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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____TO_____
COMMISSION FILE NUMBER: 0-16332
NATIONAL INSURANCE GROUP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 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 common stock held by nonaffiliates of the
Registrant, based upon the average of bid and asked price of the Common Stock on
March 26, 1998 on the Nasdaq National Market System was approximately
$23,881,377. Shares of Common Stock held by each officer and director and by
each person who owns 10% 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 26, 1998 was 4,042,882.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held June 15, 1998, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1997.
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FORWARD-LOOKING STATEMENTS
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",
"anticipates", "expects", "aware" or similar expressions as they relate to the
Company, as defined below, 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 or inferred in these forward-looking
statements. Factors that might 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." 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, including, without limitation, the Quarterly Reports on Form 10-Q to
be filed by the Company in 1998.
PART I
ITEM 1. BUSINESS
INTRODUCTION
National Insurance Group, a California corporation ("National"), and its
wholly-owned subsidiaries provide specialized information services through
technology, tracking services, outsourcing services and related insurance
products to financial institutions located throughout the United States and in
Canada. 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 the customers of the Company to:
o determine if residential or commercial real estate is located inside or
outside a federally-designated Special Flood Hazard Area ("SFHA"), with
respect to real estate which is collateral for loans being financed or
serviced by customers of the Company or for other purposes (the "Flood
Zone Determination Services");
o obtain real estate tax data from various local, county and state taxing
authorities nationwide with respect to real estate which is collateral
for loans being financed or serviced by the customers of the Company,
facilitate the payment to such taxing authorities by mortgage lenders
and mortgage loan servicing companies from certain escrowed funds
collected for real estate taxes from their borrowers with each monthly
loan payment for real estate taxes to such taxing authorities, and
inform mortgage lenders and mortgage servicing companies whether the
real estate taxes on property securing real estate loans have been paid
and perform certain tasks of the Company's customers on an outsourced
basis (the "Real Estate Tax Services"); and
o monitor the insurance coverage on collateral securing residential
mortgages (predominantly one-to-four unit family dwellings), motor
vehicle and other consumer loans and leases and, to a lesser extent,
commercial mortgages, disburse insurance premiums collected from
borrowers with each monthly loan payment for insurance coverage on
behalf of mortgage lenders and mortgage servicing companies and perform
certain tasks of the Company's customers on an outsourced basis
(collectively, the "Tracking and Outsourcing Services").
When the Tracking and Outsourcing Services indicate that hazard insurance
coverage on the collateral securing the loan has lapsed, the customer may
contract with the Company to provide specialized, fire, allied peril or physical
damage insurance (generally referred to as "lender-placed" insurance, formerly
referred to by the Company as "force-place" insurance), that generally insures
the improvements or personal property on the collateral security. The Company
provides this lender-placed insurance through its wholly-owned subsidiary Great
Pacific Insurance Company, in 48 states and the District of Columbia and through
nonaffiliated insurance companies in the remainder of the United States.
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The Company also provides flood insurance, for which the risk is assumed by an
agency of the U. S. Government under the National Flood Insurance Program
("NFIP"). In addition, the Company provides fire and allied peril insurance with
respect to properties on which financial institutions have foreclosed, and
physical damage insurance on motor vehicles. Great Pacific Insurance Company is
rated "A" ("Excellent") by A.M. Best Company, a nationally recognized insurance
statistical and rating service.
National's wholly-owned subsidiaries (the "Subsidiaries") are:
o Pinnacle Data Corporation, a California corporation ("Pinnacle")
o Pinnacle Real Estate Tax Services, Inc., a Delaware corporation
("PinTax-VA")
o Pinnacle Real Estate Tax Services of New York, Inc., a Delaware
corporation ("PinTax-NY", which together with PinTax-VA, are referred
to in this Report collectively as "PinTax")
o Pinnacle Management Solutions Insurance Services, a California
corporation ("PMSIS"), formerly named Fastrac Systems, Inc. Insurance
Agent & Broker
o Great Pacific Insurance Company, a California corporation ("GPIC")
o Fastrac Systems, Inc., a California corporation ("Fastrac")
o New Arts Acquisition, Inc., a Delaware corporation ("New Arts")
The Company began operations in 1972 as an independent general insurance
agency (which now operates as a subsidiary of National under the name "Pinnacle
Management Solutions Insurance Services"), providing financial institutions with
fire and related insurance products written by nonaffiliated companies. In 1977,
the Company formed GPIC to underwrite the business being generated by PMSIS.
During the mid-1980s, the Company developed computer software systems to provide
financial institutions with an economical 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
expanded the Company's Tracking and Outsourcing Services to provide outsourcing
capabilities. PMSIS provides the Tracking and Outsourcing Services for mortgage
lenders and servicers. Fastrac provides those services for motor vehicle leasing
companies. Fastrac operated as a wholly-owned subsidiary of PMSIS until February
1998, at which time it became a wholly-owned subsidiary of National.
Beginning in the late 1980s, the Company developed and test-marketed its
Flood Zone Determination Services. Such services assist a financial institution
that is financing improved real estate in meeting its federally mandated
obligation to advise potential borrowers whether such improvement is located
inside or outside of an SFHA. Federal law and certain secondary markets require:
(i) that regulated real estate lenders and users of such markets determine and
disclose to each mortgage loan applicant whether the property securing such loan
is located inside or outside of an SFHA; and (ii) that borrowers maintain flood
insurance in force as long as the mortgaged property is located within an SFHA.
These Flood Zone Determination Services are provided by Pinnacle.
