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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: MARCH 31, 1998 Commission file number: 0-16332
NATIONAL INSURANCE GROUP
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3031790
(State of Incorporation) (IRS Employer Identification No.)
395 OYSTER POINT BOULEVARD, SUITE 500
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(Address of principal executive office) (Zip Code)
(650) 872-6772
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes XX No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 4,102,882 shares as
of May 6, 1998.
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NATIONAL INSURANCE GROUP
TABLE OF CONTENTS TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1 - Financial Statements:
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 1
Consolidated Statements of Earnings for the three months
ended March 31, 1998 and 1997 2
Consolidated Statements of Shareholders' Equity
for three months ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997. 4
Notes to Consolidated Financial Statements 5-6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 13
Item 2 - Changes in Securities 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
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NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 1998 and December 31, 1997
(in thousands of dollars, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ----------
(unaudited)
<S> <C> <C>
ASSETS:
Fixed maturities $ 14,735 $ 15,359
Equity securities 5,143 4,200
Short-term investments 6,291 9,290
--------- ----------
Total investments 26,169 28,849
-------- --------
Cash 285 1,113
Net Premiums and
accounts receivable 10,242 8,990
Accrued interest receivable 418 499
Property and equipment, net 6,063 5,424
Deferred acquisition costs 2,409 2,704
Deferred federal income taxes 3,209 3,117
Intangible assets 13,058 13,178
Other assets 1,504 2,918
--------- ---------
Total assets $ 63,357 $ 66,742
========= =========
LIABILITIES:
Reserve for losses and LAE $ 3,480 $ 3,232
Unearned premiums 5,529 6,217
Commissions payable 890 837
Accrued expenses and other
liabilities 4,603 6,125
Drafts payable 813 832
Notes payable 9,351 9,601
Reserve for return premiums 2,656 4,399
Deferred revenue 8,026 7,719
----------- ----------
Total liabilities $ 35,348 $ 38,962
---------- ---------
SHAREHOLDERS' EQUITY:
Common Stock, no par value;
authorized, 15,000,000 shares;
issued and outstanding 4,042,882
in 1998 and 4,032,882 in 1997 18,705 18,610
Retained earnings 9,304 9,170
---------- ---------
Total shareholders' equity $ 28,009 $ 27,780
---------- ---------
Total liabilities and
shareholders' equity $ 63,357 $ 66,742
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31, 1998 and 1997
(in thousands of dollars, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
First Quarter
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net premiums written $ 4,247 $ 4,647
Change in unearned premiums 688 (470)
----------- -----------
Net premiums earned 4,935 4,177
Real estate information services 8,502 4,306
Tracking fees 2,043 1,760
Net commission income 69 217
Net investment income 430 454
----------- -----------
TOTAL REVENUES 15,979 10,914
----------- -----------
Personnel expenses 7,024 4,951
Loss and LAE incurred 1,973 1,213
Commissions
to non-affiliates 864 415
All other expenses 5,236 3,156
----------- -----------
TOTAL EXPENSES 15,097 9,735
----------- -----------
Income before provision
for income taxes 882 1,179
Provision for income taxes 294 377
----------- -----------
NET INCOME $ 588 $ 802
=========== ===========
Weighted average common and
common equivalent shares
outstanding-Basic 4,033,882 3,896,937
=========== ===========
Diluted 4,179,883 3,970,316
=========== ===========
Per share results:
Net income per share-Basic $ 0.15 $ 0.21
=========== ===========
Diluted $ 0.14 $ 0.20
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 1998 and 1997
(in thousands of dollars, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
Total
Common Stock Share-
------------------------ Retained holders'
Shares Amount Earnings Equity
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at
Dec. 31, 1996 3,896,937 $ 17,592 $ 10,960 $ 28,552
Net Income -- -- 802 802
Unrealized gain, net
of deferred tax -- -- 1 1
--------- --------- --------- ---------
Balance at
March 31, 1997 3,896,937 $ 17,592 $ 11,763 $ 29,355
========= ========= ========= =========
Balance at
Dec. 31, 1997 4,032,882 $ 18,610 $ 9,170 $ 27,780
Net income -- -- 588 588
Options exercised 10,000 95 -- 95
Dividends paid -- -- (443) (443)
Unrealized loss
net of deferred tax -- -- (11) (11)
--------- --------- --------- ---------
Balance at
March 31, 1998 4,042,882 $ 18,705 $ 9,304 $ 28,009
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1998 and 1997
(in thousands of dollars, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 588 $ 802
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 502 291
Change in assets and liabilities:
(Increase) decrease in net premiums and accounts
receivable and accrued interest receivable (1,220) 1,054
(Increase) decrease in deferred acquisition costs 295 (216)
Increase (decrease) in insurance liabilities (2,202) 1,130
Decrease in tax assets 1,871 393
Other, net (1,733) (1,777)
------- -------
Net cash provided (used) by operating activities (1,899) 1,677
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (4,131) (1,594)
Maturity of investments 6,793 652
Purchase of equipment (993) (413)
------- -------
Net cash provided (used) by investing activities 1,669 (1,355)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable (250) (250)
Stock options exercised 95 --
Dividends to shareholders (443) --
------- -------
Net cash (used) by financing activities (598) (250)
------- -------
Net increase (decrease) in cash (828) 72
Cash at beginning of period 1,113 3,183
------- -------
Cash at end of period $ 285 $ 3,255
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Information
In the opinion of management, the financial information for National
Insurance Group ("National" and, together with its subsidiaries, the "Company")
contained in this Report reflects all adjustments (consisting only of normal
recurring adjustments) which are necessary to a fair presentation of financial
position and results of operations for the interim periods. The results for the
three month period ended March 31, 1998 and March 31, 1997 are not necessarily
indicative of the results to be expected in the future.
2. Acquisition
In September 1997, two wholly-owned subsidiaries of National acquired
substantially all of the assets and assumed certain liabilities of American
Realty Tax Services, Inc., a Virginia corporation, and American Realty Tax
Services of New York, Inc., a Virginia corporation. As a result of this
acquisition, National performs real estate tax services through its wholly-owned
subsidiaries, Pinnacle Real Estate Tax Services, Inc., a Delaware corporation,
and Pinnacle Real Estate Tax Services of New York, Inc., a Delaware corporation
(collectively, "PinTax"). Please refer to "Notes to Consolidated Financial
Statements" in the Company's annual report on Form 10-K for the year ended
December 31, 1997 for details regarding this transaction. The financial results
for the first quarter of 1998 reflect the operating results of PinTax, but the
results for the comparable period of 1997 do not.
3. Dividend
On February 8, 1998 the Company's Board of Directors declared a dividend
of $0.11 per share, which was paid on February 25, 1998 to shareholders of
record on February 19, 1998. The aggregate amount of the dividend payment was
approximately $443,617.
4. Comprehensive income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The Company's comprehensive
income for the three month period ended March 31, 1998 and March 31, 1997
includes unrealized losses net of deferred tax of $11,000 and unrealized gains
net of deferred tax of $1,000, respectively.
