------------------
Acceptance by the signatory Employer to the Execution Page of the Plan on this
8th day of November , 1996
Signatory Employer: National Insurance Group
By: /s/ Robert P. Barbarowicz
------------------------------
Title: Executive Vice President
------------------------------
<PAGE> 68
PARTICIPATION AGREEMENT
For Participation by Controlled Group Members
By executing this Participation Agreement, Fastrac Systems, Inc.
Insurance Agent & Broker ("Participating Employer"), elects to become a
participating employer in the National Insurance Group 401 (k) Plan (the
"Plan"), as if the Participating Employer were a signatory to that Plan. The
Participating Employer accepts, and agrees to be bound by, all of the provisions
of the Plan as made by National Insurance Group, a California corporation, the
signatory Employer to the Execution Page of the Plan.
1. The Effective Date of the Participating Employer's
participation in the designated Plan is July 1, 1996.
2. The Participating Employer's adoption of this Plan constitutes
the adoption of a new plan by the Participating Employer.
Dated this 8th day of November 1996.
Participating Employer: Fastrac Systems, Inc.
Insurance Agent & Broker
By: /s/ R. J. Lelieur
-------------------------------
Title: Vice President
-------------------------------
Acceptance by the signatory Employer to the Execution Page of the Plan on this
8th day of November , 1996
Signatory Employer: National Insurance Group
By: /s/ Robert P. Barbarowicz
------------------------------
Title: Executive Vice President
------------------------------
<PAGE> 1
EXHIBIT 11.1
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
AND EARNINGS PER SHARE
for the year ended December 31, 1994, 1995 and 1996
There are no differences between primary and fully diluted earnings per share.
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares......................... 4,678,729 4,679,697 3,885,740
Common shares issuable under outstanding stock
options.............................................. -- -- 31,686
--------- --------- ---------
Total....................................... 4,678,729 4,679,697 3,917,426
========= ========= =========
Net income (loss) (in thousands)....................... $ (1,084) $ (4,864) $ 1,274
Per share results:
Net income (loss)........................... $ (0.23) $ (1.04) $ 0.33
</TABLE>
Please refer to Note 13 of the Consolidated Financial Statements for a
description of the method used to calculate earnings per share.
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose name and
individual signature appears below constitutes and appoints Robert P.
Barbarowicz and Gregory S. Saunders (each of them with full power of
substitution and with full power to act without the other), his true and lawful
attorneys-in-fact and agents, with the power of substitution and resubstitution,
for the undersigned, in such person's name, place and stead, in any and all
capacities, to sign an Annual Report for the fiscal year ended December 31, 1996
on Form 10-K, and any all subsequent amendments thereto, and to file such Annual
Report on Form 10-K, with any amendments thereto, so signed with all exhibits
thereto and any other and all documents in connection therewith, with the
Securities and Exchange Commission, hereby granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and to perform any
and all acts and things requisite and necessary to be done in and about the
premises, as fully, to all intents and purposes, as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Mark A. Speizer Chairman of the Board March 25, 1997
- -------------------------- and Chief Executive
Mark A. Speizer Officer and Director
(Principal Executive
Officer)
/s/ Bruce A. Cole President and Director March 25, 1997
- --------------------------
Bruce A. Cole
/s/ Gregory S. Saunders Executive Vice President, March 25,1997
- -------------------------- Treasurer and Chief
Gregory S. Saunders Financial Officer
(Principal Financial
Officer)
</TABLE>
1
<PAGE> 2
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------ ----- ----
<S> <C> <C>
/s/ Robert J. Lelieur Vice President and March 25,1997
- ------------------------ Controller (Principal
Robert J. Lelieur Accounting Officer)
/s/ Nuno Brandolini Director March 25,1997
- -----------------------
d'Adda
- -----------------------
Nuno Brandolini d'Adda
/s/ Saul B. Jodel Director March 25,1997
- -----------------------
Saul B. Jodel
/s/ Kevin R. McCarthy Director March 25,1997
- -----------------------
Kevin R. McCarthy
</TABLE>
2
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000815555
<NAME> NATIONAL INSURANCE GROUP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 13,171
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,051
<MORTGAGE> 36
<REAL-ESTATE> 0
<TOTAL-INVEST> 32,573
<CASH> 1,204
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,187
<TOTAL-ASSETS> 47,112
<POLICY-LOSSES> 2,198
<UNEARNED-PREMIUMS> 4,753
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,333
0
0
<COMMON> 17,592
<OTHER-SE> 10,960
<TOTAL-LIABILITY-AND-EQUITY> 47,112
13,585
<INVESTMENT-INCOME> 1,975
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 25,123
<BENEFITS> 4,002
<UNDERWRITING-AMORTIZATION> 6,296
<UNDERWRITING-OTHER> 28,827
<INCOME-PRETAX> 1,558
<INCOME-TAX> 284
<INCOME-CONTINUING> 1,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,274
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<RESERVE-OPEN> 3,055
<PROVISION-CURRENT> 3,970
<PROVISION-PRIOR> 32
<PAYMENTS-CURRENT> 2,318
<PAYMENTS-PRIOR> 2,541
<RESERVE-CLOSE> 2,198
<CUMULATIVE-DEFICIENCY> 32
</TABLE>