In September 1997, two newly formed wholly-owned subsidiaries of National,
PinTax-VA and PinTax-NY, acquired substantially all the assets and assumed
certain liabilities of American Realty Tax Services, Inc., a Virginia
corporation ("ARTS-VA"), and American Realty Tax Services of New York, Inc., a
Virginia corporation ("ARTS-NY", which together with ARTS-VA, are referred to in
this Report collectively as "ARTS"). The acquisition is referred to in this
Report as the "PinTax Acquisition". PinTax provides the customers of the Company
with the Real Estate Tax Services.
The Company's information services and insurance products are marketed
nationwide by its direct sales force to mortgage bankers and other financial
institutions (including mortgage origination/servicing companies, commercial
banks, savings and loans, credit unions, motor vehicle leasing firms and
others). In addition, its Tracking and Outsourcing Services are marketed to
motor vehicle leasing firms in Canada by its direct sales force. Additional
sales are made, on an indirect basis, through independent sales representatives
and insurance agents and brokers.
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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 inside or outside of an SFHA as defined by the
Federal Emergency Management Agency ("FEMA"). The Company's database has been
developed by merging about 80,000 of the approximately 126,000 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 the subject property is located inside or outside of an
SFHA. If located in an SFHA, 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.
Real Estate Tax Services Market
The Company markets its Real Estate Tax Services to mortgage bankers and
financial institutions that own or service real estate loan portfolios
("Servicers"). In order to prevent the placement of a lien for unpaid real
estate taxes on real property which is the collateral for a loan, Servicers
generally have a need to monitor whether real property taxes are paid to the
taxing authority when due. In many cases Servicers require borrowers to pay to
the Servicer a portion of real property taxes on the subject property with each
mortgage loan payment ("Escrowed Loans"). The Servicer holds such funds in
escrow and then remits them to the appropriate taxing authority when due. The
Company provides Servicers with outsourcing for real property tax related tasks
usually performed by the Servicers for both Escrowed Loans and non-Escrowed
Loans. Such services include identification of applicable taxing authorities,
research regarding real estate parcel identification numbers, and in the case of
Escrowed Loans, disbursement of funds by check or electronic funds transfer and
transmission of electronic data, tax bills and tax listings to taxing
authorities, and, in the case of non-Escrowed Loans, searching records of taxing
authorities to determine whether taxes are delinquent.
Insurance Tracking and Outsourcing Services Market
The Company markets its Tracking and Outsourcing Services to Servicers. In
many cases, the Company also sells lender-placed insurance to Servicers that use
its insurance Tracking and Outsourcing 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. In exchange for
insurance premiums payable by the Company's customers and/or for fees, the
Company provides its customers with access to the Company's database and
tracking systems. In other cases, the Company's clients transfer many of their
tasks associated with servicing the customer's loan portfolio. Such tasks
performed by the Company for its customers is referred to as "Outsourcing". In
addition, Servicers will acquire ownership of some property through foreclosure
which property is sometimes referred to as Real Estate Owned ("REO"). Servicers
need to insure the improvements located on REO for perils such as fire
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and vandalism. The Company insures certain REO for fire and allied peril ("REO
Insurance"). The Company primarily focuses its marketing efforts on Servicers
with mortgage loan, consumer loan (primarily motor vehicle) or motor vehicle
lease portfolios.
Specialized Insurance Market
The Company markets its specialized insurance including lender-placed
insurance, REO Insurance and, in certain cases, flood insurance, to Servicers.
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 or
if the insurance is canceled or otherwise terminated, Servicers may order
lender-placed insurance from the Company. The Company sells lender-placed
insurance and REO Insurance to customers that use its Tracking and Outsourcing
Services and to customers which track their own loans and order such insurance.
The Company primarily sells flood insurance to customers that also use its Flood
Zone Determination Services. See "Business - Market Overview - Flood Zone
Determination Services Market" and "- Insurance Tracking and Outsourcing
Services Market".
INFORMATION SERVICES
The Company's information services consist of Flood Zone Determination
Services, Real Estate Tax Services and Tracking and Outsourcing Services.
Information services contributed 58.5% of consolidated revenues in 1997. See
Note 23 of Notes to Consolidated Financial Statements.
Flood Zone Determination Services
Through Pinnacle, the use of the Company's on-line computerized Flood Zone
Determination Services system is offered nationwide to financial institutions
and others who originate loans secured by real property. The proprietary system
is a relational database of digitized geographical information which determines
whether or not a particular property address is located inside or outside of 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 inside or outside of
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 prints flood zone certificates (which
describe, among other things, whether the subject property is located inside or
outside of an SFHA), certain disclosure notices, and, for some customers, flood
insurance policy rating information for flood insurance policies placed through
PMSIS and, in most cases, with GPIC. Pinnacle offers life of loan services
whereby Pinnacle will automatically notify its customers of changes in the SFHA
status of properties in their mortgage loan portfolios. Life of loan service is
available during the term of the customer's agreement with Pinnacle, or
throughout the term of the loan, depending upon the fee paid for the life of
loan service.