5. Segment reporting
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available
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and utilized by the chief operating decision maker. Specific information to be
reported for individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be provided.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
The Company does not believe that SFAS No. 131 will have a material impact on
its financial statements.
6. Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has not yet determined the
impact, if any, of adopting SOP 98-1, which will be effective for the Company's
year ending December 31, 1999.
7. Subsequent events
On May 1, 1998, the Company's Board of Directors declared a dividend of
$0.04 per share. The dividend is payable on May 29, 1998 to shareholders of
record on May 18, 1998.
These quarterly interim financial statements are unaudited.
THIS SPACE LEFT BLANK INTENTIONALLY.
6
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ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the interim
financial statements and the notes thereto, which are set forth elsewhere in
this Report.
In addition to historical information, this Report contains forward-looking
statements. Such statements include, but are not limited to, forward-looking
statements made in this Report which are identified by the words "believe",
"expects", "aware", "anticipates" or similar expressions as they relate to
National Insurance Group ("National" and, together with its subsidiaries, the
"Company") or its management. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in this Report under the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results." These forward-looking statements reflect management's
opinions as of the date of this Report. Undue reliance should not be placed on
such forward looking statements. The Company undertakes no obligation to revise
or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
FIRST QUARTER OF 1998 COMPARED WITH FIRST QUARTER OF 1997
The dollar amounts referred to in this section comparing operating results
for the three months ended March 31, 1997 with March 31, 1998 are approximate
amounts stated in millions unless otherwise indicated. These figures are based
upon the financial statements included elsewhere in this Report, which amounts
are stated in thousands, unless otherwise noted. All percentages referred to in
this section comparing operating results for the three months ended March 31,
1997 with March 31, 1998 are approximate percentages and are based only on
dollar amounts set forth in the financial statements contained elsewhere in this
Report, which amounts are stated in thousands, unless otherwise noted.
Revenue
Total revenue of the Company for the first quarter increased from $10.9
million in 1997 to $16.0 million in 1998, an increase of $5.1 million, or 46.4%.
Net premiums written by National's wholly owned subsidiary, Great Pacific
Insurance Company ("GPIC"), for the first quarter decreased from $4.6 million in
1997 to $4.2 million in 1998, a decrease of $0.4 million, or 8.6%. The decrease
in net premiums written was primarily due to the loss in the third and fourth
quarters of 1997 of two mortgage tracking customers.
Net premiums earned for the first quarter increased from $4.2 million in
1997 to $4.9 million in 1998, an increase of $758,000, or 18.1%. Premium revenue
is generally earned ratably over a twelve month period and is affected by net
premiums written over the prior twelve months and the change in unearned
premiums during the current reporting period. Although net premiums written
decreased for the three months ended March 31, 1998 as previously described,
this was more than offset by the change in unearned premiums for the three
months ended March 31, 1998, which decreased by $688,000,
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compared to an increase of $470,000 for the same period of 1997. The reduction
in unearned premiums was a result of a reduction in net premiums written in the
first quarter of 1998 from the previous three quarters.
Real estate information services revenues for the first quarter increased
from $4.3 million in 1997 to $8.5 million in 1998, an increase of $4.2 million,
or 97.4%. Approximately half of this increase is a result of higher volume of
flood zone inquires, which was aided by an increase in the number of mortgage
loan financings and refinancings in the first quarter of 1998. The other half of
the increase was a result of the September 1997 acquisition of certain assets
and assumption of certain liabilities of American Realty Tax Services, Inc. and
American Realty Tax Services of New York, Inc. (the "Arts Acquisition"). As a
result of the Arts Acquisition, National, through its wholly-owned subsidiaries,
Pinnacle Real Estate Tax Services, Inc. and Pinnacle Real Estate Tax Services of
New York, Inc. (collectively, "PinTax"), derives revenues from performing real
estate tax services for certain customers.
Tracking fees for the first quarter increased from $1.8 million in 1997 to
$2.0 million in 1998, an increase of $283,000, or 16.1%. The increase was a
result of higher motor vehicle tracking volumes from existing and new customers.
Expenses
Personnel expenses in the first quarter increased from $4.9 million in 1997
to $7.0 million in 1998, an increase of $2.1 million, or 41.9%. The increase in
personnel expenses was primarily due to the Arts Acquisition. Personnel expenses
as a percent of total revenue was approximately the same at 45.4% in 1997 as
compared to 44.0% in 1998.
Loss and loss adjustment expenses (LAE) incurred for the first quarter
increased from $1.2 million (29.0% of net premiums earned) in 1997 to $2.0
million (40.0% of net premiums earned) in 1998, an increase of $760,000, or
62.7%. The average loss and loss adjustment expense per new claim reported in
the first quarter of 1997 was approximately $6,800, compared to $6,500 for the
same period in 1998. The number of losses increased from 176 in 1997 to 302 in
1998.
Commissions to non-affiliates, which includes the change in commissions
capitalized in connection with the writing, or acquisition, of insurance
policies ("Deferred Acquisition Costs"), increased in the first quarter from
$415,000 (9.9% of net premiums earned) in 1997 to $864,000 (17.5% of net
premiums earned) in 1998, an increase of $449,000, or 108.2%. The increase was
primarily a result of a reduction in Deferred Acquisition Costs. The net change
in Deferred Acquisition Costs is a function of the amount of insurance premiums
being written by the Company versus the rate at which the Company's in-place
insurance premiums are being earned, or "run-off". Accordingly, the change in
Deferred Acquisition Costs is calculated as a percentage of the change in
unearned premium. During the first quarter of 1998, the amount of new net
premiums written by the Company declined relative to recent quarters, reducing
the Company's balance of unearned premium and deferred acquisition costs.
All other expenses in the first quarter increased from $3.2 million in 1997
to $5.2 million in 1998, an increase of $2.0 million or 65.9%. For the first
quarter of 1997, this expense category included a $300,000 credit in connection
with the full recovery of a note previously written-off in the fourth quarter of
1996. Notwithstanding this item, the increase in all other expenses was
primarily a result of additional expenses of PinTax, including goodwill
amortization and interest expense. PinTax was formed in September 1997 to effect
the ARTS Acquisition.
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As a result of the above factors, income before provision for income taxes
for the first quarter decreased from $1.2 million in 1997 to $882,000 in 1998, a
decrease of $297,000. Net income for the first quarter of 1998 was $588,000, or
$ 0.14 per diluted share compared with $802,000, or $0.20 per diluted share in
1997. The weighted average number of shares outstanding on a diluted basis for
the first quarter of 1998 and 1997 was 4,179,883 and 3,970,316, respectively.
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 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 and lines of credit to meet its
liquidity requirements, including debt service obligations. Dividends payable to
National by GPIC are subject to certain regulatory restrictions described below.
The Company's primary sources of cash are from operating income and lines of
credit. In the first quarter of 1998, the Company derived a substantial portion
of its operating cash from the operating profits of Pinnacle Data Corporation
("Pinnacle Data"), as well as the net premiums written from GPIC. The Company
believes that its cash flow from operations, existing cash balances and lines of
credit will be sufficient to meet its working capital needs for the foreseeable
future.
GPIC 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 March 31, 1998, the Company had cash and short-term investments
aggregating $6.6 million compared to $10.4 million at December 31, 1997.
Of the Company's cash and short-term investments as of March 31, 1998, $6.4
million is held by GPIC compared to $8.7 million at December 31, 1997. Insurance
companies, including GPIC, 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 GPIC may pay National 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, 1997, GPIC had net income of $1.6
million and as of December 31, 1997, statutory policyholders' surplus of $25.6
million. For the year ended December 31, 1997, the maximum dividend permitted to
be paid by GPIC to National was approximately $2.6 million. In May 1998, GPIC
made a dividend payment to National in the amount of $2.5 million.
Industry and regulatory guidelines suggest that a property and casualty
insurers' annual statutory net written premium should not exceed approximately
three times its policyholder's surplus. GPIC's surplus ratio is significantly
lower than such guidelines. For the year ended December 31, 1997, GPIC's net
written premium to policyholder surplus ratio was .8 to 1. Management believes
that, as of March 31, 1998, this ratio has not materially changed.
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Consolidated stockholders' equity at March 31, 1998, totaled $28.0 million,
or $6.70 per diluted share compared to $27.8 million, or $7.00 per diluted
share, at December 31, 1997.
Inflation or deflation and other factors generally affect 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.
FACTORS AFFECTING FUTURE FINANCIAL CONDITION AND OPERATING RESULTS
Significant Customers
In 1997, Advanta Mortgage Corp. accounted for 11.8% of consolidated revenues
of the Company. During the second half of 1997 the Company received notice that
Advanta Mortgage Corp. and one other customer would not renew their hazard
tracking, outsourcing and lender-placed insurance contracts. Such customers
accounted for 7.3% of consolidated revenues in 1995, 11.2% in 1996 and 18.8% in
1997. Management believes that the decrease in revenue due to the loss of these
customers may be delayed and offset, in part, by changes in certain reserves
potentially arising from the customers' departures, and additional business from
new and existing customers. The decrease in revenue will also be delayed by the
rate at which the unearned premium for such customers is earned over the year
1998. The Company is presently unable to estimate the amount of such offsets,
which are dependent upon numerous factors, including, without limitation, the
general health of the mortgage banking and vehicle financing industries and of
the Company's customers, interest rates, general economic conditions, the
realization of expected new business from new and existing customers and other
factors. The loss of such customers may affect adversely the results of
operations and earnings of the Company during 1998.
Additional Expenses
The Company anticipates that it may incur certain costs in 1998 in
connection with various new business activities, including building its customer
base, reorganizing operations and carrying on its product quality improvement
programs. The overall goal of these activities is to enhance the long term value
of the Company and to serve the needs of the Company's customers. The Company
has begun to hire additional personnel, purchase new computer and other
equipment, lease additional office space and incur other expenses in connection
with these business activities. There can be no assurance that such costs will
be offset by increases in revenue; and, in any event, the Company expects that
any increase in revenue will lag the periods in which expenses are incurred.
Furthermore, there can be no assurances that the hiring of additional personnel
or the reorganizing of operations will lead to higher profitability. If such
increases in expenses are not fully offset by increases in revenue, the
Company's financial position and results of operations and earnings could be
materially adversely affected.
Earnings Volatility
The Company's financial results can be significantly affected by a number of
factors, including, but not limited to, the amount of net written premium and
the rate of cancellation of insurance policies, the addition or loss of
customers, a change in government regulations, the introduction of new products
or enhanced services or delivery systems by the Company's competitors, changes
in the number of loans or personal property leases being tracked for customers,
increases or decreases in interest rates, and catastrophic loss events. For
example, in 1992 GPIC incurred net losses relating to the Los Angeles riots and
Hurricane Andrew of $612,000 and $527,000, respectively. In November 1993, GPIC
received claims of approximately $650,000 from policyholders for losses arising
out of the October and November
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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 property and casualty losses in California, relating
to losses from those fires. In addition, revenues from the Company's Flood Zone
Determination Services and Real Estate Tax Services are directly related to the
volume of mortgage loan originations, both new and refinanced, and any change in
the level of such activity, which is affected by changes in interest rates,
could have a material impact on the Company's financial performance. The number
of loans or leases for which the Company provides Tracking and Outsourcing
Services may increase or decrease depending upon, among other things, the number
of new loans or leases serviced by its customers and the volume of loans or
leases paid off or sold to others
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, GPIC
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 GPIC 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
GPIC 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 GPIC
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 GPIC. Any significant changes in GPIC's estimate of ultimate
losses on reported claims may materially adversely affect the results of GPIC's
operations in the period reported. GPIC has in the past experienced adverse
developments in its loss reserves. GPIC's loss and loss adjustment expense
reserves are reviewed on an annual basis by unaffiliated actuaries. GPIC's most
recent actuarial review of such reserves as of December 31, 1997 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 GPIC under the terms of its policies and agreements.
GPIC also maintains a reserve for return premiums which is based upon GPIC's
historical experience. As is prevalent in the lender-placed insurance industry,
a substantial amount of GPIC'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 GPIC uses as a
basis for recording written premiums, or the loss of customers. No assurance can
be given that the reserve for return premiums will be adequate to cover actual
refunded premiums paid by GPIC in the future. See the Company's annual report on
Form 10-K, "Business - Insurance Operations".
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Underwriting Risks
Traditional insurance companies underwrite risks individually or by class,
following an in-depth analysis of such risks. Although GPIC applies underwriting
techniques to a small portion of insured risks, the immediate coverage required
by purchasers of lender-placed insurance and REO Insurance generally requires
GPIC to write specialized insurance within predesignated limits and geographic
areas, at a flat rate, without the application of traditional underwriting
criteria to individual risks. Accordingly, GPIC may be insuring individual risks
that it might not have insured had it applied traditional analysis to such
risks. In addition, GPIC may not have adequate spread of risk in a particular
geographic area. See the Company's annual report on Form 10-K, "Business -
Insurance Operations - Underwriting".
Reinsurance Considerations
GPIC's business is partially dependent upon its ability to cede to
reinsurers risks insured by GPIC. The amount, availability and cost of
reinsurance are subject to prevailing market conditions, beyond the control of
GPIC, which can affect GPIC's level of business and profitability. GPIC is
ultimately liable for the reinsured risk if for any reason the reinsurers do not
cover or will not pay GPIC for the losses of the insureds. As a result of the
anticipated increased cost and more limited availability of reinsurance, in the
future, GPIC may elect to retain a higher portion of the risk historically ceded
to reinsurers. If GPIC were to retain a higher proportion of insured risks, it
would increase its exposure to significant losses relating to properties insured
by GPIC. This increased exposure could have a material adverse effect on the
Company's results of operations. See the Company's annual report on Form 10-K,
"Business Regulation - Reinsurance".