Real Estate Tax Services
Since September 1997, the Company has provided Real Estate Tax Services to
Servicers on a nationwide basis. In order to prevent the placement of a lien for
unpaid real estate taxes on real property which is the collateral for a loan,
Servicers generally have a need to monitor whether real property taxes are paid
to the taxing authority when due. In many cases Servicers require borrowers to
pay to the Servicer a portion of real property taxes with each mortgage loan
payment. The Servicer holds such funds in escrow and then remits them to the
appropriate taxing authority when due. The Company provides Servicers with
outsourcing services for real property tax related tasks usually performed by
the Servicers for both Escrowed Loans and non-Escrowed Loans. Such services
include identification of applicable taxing authorities, research regarding real
estate parcel identification numbers, for escrowed loans, disbursement of funds
by check or electronic funds transfer and transmission of electronic data, tax
bills and tax listings to taxing authorities, and, for non-Escrowed Loans,
searching records of taxing authorities to determine whether real estate taxes
are delinquent. The Company has begun offering to perform, for a fee, certain
additional tasks now performed by its customers, referred to as "Tax
Outsourcing".
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Tracking and Outsourcing Services
The Company, through PMSIS and Fastrac, provides its Tracking and
Outsourcing Services to financial institutions located throughout the United
States and Canada. The tracking system utilizes Company-developed
special-purpose, proprietary software and database systems to provide multiple
tracking features for mortgages, motor vehicle and personal property loan and
motor vehicle lease portfolios, as well as for REO properties. The Tracking and
Outsourcing 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, ordering and canceling
lender-placed and/or REO insurance coverage, and accounting for multiple premium
transactions. Outsourcing performed by PMSIS and Fastrac includes opening
customers' inbound mail, inputting insurance information relating to the tracked
collateral into the Company's database and receiving that information from
insurance companies by electronic data interchange ("EDI"), making and receiving
telephone calls for clients and sending correspondence to customers of the
Company's clients, and disbursing Escrowed Loans insurance premiums on behalf of
the Company's clients to insurance companies. In addition, the Company's
customers have online real-time access to their data and information in the
Company's database. Customers who process their own insurance transactions may
access the computer system of PMSIS and Fastrac to order lender-placed insurance
or REO insurance. See "Business-- Insurance Products - Lender-Placed Insurance".
The Company believes its Tracking and Outsourcing 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 and Flood Zones, Inc. 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 real estate tax services business is also highly competitive. The major
competitors in the real estate tax services business include Transamerica Real
Estate Tax Service, First American Real Estate Tax Services and Lereta
Corporation. 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 and outsourcing industry is also highly competitive.
The major competitors in the insurance tracking and outsourcing industry include
American Security Insurance Group, ZC Sterling Corporation, Balboa Life and
Casualty and Insureco Inc. 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.
INSURANCE PRODUCTS
The Company provides the following specialized insurance products to its
Tracking and Outsourcing Services and Flood Zone Determination Services
customers, other financial institutions and insurance agents and brokers.
Insurance products contributed 44.5% of consolidated revenues in 1997. See Note
23 to Notes to Consolidated Financial Statements.
Lender-Placed Insurance
Lender-placed insurance is purchased by financial institutions when their
borrowers, whose loans are secured by real property or personal property
(primarily motor vehicles), fail to provide the financial institutions with
adequate evidence of fire and certain allied perils insurance covering
improvements to real property or physical damage insurance on personal property,
as the case may be. The financial institutions pay insurance premiums to GPIC
and ordinarily
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are entitled to reimbursement of the premiums paid from their borrowers in
accordance with the terms of their loans. In the Company's experience,
approximately 64% to 68% of lender-placed insurance coverage terminates or is
canceled within a year of the date the policy is issued.
GPIC 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
lender-placed policies. REO insurance premiums may be higher than lender-placed
premiums because of the higher risks involved in insuring REO property, which is
often vacant.
Financial institutions ordinarily require immediate coverage for
lender-placed and REO insurance, but generally do not have readily available
underwriting information on the subject risk. Due to the lack of underwriting
information, GPIC 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 lender-placed insurers, is unusual in the property and casualty
insurance industry which traditionally underwrites each risk on an individual or
class basis. GPIC 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, GPIC is
required to refund, at a minimum, an unearned premium calculated pursuant to
applicable statutes or regulations.
GPIC's primary customers for lender-placed 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 GPIC on one-to-four unit dwellings accounted for approximately 79% of GPIC's
lender-placed and REO insurance for fiscal years 1993 through 1997.
GPIC also offers lender-placed motor vehicle and personal property physical
damage insurance products to financial institutions with loans secured by motor
vehicles 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.
GPIC also underwrites motor vehicle physical damage insurance through an
unaffiliated 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 automobile insurance
market.
GPIC writes lender-placed and REO insurance on a direct basis in 48 states
and the District of Columbia. GPIC assumed some of the risk and premium on
lender-placed and REO insurance in the other states by being the primary
reinsurer on such business generated by PMSIS. See "Business - Insurance
Operations - Insurance Agency Operations".
Flood Insurance
In 1987, the Company entered into an agreement with the Federal Insurance
Administration of FEMA enabling GPIC 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. GPIC receives a commission based upon a percentage of premium
for each policy it writes under the WYO Program. GPIC provides its flood
insurance policies under the WYO Program to customers who utilize the Flood Zone
Determination Services of Pinnacle and the Tracking and Outsourcing Services of
PMSIS and through insurance agents and brokers.
Competition
GPIC's major competitors in the highly competitive lender-placed insurance
industry include the major competitors of PMSIS in the insurance tracking and
outsourcing 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
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greater financial, marketing and other resources than GPIC. 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 and price.
The Company believes it competes favorably with respect to these factors.
INSURANCE OPERATIONS
Insurance Agency Operations
PMSIS is a general insurance agent for GPIC and other insurance companies.