Errors and Omissions
National's wholly owned subsidiary, Pinnacle Data, 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. PinTax indemnifies its customers for real estate late-payment
penalties, interest on late-paid taxes and loss of tax payment discounts as a
result of certain errors or omissions made by PinTax. In addition, two other
subsidiaries of National, Pinnacle Management Solutions Insurance Services and
Fastrac Systems, Inc., indemnify customers for certain errors and omissions made
by either of them. The Company maintains insurance coverage in the maximum
aggregate amount of $5 million for certain types of errors and omissions. The
policy coverage is provided on a claims made basis. While to date the Company
has experienced no significant losses related to errors or omissions and
maintains reserves equal to its self insured retention for errors and omissions
losses, there can be no assurance such reserves will prove adequate in the
future or that the Company's insurance will avert adverse impacts as a result of
any errors or omissions.
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 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.
12
<PAGE> 15
Shortage of Skilled Labor
The Company's delivery and upgrade of products and services to its customers
is dependent upon, among other factors, the Company's ability to attract and
retain key analytical and management professionals, including skilled computer
programmers and systems analysts. Businesses located in San Francisco, San
Mateo, Contra Costa and Santa Clara counties of California are experiencing a
tightening of the local labor market for these professionals, which may result
in one or more of the following: an increase in personnel costs, a delay in
service installations and a reduction in customer service. The Company is unable
to predict when the conditions in the local labor market will change.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II OTHER INFORMATION
ITEM 1. 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 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit 10.1 Credit Terms and Conditions dated September 10, 1996,
by and between National Insurance Group and Imperial Bank.
Exhibit 10.2 Note dated September 10, 1996, made by National
Insurance Group payable to Imperial Bank in the original
principal amount of $2,000,000.
Exhibit 10.3 Pledge Agreement dated September 10, 1996 by and
between National Insurance Group and Imperial Bank.
Exhibit 11.1 Computation of weighted average shares outstanding and
earnings per share.
Exhibit 27.1 Financial data schedule.
13
<PAGE> 16
(b) Reports on Form 8-K
None.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
NATIONAL INSURANCE GROUP
(REGISTRANT)
BY: /s/ MARK A. SPEIZER
--------------------------------------
DATE: MAY 8, 1998 (SIGNATURE)
Mark A. Speizer, Chairman
of the Board and Chief
Executive Officer
BY: /s/ GREGORY S. SAUNDERS
--------------------------------------
DATE: MAY 8, 1998 (SIGNATURE)
Gregory S. Saunders,
Executive Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
14
<PAGE> 17
EXHIBIT INDEX
Exhibit
Number
-------
10.1 Credit Terms and Conditions dated September 10, 1996,
by and between National Insurance Group and Imperial Bank.
10.2 Note dated September 10, 1996, made by National
Insurance Group payable to Imperial Bank in the original
principal amount of $2,000,000.
10.3 Pledge Agreement dated September 10, 1996 by and
between National Insurance Group and Imperial Bank.
11.1 Computation of weighted average shares outstanding and
earnings per share.
27.1 Financial data schedule.
<PAGE> 1
EXHIBIT 10.1
[IMPERIAL BANK LETTERHEAD]
Subject: Credit Terms and Conditions ("Agreement")
Gentlemen:
To induce you to make loans to the undersigned (herein called "Borrower"), and
in consideration of any loan or loans you, in your sole discretion, may make to
Borrower, Borrower warrants and agrees as follows:
A. Borrower represents and warrants that:
1. Existence and Rights. Company is a California Corporation.
Borrower is duly organized and existing and in good standing under the laws of
the State of California (without limit as to the duration of its existence) and
is authorized and in good standing to do business in the State of California;
Company has powers and adequate authority, rights and franchises to own its
property and to carry on its business as now conducted, and is duly qualified
and in good standing in each State in which the character of the properties
owned by it therein or the conduct of its business makes such qualification
necessary; and Borrower has the power and adequate authority to make and carry
out this Agreement. Borrower has no investment in any other business entity,
except;
Great Pacific Insurance Company
Pinnacle Data Corporation
Fastrac Systems, Inc. Insurance Agent and Broker, and Fastrac Systems, Inc.
2. AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or
approval of any governmental body or other regulatory authority; are
not in contravention of or in conflict with any law or regulation or
any term or provision of Borrower's articles of incorporation,
by-laws, or Articles of Association, as the case may be, and this
Agreement is the valid, binding and legally enforceable obligation of
Borrower in accordance with its terms.
3. NO CONFLICT. The execution, delivery and performance of this Agreement
are not in contravention of or in conflict with any agreement,
indenture or undertaking to which Borrower is a party or by which it
or any of its property may be bound or affected, and do not cause any
lien, charge or other encumbrance to be created or imposed upon any
such property by reason thereof.
4. LITIGATION. To the knowledge of Borrower (I) there is no litigation or
other legal proceedings pending or threatened against Borrower, which
individually or in the aggregate would have a material adverse effect
on the financial condition, operations, or business of Borrower; and
(ii) Borrower is not in default with respect to any order, writ,
injunction, decree or demand of any court or other governmental or
regulatory authority, where such default would have a material adverse
effect to the financial condition, operations or business of Borrower.
5. FINANCIAL CONDITION. The balance sheet of Borrower as of 6/30/95, and
the related profit and loss statement for the six months ended on that
date, copy of which has heretofore been delivered to you by Borrower,
and all other statements and data submitted in writing by Borrower to
you in connection with this request for credit are true and correct,
and said balance sheet and profit and loss statement fairly present
the financial condition of Borrower as of the date thereof and the
results of the operations of Borrower for the period covered thereby,
and have been prepared in accordance with generally accepted
accounting principles on a basis consistently maintained. Since such
date there have been no materially adverse changes in the financial
condition or business of Borrower. Except for the undertaking to
repurchase approximately 700,000 shares of common stock of Borrower
either in the open market or in privately negotiated transactions,
Borrower has no knowledge of any material liabilities, contingent or
otherwise, at such date not reflected in said balance sheet in any
case where such liabilities are required to be so set forth in
accordance with generally accepted accounting principles, consistently
applied.
6. TITLE TO ASSETS. Borrower has good title to its assets.
7. TAX STATUS. Borrower has no liability for any delinquent state, local
or federal taxes, not subject to dispute by Borrower and for which
reasonable reserves have been established and, if Borrower has
contracted with any government agency, Borrower has no liability for
renegotiation of profits.
<PAGE> 2
8. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known
conflict with the valid trademarks, trade names, copyrights, patents and
license rights of others.
9. REGULATION U. The collateral for this loan is not margin stock within the
definition of Regulation U of the Board Governors of the Federal Reserve
system.