PMSIS has entered into agency agreements to sell lender-placed and REO insurance
in the states where GPIC 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 PMSIS agreements, the unaffiliated
insurance companies pay PMSIS commissions for policies sold. These agency
agreements allow PMSIS to initiate and maintain relationships with customers and
to continue these relationships following termination of the agency agreements.
PMSIS also markets flood insurance policies on behalf of GPIC and other WYO
Program insurance companies.
PMSIS is currently licensed and regulated as an insurance agent and broker
in California and as a nonresident insurance agent and/or broker in 31 other
states, and the District of Columbia, with licensing pending in one other state.
In 17 other states, PMSIS transacts insurance services through licensed agents
who are officers and employees of PMSIS. 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, GPIC, like many of its lender-placed insurance
competitors, insures for a flat premium rate coverage for almost all property
within predesignated limits and territories without the application of
underwriting criteria to individual risks. GPIC determines its flat premium rate
based on its underwriting experience and knowledge of the industry in which it
operates. GPIC uses actuaries to determine such premium rates only where
mandated by law or regulations. Accordingly, GPIC may be insuring individual
risks that it might not have insured if it had information obtained in the
traditional underwriting process. The motor vehicle physical damage insurance
written through an unaffiliated general agent is underwritten using more
traditional methods of underwriting.
Policies and Endorsements
For its lender-placed insurance products, GPIC 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. GPIC customizes its policy language and forms to meet the specific needs
of its customers. GPIC has also developed some special endorsements, including
one which provides that some lender-placed 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.
The maximum limit of GPIC's insurance coverage overall is generally $3
million per property location for lender-placed insurance, $500,000 per location
for REO insurance, $100,000 per vehicle for lender-placed physical damage
insurance and $50,000 for the motor vehicle physical damage written through an
unaffiliated general agent. In certain cases, GPIC grants its customers a higher
maximum limit and, additionally, GPIC 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 GPIC's net premiums earned. For flood
insurance, GPIC uses policy language, coverage limits and rates provided by
FEMA.
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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, GPIC's loss ratio, expense ratio and combined ratio.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Loss ratio................................... 38.5% 37.8% 35.5% 30.0% 34.0%
Expense ratio................................ 53.4% 55.7% 66.6% 61.2% 63.1%
----- ----- ----- ----- -----
Combined ratio............................... 91.9% 93.5% 102.1% 91.2% 97.1%
===== ===== ===== ===== =====
Property and casualty industry
combined ratio (fire) (1)................. 111.7% 109.2% 107.6% 96.5% --
===== ===== ===== ===== =====
</TABLE>
(1) Based on property and casualty insurance industry statistics (fire)
published by A.M. Best Company as of December 31, 1996. Industry statistics
for 1997 are not available from A.M. Best Company as of the date of this
report. The Company does not currently write any casualty insurance.
The increase in the combined ratio from 1996 to 1997 was primarily due to an
increase of the loss ratio from 30% to 34% which was the result of an increase
in the number and average size of claims. The average loss per new claim
reported increased from $5,513 in 1996 to $7,693 in 1997. The number of new
claims increased from 726 reported in 1996 to 843 reported in 1997.
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 premium to surplus. GPIC's premium-to-surplus ratio for
the periods indicated are shown in the following table.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net premiums written to surplus ratio...... 1.0 0.8 0.6 0.5 0.8
Property and casualty industry average(1).. 1.3 1.1 1.0 1.0 --
</TABLE>
(1) Based on property and casualty insurance industry statistics published by
A.M. Best Company as of December 31, 1996. Industry statistics for 1997 are
not available from A.M. Best Company as of the date of this report. The
Company does not currently write any casualty insurance.
The increase in net premiums written to surplus ratio from 1996 to 1997 was
primarily the result of an increase in net written premiums in 1997 over 1996.
8
<PAGE> 10
Loss and LAE Reserves
GPIC 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 GPIC 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 GPIC 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 lender-placed, REO, flood and motor vehicle 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 for known and unreported claims than with many other lines
of insurance.
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, 1997, the Company had
$29 million of investment assets. GPIC held approximately $25 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. GPIC also maintains a large portion of its investments in short-term
instruments in order to maintain the ability to fund large losses of GPIC'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, 1997.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Average investment............................. $38,080 $34,888 $30,711
Net investment income.......................... 2,042 1,975 1,839
Average annualized yield....................... 5.4% 5.7% 6.0%
</TABLE>
The following table summarizes by type, the investments of the Company as of
December 31, 1997 (dollars in thousands). With the exception of equity
securities and certain debt securities, the Company's investments are either
insured by the Federal Deposit Insurance Corporation or have one of the top
three designations from the National Association of Insurance Commissioners
("NAIC"), which correspond to an "investment grade" rating.
9
<PAGE> 11
<TABLE>
<CAPTION>
PERCENT
AMOUNT OF TOTAL
----- --------
<S> <C> <C>
Short-term investments............................ $2,726 9.4%
Certificates of Deposit........................... 9,928 34.5%
U.S. Government-backed securities................. 1,859 6.4%
Obligations of states and municipalities.......... 8,907 30.9%
Corporate Bonds................................... 1,193 4.1%
Equity securities................................. 4,200 14.6%
Mortgage-backed securities........................ 36 0.1%
------- -----
Total investments........................ $28,849 100.0%
======= =====
</TABLE>
The table set forth below indicates the expected maturity distribution of
GPIC's fixed income securities and short-term investments as of December 31,
1997 (dollars in thousands).
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT PORTFOLIO
<S> <C> <C>
One year or less...................................$ 9,467 39.7%
One year to five years............................. 12,664 53.1%
Six years to ten years............................. 1,697 7.1%
More than ten years................................ 36 0.1%
-------- -----
Total fixed income securities and
short-term investments $ 23,864 100.0%
======== =====
</TABLE>
Reinsurance
In order to limit the maximum losses for which it might otherwise be solely
responsible under its policies, GPIC 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 GPIC's "retention". GPIC pays treaty reinsurers a
percentage of net premiums written and/or earned to cover reinsurance costs.
Subject to certain limitations, in 1997 GPIC retained on non-flood
insurance, and in 1998 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. GPIC also purchases catastrophic reinsurance,
under which GPIC 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 GPIC 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 $15.0 million for all losses during the term. Each of the
catastrophic reinsurance agreements has a one (1) year term. GPIC from time to
time purchases another form of reinsurance called "facultative reinsurance" for
an individual policy or group of policies to protect GPIC and its treaty
reinsurers from certain risks or when the amount of insurance exceeds the
maximum amount covered under various reinsurance treaties. GPIC negotiates the
cost of facultative reinsurance on a case-by-case basis. Flood insurance issued
by GPIC is reinsured by an agency of the federal goverment.
The purchase of reinsurance does not relieve GPIC of liability for the full
amount of loss in the event the reinsurer fails or refuses to pay the reinsured
portion. To date, GPIC has collected full reinsurance reimbursement on all
claims submitted to its reinsurers. During 1995, GPIC ceded non-flood insurance
losses of $6,600 to reinsurers related to losses that occurred in 1992. There
were no losses ceded to reinsurers in 1996 or 1997 on non-flood insurance
policies. In 1996 and 1997, GPIC paid 4.9% and 4.0%, respectively, of its earned
premiums for its excess and catastrophic reinsurance treaties.
10
<PAGE> 12
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 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 operations of PinTax are generally not subject to regulation by any
government agency. PinTax interacts regularly with taxing authorities in various
jurisdictions and, in many cases, in order to obtain the information required to
carry out its operations, PinTax must comply with the rules and regulations
promulgated by such taxing authorities. However, neither such taxing authorities
nor any other government agency directly regulates the activities of PinTax.
GPIC is subject to regulation by government agencies in California, its
state of domicile, and in the remaining states in which it transacts insurance.
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
GPIC and its affiliates.
Licensing in Other Jurisdictions
In order to issue policies on a direct basis in a state, GPIC 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. GPIC
currently is licensed to write insurance in the following 46 states and the
District of Columbia:
Alabama Indiana Missouri Rhode Island
Alaska Illinois Montana South Carolina
Arizona Iowa Nebraska South Dakota
Arkansas Kansas Nevada Tennessee
California Kentucky New Jersey Utah
Colorado Louisiana New Mexico Virginia
Connecticut Maine North Carolina West Virginia
Delaware Maryland North Dakota Washington
Florida Massachusetts Ohio Wisconsin
Georgia Michigan Oklahoma Wyoming
Hawaii Minnesota Oregon
Idaho Mississippi Pennsylvania
In addition, GPIC is authorized to write insurance in Texas and Vermont on a
surplus lines basis.
11
<PAGE> 13
GPIC is in the process of obtaining requisite approvals to write insurance
on a direct basis in New Hampshire. PMSIS (or, as to some states, at least one
of PMSIS's officers) must be licensed in any state in which it operates. PMSIS
is currently licensed in California and as a nonresident insurance agent and
broker in 31 other states and the District of Columbia with licensing pending in
one other state. PMSIS is subject to laws and regulations and is regulated by
the insurance commissioner in each state in which it conducts its insurance
agency or brokerage business.
Restrictions on Dividends Payable by GPIC to the Company
As a nonoperating holding company, a principal source of National's
liquidity is the cash dividends received from its subsidiaries, principally GPIC
and Pinnacle. GPIC is subject to laws and regulations which restrict its ability
to pay dividends. GPIC 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,
GPIC 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 GPIC's policy holder surplus as of the previous December
31, or
(ii) The net income of GPIC, 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 GPIC
In addition to the dividend payment restrictions set forth above, California
law has three additional methods of regulating an insurance company's
relationships and transactions with its affiliates. The first is the requirement
that an insurer file and keep current a "Form B" registration statement
identifying the affiliated members of the insurer's holding company system and
disclosing the agreements in force, relationships existing and transactions
outstanding between the insurance company and its affiliates. The matters that
must be reported in the registration statement include all types of financial
transactions, transactions not in the ordinary course, the insurer's guarantee
of affiliate obligations, management agreements, service contracts and
cost-sharing agreements, tax allocation agreements, reinsurance agreements,
stock pledges, dividends and distributions. An insurer's registration statement
must be filed annually. In addition, the registration statement must be updated
on a monthly basis to disclose any reportable transaction that occurred in the
prior monthly period. The second method of regulating transactions between an
insurer and its affiliates is the requirement that the insurer give the
California Insurance Department not less than thirty days' prior written notice
of certain types of transactions, with the Department having the right to
disapprove the transaction during the notice period. The third method is the
requirement that the Insurance Commissioner be notified within thirty days of
any investment by the insurer in another corporation if such would cause the
total investments in that company by all members of the insurer's holding
company system to exceed ten percent of the other company's voting securities.
12
<PAGE> 14
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.
Companies having statutory surplus less than that determined necessary by
the RBC model will likely be required to adequately address certain risk factors
(underwriting risk, investment risk and other off-balance sheet risk) and will
be subject to varying degrees of regulatory intervention, depending upon their
level of capital inadequacy. The RBC model for the 1997 annual statement did not
indicate an impairment of GPIC's measurement of capital adequacy.