B. Borrower agrees that so long as it is indebted to you, it will, unless you
shall otherwise consent in writing:
1. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business;
maintain its properties, equipment and facilities in good order and
repair, conduct its business in an orderly manner without voluntary
interruption and, if a corporation or partnership, maintain and
preserve kind its existence.
2. INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property
against fire and other hazards with responsible insurance carriers to
the extent usually maintained by similar businesses.
3. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes,
assessments and governmental charges upon or against it or any of its
properties, and all its other liabilities at any time existing,
except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially
adverse effect upon its financial condition or the loss of any
right of redemption from any sale thereunder; and
(b) It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice)
deemed adequate with respect thereto.
4. NET WORTH. Maintain a tangible net worth (meaning the excess of all
assets, excluding any value for good will, trademarks, patents,
copyrights, leaseholds, organization expense and other similar
intangible items, over its liabilities) of not less than $26,000,000.
5. PROFITABILITY. Borrower to be profitable for the third and fourth
quarters of the 1996 fiscal year, thereafter, on a fiscal year basis
and shall not have losses for any two consecutive quarters.
6. CASH FLOW COVERAGE. Commencing with fiscal year 1997, the sum of
Borrower's net profit plus period depreciation divided by the current
portion of long term debt and capitalized leases shall not be less
than 1.5 times.
7. RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting
principles on a basis consistently maintained; permit your
representatives to have access to, and to examine its properties,
books and records at all reasonable times; and furnish you:
(a) As soon as available, and in any event within 45 days after the
close of each quarter of each fiscal year of Borrower,
commencing with the quarter next ending, a balance sheet, profit
and loss statement and reconciliation of Borrower's capital
accounts as of the close of such period and covering operations
for the portion of Borrower's fiscal year ending on the last day
of such period, all in reasonable detail and stating in
comparative form the figures for the corresponding date and
period in the previous fiscal year, prepared in accordance with
generally accepted accounting principles on a basis consistently
maintained by Borrower and certified by an appropriate officer
of Borrower, subject, however, to year-end audit adjustments.
(b) As soon as available, and in any event within 120 days after the
close of each fiscal year of Borrower, a report of audit of
Company as of the close of and for such fiscal year, all in
reasonable detail and stating in comparative form the figures as
of the close of and for the previous fiscal year, with the
unqualified opinion of accountants satisfactory to you, or no
third party opinion required.
(c) Within 90 days after the end of each fiscal year of Borrower, a
certificate of chief financial officer of Borrower, stating that
to the actual knowledge of such officer, Borrower has performed
and observed all material covenants on its part required to be
performed by it except where the failure to so perform or
observe would have a material adverse effect on the financial
condition, operations or business of Borrower,
(d) Promptly after the receipt thereof by Borrower shall send to its
stockholders, if any, and copies of all reports which Borrower
may file with the Securities and Exchange Commission or any
governmental authority at any time substituted therefor, and
(e) Such other information relating to the affairs of Borrower as
you reasonably may request from time to time.
(f) Notice of Default. Promptly notify the Bank in writing of the
occurrence of any event of default hereunder or any event which
upon notice and lapse of time would be an event of default.
C. Borrower agrees that so long as it indebted to you, it will
not, without your written consent:
1. TYPE OF BUSINESS; MANAGEMENT; EXECUTIVES' COMPENSATION.
Make any substantial change in its business or operations
or make any change in incumbency of Mark A. Speizer as
chairman and Chief Executive Officer of Borrower or of
Bruce A. Cole as President of Borrower.
2. DIVIDENDS, STOCK PAYMENTS. If a corporation, declare or pay
any dividend (other than dividends payable in common stock
of Borrower) or make any other distribution on any of its
capital stock now outstanding or hereafter issued or
purchase, redeem or retire any of such stock; except,
however, 100% of net after tax earnings for such dividend
period excluding the retirement or redemption of the
approximately 700,000 shares of Common Stock of Borrower
being repurchased and Borrower may pay cash dividends to its
shareholders so long as no default shall have occurred
hereunder and remained uncured.
<PAGE> 3
D. The occurrence of any one of the following events of default shall, at your
option, terminate your commitment to lend and make all sums of principal and
interest then remaining unpaid on all Borrower's indebtedness to you
immediately due and payable, all without demand, presentment or notice, all
of which are hereby expressly waived:
1. FAILURE TO PAY NOTE. Failure to pay any installment of principal or of
interest on any indebtedness of Borrower to you within 10 days of the date
when due.
2. BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Agreement binding upon Borrower, which failure continues
and is not cured within thirty days after written notice from Bank to
Borrower.
3. BREACH OF WARRANTY. Any of Borrower's representations or warranties made
herein or any statement or certificate at any time given in writing pursuant
hereto or in connection herewith shall be false or misleading in any material
respect.
4. INSOLVENCY, RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit
its inability to pay its debts as they mature; or make an assignment for the
benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
5. JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of attachment, or
similar process shall be entered or filed against Borrower or any of its
assets, which judgment, writ or warrant of attachment or similar process will
have a material adverse effect on the financial condition, operations and
business of Borrower and which remains unvacated, unbonded, or unstayed for a
period of 30 days or in any event later than five days prior to the day of
any proposed sale or execution under such judgment, writ, warrant of
attachment or similar process.
6. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.
E. Miscellaneous Provisions
1. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of your
Bank or any holder of Notes issued hereunder, in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege.
All rights and remedies existing under this agreement of any note issued in
connection with a loan that your Bank may make hereunder, are cumulative to,
and not exclusive of, any rights or remedies otherwise available.
2. NOTICES. All notices, demands, requests or other communications that may be
or are required to be given, served, or sent by any party to any other party
pursuant to this agreement shall be in writing and shall be mailed by
first-class registered or certified mail, return receipt requested, postage
prepaid, or transmitted by hand delivery, with signature required by
recipient, addressed as follows:
Notices to Borrower:
Bruce A. Cole, President
National Insurance Group
355 Oyster Point Boulevard, Suite 500
South San Francisco, California 94080-1933
With a copy (which shall
not constitute notice) to:
Robert P. Barbarowicz
Executive Vice President and General Counsel
355 Oyster Point Boulevard, Suite 500
South San Francisco, California 94080-1933
Notices to Bank:
Joseph J. McCarthy, Vice President
Imperial Bank
456 Montgomery Street, 6th Floor
San Francisco, California 94104
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or
sent. Each notice, demand, request or communication that is mailed shall be
deemed sufficiently given, served, sent, and received for all purposes at
such time as it is delivered to the addressees (with the return receipt,
the delivery receipt, the affidavit of messenger being conclusive evidence
of such delivery) or at such time as delivery refused by the addressees
upon presentation.