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. GPIC is
required to participate in such insolvency funds and associations and
contributed $23,056 in 1996 and $1,179 in 1997 to such funds and associations.
GPIC 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. GPIC made
certain significant contributions to the California FAIR Plan Association in
1996 and 1997. 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
GPIC 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 GPIC. Any purchase resulting in such an
acquisition of control of GPIC would require prior action by the California
Commissioner of Insurance.
MARKETING
The Company's information services and insurance products are marketed
nationwide and in Canada by its sales and marketing staff. 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
until recently had 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
products and services to meet the needs of its customers. The Company uses
direct mail and select advertising to augment its sales efforts. The Company has
an Internet site with an address of www.naig.com.
13
<PAGE> 15
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;
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 in 1998. See also, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
EMPLOYEES
As of December 31, 1997, the Company employed approximately 621 persons. 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.
BUSINESS SEGMENT DATA
The principal industry segments in which the Company operates are
information services and insurance products. 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 in South San Francisco,
California which are used as the Company's headquarters and as the primary
operations center for GPIC, PMSIS, Fastrac, and Pinnacle. In addition the
Company leases space in Concord, California and Tucson, Arizona, which is
currently used by Pinnacle primarily for making manual flood zone
determinations. The Company leases space in Springfield, Ohio which is used by
Fastrac with respect to its motor vehicle insurance tracking and outsourcing
operations. The Company leases space in Vienna, Virginia and Warwick, Rhode
Island, which is used as the primary operations centers of PinTax. The Company
also leases other sales and service offices.
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 pending litigation or group of similar items of
pending 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 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of March 25, 1998,
are set forth below. Except for Mr. Bergstrom, Mr. Gauer, and Mr. Padilla the
following hold the indicated office with respect to National and each of the
Subsidiaries.
14
<PAGE> 16
<TABLE>
<CAPTION>
Name Age Position with National
--- -- ----------------------
<S> <C> <C>
Mark A. Speizer......... 54 Chairman of the Board and Chief Executive Officer
Bruce A. Cole........... 50 President
Robert P. Barbarowicz... 51 Executive Vice President, General Counsel and Secretary
Gregory S. Saunders..... 35 Executive Vice President, Treasurer and Chief Financial Officer
Douglas H. Helm......... 56 Executive Vice President, Business Development and Strategic
Marketing
George R. Jump.......... 47 Executive Vice President, Sales
Gunnar Bergstrom........ 34 Executive Vice President of PinTax
Gerry L. Gauer.......... 33 Executive Vice President of Pinnacle
Larry Padilla........... 48 Executive Vice President of Fastrac and PMSIS
</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 the Company.
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 and Chairman
of the Board of the 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 of the Company. 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. HELM was elected Executive Vice President, Business Development and
Strategic Marketing in May 1997. From July 1995 to May 1997, Mr. Helm was
President and Chief Executive Officer of the Property/Casualty Division of
InsWeb Corporation. From 1989 to 1995, Mr. Helm was Executive Vice President,
Sales and Marketing of the Company. Mr. Helm held a variety of executive offices
and management positions in the insurance industry from 1970 to 1997.
MR. JUMP was elected Executive Vice President, Sales in November 1997. Mr.
Jump assumed responsibility for the sales area of the Company in February 1998.
Mr. Jump joined the Company in 1993 and had served as a Vice
15
<PAGE> 17
President and Senior Vice President of Sales of the Company's subsidiaries from
1993 to 1997. Prior to joining the Company, Mr. Jump was the Vice President,
Marketing of American Security Group from 1980 to 1993.
MR. BERGSTROM was elected Executive Vice President and General Manager of
PinTax in September 1997. From 1996 to 1997, Mr. Bergstrom served with Chicago
Title & Trust Company in their Mergers, Acquisitions and New Business
Development Unit. Prior to 1996, Mr. Bergstrom served as Executive Vice
President of ARTS-VA and ARTS-NY.
MR. GAUER was elected Executive Vice President and General Manager of
Pinnacle in November 1997 and served as Senior Vice President and General
Manager of Pinnacle since 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 customer service,
production and human resources functions as well as facilities management. In
such capacity he managed a staff, including professional appraisers, productions
managers, supervisors and processors.
MR. PADILLA joined Fastrac Systems, Inc. and PMSIS in June 1996 as Senior
Vice President and General Manager and was elected as Executive Vice President
and General Manager in November 1997. 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. Prior to May 1994 Mr. Padilla held various executive
positions with other financial institutions.
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 tortious 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 motor vehicle 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.
PART II
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.
COMMON
STOCK PRICE CASH DIVIDENDS
---------- DECLARED PER
HIGH LOW SHARE
--- -- -----
1996
First Quarter $ 7.13 $ 5.50 $0.00
Second Quarter 7.25 5.25 $0.00
Third Quarter 7.38 5.63 $0.00
Fourth Quarter 6.88 4.38 $0.00
16
<PAGE> 18
1997
First Quarter $ 7.75 $ 4.25 $0.00
Second Quarter 8.00 6.13 $1.08
Third Quarter 11.13 6.38 $0.11
Fourth Quarter 10.88 8.00 $0.11
The average of the last closing bid and ask prices of the Common Stock, as
reported on the Nasdaq National Market System on March 26, 1998, was $9.75 per
share. As of March 26, 1998, 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 GPIC.