<TABLE>
<CAPTION>
<S> <C>
Agreed to and Accepted: Agreed to and Accepted
National Insurance Group Imperial Bank
By: /s/ ROBERT P. BARBAROWICZ Date 9/10/96 By: /s/ JOSEPH J. McCarthy Date: 9/10/96
------------------------- ------- ---------------------- -------
(Signature and Title) (Signature and Title)
Robert P. Barbarowicz
Executive Vice President
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By /S/ R.J. LELIEUR Date 9/10/96 By Date
------------------------------------- ------------------ ------------------------------------- ------------------
(Signature and Title)
Vice President & Treasurer
</TABLE>
<PAGE> 1
EXHIBIT 10.2
[IMPERIAL BANK LOGO]
NOTE
$2,000,000.00 San Francisco, California September 10, 1996
On December 6, 1998, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its San Francisco Regional Office, the principal sum
of $2,000,000.00 or such sums up to the maximum if so stated, as the Bank may
now or hereafter advance to or for the benefit of the undersigned in accordance
with the terms hereof, together with interest from date of disbursement or N/A,
whichever is later, on the unpaid principal balance [ ] at the rate of %
per year [X] at the rate of 1.000% per year in excess of the rate of interest
which Bank has announced as its prime lending rate (the "Prime Rate"), which
shall vary concurrently with any change in such Prime Rate, or $250.00,
whichever is greater. Interest shall be computed at the above rate on the basis
of the actual number of days during which the principal balance is outstanding,
divided by 360, which shall, for interest computation purposes, be considered
one year.
Interest shall be payable [X] monthly [ ] quarterly
[ ] included with principal [X] in addition to principal [ ]
beginning October 10, 1996, and if not so paid shall become a part of the
principal. All payments shall be applied first to interest, and the remainder,
if any, on principal. [X] (If checked), Principal shall be payable in
installments of $ *, or more, each installment on the 10th day of each month,
beginning January 10, 1997. Advances not to exceed any unpaid balance owing at
any one time equal to the maximum amount specified above, may be made at the
option of Bank.
Any partial prepayment shall be applied to the installments, if any in
inverse order of maturity. Should default be made in the payment of principal
or interest when due, or in the performance or observance, when due in
accordance with the terms of the Credit Terms and Conditions between Bank and
the undersigned, of any item, covenant or condition of any deed of trust,
security agreement or other agreement (including amendments or extensions
thereof) securing or pertaining to this note, at the option of the holder
hereof and without notice or demand, the entire balance of principal and
accrued interest then remaining unpaid shall (a) become immediately due and
payable, and (b) thereafter bear interest, until paid in full, at the increased
rate of 5% per year in excess of the rate provided for above, as it may vary
from time to time.
Defaults shall include, but not be limited to, the failure of the
maker(s) to pay principal or interest when due, in accordance with the terms of
the Credit Terms and Conditions between the Bank and the undersigned, or if any
event should occur under the terms of the Credit Terms and Conditions.
[X] If any installment payment or principal balance payment due hereunder is
delinquent ten or more days, Obligor agrees to pay a late charge in the amount
of 5% of the payment so due and unpaid, in addition to the payment; but nothing
in this paragraph is to be construed as any obligation on the part of the
holder of this note to accept payment of any installment past due or less than
the total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all costs
and expenses of collection and reasonable attorney's fees incurred by the
holder hereof on account of such collection, plus interest at the rate
applicable to principal, whether or not suit is filed hereon. Each Obligor
shall be jointly and severally liable hereon and consents to renewals,
replacements and extensions of time for payment hereof, before, at, or after
maturity; consents to the acceptance, release or substitution of security for
this note; and waives demand and protest and the right to assert any statute of
limitations. Any married person who signs this note agrees that recourse may be
had against separate property for any obligations hereunder. The indebtedness
evidenced hereby shall be payable in lawful money of the United States. In any
action brought under or arising out of this note, each Obligor, including
successor(s) or assign(s) hereby consents to the application of California law,
to the jurisdiction of any competent court within the State of California, and
to service of process by any means authorized by California law.
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect
to any of the security. Any delay or omission on the part of the holder hereof
in exercising any right hereunder, or under any deed of trust, security
agreement or other agreement, shall not operate as a waiver of such right, or
of any other right, under this note or any deed of trust, security agreement or
other agreement in connection herewith.
* See Addendum attached.
NATIONAL INSURANCE GROUP
------------------------------------------
BY /s/ ROBERT P. BARBAROWICZ
---------------------------------------
Robert P. Barbarowicz, E.V.P. General
Counsel & Secretary
BY /s/ ROBERT J. LELIEUR
---------------------------------------
Robert J. Lelieur, V.P. Treasurer &
Controller
<PAGE> 2
ADDENDUM TO NOTE
Disbursements under the Note shall be available through December 10, 1996.
On said date, the outstanding balance of the disbursements under the Note shall
be converted to an amortizing loan payable in 24 equal monthly payments of
principal plus accrued interest, commencing January 10, 1997.
All principal and accrued but unpaid interest shall in any event be due and
payable on December 10, 1998.
NATIONAL INSURANCE GROUP
by: /s/ ROBERT P. BARBAROWICZ
-----------------------------------
Robert P. Barbarowicz, E.V.P.
General Counsel & Secretary
by: /s/ ROBERT J. LELIEUR
-----------------------------------
Robert J. Lelieur, V.P. Treasurer
& Controller
<PAGE> 1
EXHIBIT 10.3
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT ("AGREEMENT") is made as of the 10th day of September,
1996, by and between National Insurance Group, a California Corporation
("Pledgor"), and Imperial Bank ("Secured Party").
INTRODUCTORY STATEMENT
A. Secured Party and Pledgor have entered into those certain credit terms and
conditions of even, date herewith (the "Loan Agreement").
B. To induce Secured Party to enter into the Loan Agreement, Pledgor has agreed
to grant to Secured Party, and to create in favor of Secured Party, a security
interest in certain property of Pledgor, as hereinafter provided, as security
for Pledgor's payment and performance of its obligations to Secured Party under
the Loan Agreement.
Accordingly, the parties hereto hereby agree as follows:
ARTICLE I
COLLATERAL
Section 1.1 Grant of Security Interest in Collateral. In order to secure the due
and punctual payment and performance of Pledgor's obligations under the Loan
Agreement and this Agreement (The "Obligations"), Pledgor hereby pledges to
Secured Party, and grants to Secured Party a security interest in, all of
Pledgor's right, title and interest in, to and under the following property.
(a) all of Pledgor's right, title and interest in and to 1000 shares of
capital stock of Pinnacle Data Corporation, evidenced by certificate No. 201
(the "Pledged Collateral"), and all distributions or payments of any type,
whether in cash or kind, on account of or otherwise related thereto, and any
securities or other equity interests therein as a result of a merger,
reorganization, or any other activity; and
(b) All proceeds and products of the foregoing.
The interest in property described in paragraphs (a) and (b) of this Section 1.1
are sometimes referred to herein collectively as the "Collateral."
<PAGE> 2
ARTICLE 2
PLEDGOR'S GENERAL
REPRESENTATIONS, WARRANTIES AND COVENANTS
Pledgor represents and warrants, and covenants and agrees that it will
do the following:
Section 2.1 Title. Pledgor has and will at all times have and maintain
good title to all Collateral free of all security interests, liens and
encumbrances. The liens and security interests granted hereunder will be
perfected on or prior to the date hereof by delivery of the certificates
representing the Pledged Collateral to Secured Party each certificates
evidencing any of the Pledged Collateral pledged hereunder by Pledgor is issued
in the name of Pledgor and has attached an appropriate instrument of transfer
duly signed in blank by Pledgor.
Section 2.2 Preservation of Rights. Pledgor shall at its expense protect
and defend its rights in the Collateral as described in Section 2.1, and the
security interests of Secured Party therein and thereto, against the claims and
demands of third parties.
Section 2.3 No Consent. No authorization, approval or other action by,
and no notice to or filing with, any governmental authority or regulatory body
or other person is required for the pledge by Pledgor of the Collateral pursuant
to this Agreement or for the execution, delivery or performance of this
Agreement by Pledgor. The making and performance of this Agreement are within
Pledgor's corporate power and authority and have been duly authorized by all
necessary action of Pledgor.
Section 2.4 Perfection or Liens. Pledgor has caused and shall cause to
be taken all actions as may be required by any present or future law in order
fully to protect and perfect the liens and security interests of Secured Party
hereof upon, and the rights and interests of Secured Party in, the Collateral.
The security interest created hereby represents a first priority lien on and
security interest in the Collateral.
Section 2.5 Other Assurances. Pledgor upon request shall take such
actions and deliver such documents as may be reasonably requested by Secured
Party.
Section 2.6 Release of Collateral. Pledgor shall not sell, transfer,
pledge or otherwise dispose of any of the Collateral or any interest therein, or
attempt or contract to do so.
<PAGE> 3
ARTICLE 3
PARTICULAR PROVISIONS RESPECTING COLLATERAL
(a) Provided no Event of Default shall have occurred and be continuing,
Pledgor shall be entitled, from time to time, to collect, receive and retain for
its own use all distributions and other payments of any type or nature made upon
or with respect to the Collateral (collectively, the "Pledged Collateral
Payments"). Secured Party shall have the right to collect, receive and retain as
Collateral all Pledged Collateral Payments made after the occurrence and during
the continuation of an Event of Default, and Pledgor shall take all such action
as may be reasonably necessary or appropriate to give effect to such right.
(b) Provided no Event of Default shall have occurred and be continuing,
Pledgor shall have the right, and, after the occurrence and during the
continuation of an Event of Default and following notice from Secured Party to
Pledgor, Secured Party shall have the right, from time to time, to (I) exercise
any and all voting power with respect to the Pledged Collateral, and (ii) give
all consents, ratifications, approvals and waivers with respect to the Pledged
Collateral and to exercise any options or rights with respect thereto.
Section 3.3 Secured Party's Appointment as Attorney-in Fact.
(a) Subject to Section 3.3 (b), Pledgor hereby irrevocably constitutes
and appoints Secured Party and any officer of Secured Party and any agent
designated by such officer, with full power of substitution, as its true and
lawful attorney-in-fact with full irrevocable except as set forth in Section 3.3
(b) power and authority in the place and stead of Pledgor and in the name of
Pledgor, or in its own name, from time to time in Secured Party's reasonable
discretion, for the purpose of carrying out the terms of this Agreement, to take
any and all appropriate action and to execute and deliver any and all documents
and instruments which may be reasonably necessary or desirable to accomplish the
purposes of this Agreement.
(b) Secured Party agrees that, except after the occurrence and during
the continuation of an Event or Default and the acceleration of the Obligations,
it will forebear from exercising the power of attorney or any rights granted to
Secured Party pursuant to this Section 3.3 The power of attorney granted
pursuant to this Section 313. is a power coupled with an interest and shall be
irrevocable until the Obligations are paid in full or otherwise satisfied in
full.
<PAGE> 4
ARTICLE 4
DEFAULT
Section 4.1 Defaults, Events of Default, etc., Pledgor agrees that the
occurrence of the following, together with the expiration of any applicable
notice and/or cure period (if any), shall constitute an "Event of Default" under
this Agreement:
(a) If a default occurs under the Loan Agreement; or
(b) If Pledgor fails faithfully to perform or observe any material
covenant or agreement herein to be performed by Pledgor and such failure has a
material adverse effect on the Collateral, and such failure continues for thirty
(30 days after notice thereof to Pledgor from Secured Party (provided that such
30-day period may be extended so long as such failure is capable of being cured
and Pledgor thereafter diligently pursues such a cure to Secured Party's
reasonable satisfaction); or
(c) If any material representation or warranty of Pledgor contained in
this Agreement is in breach or is false when made or deemed made and such breach
or falsity has a material adverse effect on the Collateral; or.
(d) In the event Secured Party shall cease to have a first priority
security interest in any of the Collateral (other than as a result of any action
or omission of Secured Party).
Section 4.2 Remedies Generally. Following the occurrence and during the
continuation of an Event of Default:
(a) Secured Party may exercise all the rights and remedies of a secured
party under the Code.
(b) Pledgor recognizes that Secured Party may be unable to effect a sale
to the public of all or part of the Collateral by reason of a certain
prohibitions or restrictions in federal or state securities laws and regulations
(herein collectively called the "Securities Laws"), or the provisions of other
federal and state laws, regulations or rulings, but may be compelled to resort
to one or more sales to a restricted group of purchasers who will be required to
agree to acquire the Collateral for their own account, for investment and not
with a view to the further distribution or resale thereof without restriction.
Pledgor agrees that any sale (s) so made may be at prices and other terms less
favorable to Pledgor than if the Collateral were sold to the public, and that
Secured Party has no obligation to delay the sale of the Collateral for
period(s) of time necessary to permit the issuer thereof to register the
Collateral for sale to the public under any of the Securities Laws. Pledgor
agrees that negotiated sales whether for cash or credit made under the
<PAGE> 5
foregoing circumstances shall not be deemed for that reason not to have been
made in a commercially reasonable manner. Pledgor shall cooperate with Secured
Party and shall satisfy any requirements under the Securities laws applicable to
the sale or transfer of the Collateral.
ARTICLE 5
DEFINITIONS
The following terms shall have the respective meanings set forth below;
"Agreement" shall mean this Pledge Agreement, by and among Pledgor and
Secured Party, as the same may from time to time be amended or supplemented.
"Code" shall mean the California Uniform Commercial Code.
"Collateral" shall have the meaning given in Section 1.1
"Obligations" shall have the meaning given in Section 1.1.
"Pledged Collateral" shall have the meaning given in Section 1.1(a).
"Pledged Collateral Payments" shall have the meaning given in Section
3.2(a)
"Pledgor" shall mean National Insurance Group.
"Secured Party" shall mean Imperial Bank.