GPIC, 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 GPIC 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, 1997, the maximum dividend permitted to be paid in 1998 by
GPIC to National is limited to approximately $2.5 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 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.
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, 1993, 1994, 1995, 1996 and 1997.
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.
17
<PAGE> 19
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net premiums written........................ $ 22,549 $ 20,036 $ 14,956 $ 12,636 $ 20,501
======== ======== ======== ======== ========
Net premiums earned......................... $ 23,265 $ 20,858 $ 17,020 $ 13,585 $ 19,038
Real estate information services (1)........ 11,693 7,978 10,593 18,499 23,492
Tracking fees............................... 2,477 3,012 4,786 5,479 7,543
Net commission income....................... 462 1,103 1,502 1,145 1,166
Net investment income....................... 1,797 1,836 2,042 1,975 1,839
------- ------- ------- ------- --------
Total revenues......................... 39,694 34,787 35,943 40,683 53,078
------- ------- ------- ------- --------
Loss and LAE ............................... 8,952 7,873 6,044 4,002 6,482
Commissions paid to nonaffiliates........... 4,989 4,739 4,079 1,954 1,837
Personnel expenses.......................... 12,890 13,677 16,891 18,948 23,127
All other expenses.......................... 7,532 9,096 12,252 14,221 16,930
Non-recurring expense....................... -- 1,020 4,100 -- --
------- ------- ------- ------- --------
Total expenses (1)..................... 34,363 36,405 43,366 39,125 48,376
------- ------- ------- ------- --------
Income (loss) before provision for income
taxes.................................... 5,331 (1,618) (7,423) 1,558 4,702
Provision for (benefit from)
income taxes............................. 1,687 (534) (2,559) 284 1,436
-------- -------- -------- -------- --------
Net income (loss)........................... $ 3,644 $ (1,084) $ (4,864) $ 1,274 $ 3,266
======== ======== ======== ======== ========
Net income (loss) per share (2)............. $ 0.85 $ (0.23) $ (1.04) $ 0.33 $ 0.79
Weighted average common and common
equivalent shares outstanding (2)........ 4,270 4,679 4,679 3,917 4,127
Dividends per share......................... $ 0.32 $ 0.20 $ 0.00 $ 0.00 $ 1.30
BALANCE SHEET DATA
Total investments........................... $ 43,008 $ 38,957 $ 37,202 $ 32,573 $ 28,849
Total assets................................ $ 63,699 $ 55,092 $ 52,096 $ 47,112 $ 66,742
Total shareholders' equity.................. $ 41,949 $ 37,290 $ 32,881 $ 28,552 $ 27,780
</TABLE>
- ----------
(1) Revenues for real estate information services include revenues in 1997 from
PinTax subsequent to the PinTax Acquisition. Total expenses include expenses
from PinTax subsequent to the PinTax Acquisition.
(2) Net income (loss) per share is presented as diluted earnings per share. The
weighted average shares outstanding includes the number of shares issuable upon
exercise of outstanding options as calculated using the treasury stock method.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
National Insurance Group provides specialized information services through
technology, tracking services, outsourcing services and related insurance
products to mortgage bankers and financial institutions located throughout the
United States.
The Company's primary sources of revenues are fees billed to customers who
use Flood Zone Determination Services, Real Estate Tax Services, premiums and
commissions earned from its specialized insurance products, Tracking and
Outsourcing Services and investment income. 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
18
<PAGE> 20
determinations 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. The Company generates fees on Real Estate
Tax Services by charging a fee for each property tracked for tax information.
The fees cover services for a one year period, or, for a higher fee, for the
life of the loan, where the Company tracks the tax information for its customer
during the term of the loan or over the term of the agreement with the
particular customer. An additional fee will be generally charged for tax
outsourcing. Net premiums written represent direct and assumed premiums
generated by GPIC, 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. Tracking and Outsourcing fees are generated by providing Tracking and
Outsourcing Services and are usually based on the number of loans or leases
tracked. Net commission income represents commissions received from
nonaffiliated insurance companies for lender-placed insurance produced by PMSIS
and from the Federal Emergency Management Agency ("FEMA") for flood insurance
written by GPIC.
The Company's insurance products include lender-placed 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 lender-placed and flood insurance 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 lender-placed 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 and earned premiums.
Since 1993, the reserve has been established at approximately 64% to 68% of
gross premiums written. Premiums are written directly by GPIC or by third party
insurance companies in certain states where GPIC is not licensed or where its
products are not approved. The following table summarizes premiums written net
of cancellations after application of the reserve for return premiums during the
periods indicated (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Gross Premiums Written (net of cancellations).. $17,127 $15,594 $24,141
Gross Premiums Ceded........................... (2,171) (2,958) (3,640)
------- ------- -------
Net Premiums Written........................... $14,956 $12,636 $20,501
======= ======= =======
</TABLE>
The Company's strategy includes expanding its authorization to write
premiums on a direct basis and reducing premiums ceded to reinsurers. At the
present time, 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 17 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 1995, the Company ceded non-flood insurance losses of $6,600 to
reinsurers, and for which it has been fully reimbursed. The Company did not cede
any losses to reinsurers in 1996 or 1997 for non-flood insurance losses. 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 purchase reinsurance
with U.S. insurers rated in the "A" categories by A.M. Best Company) at the time
of such purchase and by diversifying the reinsurance pool.