ARTICLE 6
MISCELLANEOUS
Section 6.1 No Waiver; Remedies. No failure on the part of Secured Party
to exercise, and no delay in exercising any right hereunder shall operate as a
waiver thereof; nor shall any single or partial waiver or exercise of any right
hereunder preclude any other or further waiver or exercise thereof or the waiver
or exercise of any other right. Except as express provided herein, the remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.
Section 6.2 Termination.
(a) Upon the full and final payment or other satisfaction of all
Obligations and upon termination of all of Pledgor's other obligations under
the Loan Documents and the obligations of Pledgor hereunder, the liens and
security interests created by this Agreement and by the Other Assurances shall
terminate
<PAGE> 6
forthwith and all right, title and interest of Secured Party in and to the
Collateral shall revert to Pledgor, and its successors and assigns.
(b) Upon the termination of Secured Party's liens and security interests
and the release of the Collateral, Secured Party will promptly (I) execute and
deliver to Pledgor such documents as Pledgor shall reasonably request to
evidence the termination of such security interest and the release of the
Collateral, and (ii) deliver or cause to be delivered to Pledgor all property of
Pledgor then held by Secured Party or any agent thereof, all without
representation or warranty by Secured Party (other than acknowledgment of
receipt of repayment) and with no recourse to Secured Party.
(c) This Agreement shall terminate when the liens and security interests
granted hereunder have terminated and the Collateral has been released.
Section 6.3 Successors and Assigns. This Agreement shall bind and inure
to the benefit of the respective successors and assigns of each of the parties;
provided; however, that Pledgor may not assign this Agreement or any rights or
duties hereunder without Secured Party's prior written consent and any
prohibited assignment shall be absolutely void. No consent to an assignment by
Secured Party shall release Pledgor from its obligations hereunder. Secured
Party may assign this Agreement and its rights and duties hereunder and no
consent or approval by Pledgor is required in connection with any such
assignment. Secured Party reserves the right to sell, assign, transfer,
negotiate, or grant participation in all or any part of, or any interest in
Secured Party's rights and benefits hereunder. In connection with any such
assignment or participation, Secured Party may disclose all documents and
information which Secured Party now or hereafter may have relating to Pledgor or
Pledgor's business, provided that such recipient executes a confidentiality
agreement reasonably satisfactory to Pledgor.
Section 6.4 Attorney's Fees. If any party to this Agreement shall bring
any action or proceeding for any relief against the other, declaritory or
otherwise, arising out of this Agreement, the losing party shall pay to the
prevailing party a reasonable sum for attorney's fees and costs incurred in
bringing or defending such action or proceeding and/or enforcing any judgment
granted therein, all of which shall be paid whether or not such action or
proceeding is prosecuted to final judgment. Any judgment or order entered in
such action or proceeding shall contain a specific provision providing for the
recovery of attorneys' fees and costs, separate from the judgment, incurred in
enforcing each judgment. The prevailing party shall be determined by the trier
of fact based upon an assessment of which party's major arguments or positions
taken in the proceedings could fairly be said to have prevailed over the other
party's major arguments or positions on major disputed issues.
<PAGE> 7
Section 6.5 Section Headings. Headings and numbers have been set forth
herein for conveniences only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
Section 6.6 Interpretation. Neither this Agreement nor any uncertainty
or ambiguity herein shall be construed or resolved against Security Party or
Pledgor, whether under any rule of construction or otherwise. On the contrary,
this Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
Section. 6.7 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
Section 6.8 Amendments in Writing. This Agreement can only be amended by
a writing signed by both Secured Party and Pledgor.
Section 6.9 Counterparts. This Agreement may be executed I any number of
Counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
Section 6.10 Integration. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof,
Section 6.11 Notices. Unless otherwise provided in this Agreement, all
notices or demands by any party relating to this Agreement or any other Loan
Document shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by registered or certified mail, postage
prepaid, return receipt requested, or by prepaid telex, telefacsimile, or
telegram (with messenger delivery specified) to Pledgor or to Secured Party, as
the case may be, at its address set forth in the Loan Agreement.
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this Section, shall be
deemed received on the earlier of the date of Actual receipt or three (3) days
after the deposit thereof in the mail.
Section 6.12 CHOICE OF LAW.
<PAGE> 8
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS
ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING
EFFECT TO ITS CONFLICT OF LAWS PRINCIPLES.
IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement
to be executed by their duly authorized representatives as of the day and year
first above written.
Imperial Bank
By: /s/ JOSEPH J. MCCARTHY
---------------------------------------
Name: Joseph J. McCarthy
Title: Vice President
National Insurance Group
By: /s/ ROBERT P. BARBAROWICZ
---------------------------------------
Name: Robert P. Barbarowicz
Title: E.V.P. General Counsel & Secretary
National Insurance Group
By: /s/ ROBERT J. LELIEUR
---------------------------------------
Name: Robert J. Lelieur
Title: V.P. Treasurer & Controller
<PAGE> 1
EXHIBIT 11
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
COMPUTATION OF WEIGHTED AVERAGE SHARES
OUTSTANDING AND EARNINGS PER SHARE
(in thousands of dollars except share amounts)
(unaudited)
<TABLE>
<CAPTION>
Basic
First Quarter
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Actual common shares
outstanding 4,032,882 3,896,937
Common shares issuable
under outstanding stock
options -- --
Weighted average common
shares issued upon exercise
of stock options 1,000 --
---------- ----------
Total weighted average
shares outstanding 4,033,882 3,896,937
========== ==========
Net income $ 588 $ 802
========== ==========
Net income per share $ 0.15 $ 0.21
========== ==========
Diluted
Actual common shares
outstanding 4,032,882 3,896,937
Common shares issuable
under outstanding stock
options 146,001 73,379
Weighted average common
shares issued upon exercise
of stock options 1,000 --
---------- ----------
Total weighted average
shares outstanding 4,179,883 3,970,316
========== ==========
Net income $ 588 $ 802
========== ==========
Net income per share $ 0.14 $ 0.20
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 14,735
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 5,143
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 26,169
<CASH> 285
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,409
<TOTAL-ASSETS> 63,357
<POLICY-LOSSES> 3,480
<UNEARNED-PREMIUMS> 5,529
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,351
0
0
<COMMON> 18,705
<OTHER-SE> 9,304
<TOTAL-LIABILITY-AND-EQUITY> 63,357
4,935
<INVESTMENT-INCOME> 430
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 10,614
<BENEFITS> 1,973
<UNDERWRITING-AMORTIZATION> 2,194
<UNDERWRITING-OTHER> 10,930
<INCOME-PRETAX> 882
<INCOME-TAX> 294
<INCOME-CONTINUING> 588
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 588
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.14
<RESERVE-OPEN> 3,232
<PROVISION-CURRENT> 2,248
<PROVISION-PRIOR> (275)
<PAYMENTS-CURRENT> 337
<PAYMENTS-PRIOR> 1,388
<RESERVE-CLOSE> 3,480
<CUMULATIVE-DEFICIENCY> (275)
</TABLE>