19
<PAGE> 21
Loss and loss adjustment expenses ("LAE") represent losses paid related to
insurance underwritten or reinsured by GPIC, 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 bonuses paid to Company employees and
related employee benefits. All other expenses primarily consist of occupancy
costs, including office rent and utilities, insurance expenses, 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's effective income tax rate was 34%, 18%, and 31% for 1995, 1996
and 1997, 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 8 of Notes to Consolidated
Financial Statements.
In June 1997, the FASB issued 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 does not believe that SFAS No.
130 will have a material impact on its financial statements.
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 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 the Company's
financial statements.
Acquisition
On September 18, 1997, the Company's newly formed PinTax subsidiaries
acquired substantially all the assets and assumed certain liabilities of ARTS.
The acquisition agreement, dated August 15, 1997, as amended (the "Agreement"),
was entered into by and among ARTS, the shareholders of ARTS, the Company and
New Arts. As consideration for the acquisition of certain assets of ARTS, New
Arts paid $9.8 million in cash, including transaction costs, and agreed to
assume certain liabilities of ARTS. Pursuant to the Agreement, if the cash
revenue received by the Company on certain contracts of PinTax exceeds certain
targets for the twelve months ending April 30, 1998, the Company is required to
pay additional consideration of up to $4 million according to a formula as set
forth in the Agreement ("Additional Consideration"). Fifty percent of the
Additional Consideration may be paid in the form of a three year note bearing
interest at eight percent per annum. The remaining fifty percent of the
Additional Consideration may be paid in cash. See Note 22 of Notes to
Consolidated Financial Statements.
The PinTax Acquisition was accounted for as a purchase of assets. As of the
purchase date, the fair market value of the assets acquired from ARTS was
approximately $4.4 million, and the fair market value of liabilities assumed was
approximately $7.3 million, including approximately $7 million of deferred
revenue related to ARTS' then existing portfolio of loans. The amount of
goodwill recorded as of the date of PinTax Acquisition was $12.7 million, which
is being amortized over a 25-year period as a result of long standing vendor and
customer relationships. Goodwill is classified on the Company's balance sheet
under "Intangible Assets".
The majority of tax service revenues earned by PinTax are from "life of
loan" servicing contracts, which require customers to pay an up-front, one-time
fee to receive Real Estate Tax Services over the life of a loan. The revenue
from
20
<PAGE> 22
"life of loan" contracts is recognized over the estimated life of the loans in
proportion to the amount of expenses incurred to service the real estate
property tax tracking on the subject loans. Since the bulk of expenses incurred
in providing real estate property tax tracking on the loans occurs in the first
year, a majority of the "life of loan" revenue is recognized within the first
year of servicing. The remainder of the revenue is amortized in accordance with
the estimated rate at which loans are paid off or otherwise are removed from the
servicing portfolio. As a result of this revenue recognition policy, PinTax
records a deferred revenue reserve on its balance sheet. As of December 31,
1997, deferred "life of loan" tax servicing revenue was approximately $7.0
million. This is approximately the same amount of deferred revenue as of the
date of the PinTax Acquisition.
Year 2000 Compliance
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, some of the Company's
systems are already Year 2000 compliant, and the Company believes that Year 2000
compliance will be achieved prior to December 31, 1998 on the balance of its
systems. The Company does not anticipate any significant 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 solely in connection with
Year 2000 compliance will be treated as period costs and will be expensed as
incurred. The Company's customers and companies and others from which the
Company receives data are also dependent upon computer systems. It is out of the
Company's control whether such entities are or will be Year 2000 compliant;
however, the Company believes that most of them are aware of the issue.
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,
-----------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net premiums earned ........................... 47.4% 33.4% 35.9%
Real estate information services .............. 29.5 45.4 44.2
Tracking fees ................................. 13.3 13.5 14.2
Net commission income ......................... 4.2 2.8 2.2
Net investment income ......................... 5.6 4.9 3.5
----- ----- -----
Total revenue .......................... 100.0 100.0 100.0
----- ----- -----
Loss and LAE .................................. 16.8 9.8 12.2
Commissions paid to nonaffiliates ............. 11.3 4.8 3.5
Personnel expenses ............................ 49.3 46.6 43.6
All other expenses ............................ 25.7 34.7 31.9
Non-recurring expense ......................... 17.5 0.0 0.0
----- ----- -----
Total expenses ......................... 120.6 96.2 91.2
----- ----- -----
Income (loss) before provision for income taxes (20.6) 3.8 8.9
Provision for (benefit from) income taxes ..... (7.1) 0.7 2.7
----- ----- -----
Net income (loss) ............................. (13.5)% 3.1% 6.2%
===== ===== =====
</TABLE>
21
<PAGE> 23
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1997
The dollar amounts referred to in this section comparing operating results
for the year ended December 31, 1996 with December 31, 1997 are approximate
amounts stated in millions and are based on the financial statements included
elsewhere in this Report, which amounts are stated in thousands. All
percentages referred to in this section comparing operating results for the
year ended December 31, 1996 with December 31, 1997 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.
Revenue
Total revenue increased from $40.7 million in 1996 to $53.1 million in 1997,
an increase of $12.4 million or 30.5%. Net premiums written increased from $12.6
million in 1996 to $20.5 million in 1997, an increase of $7.9 million or 62.7%.
The increase in net premiums written was principally due to growth in loan
portfolios of the Company's existing and former Tracking and Outsourcing
Services clients. There was no material price change related to the Company's
insurance products in 1997.
Net premiums earned increased from $13.6 million in 1996 to $19.0 million in
1997, an increase of $5.5 million, or 40.1%. The increase was primarily due to
an increase in net written premiums, as previously described.
Real estate information services revenue (consisting of revenue from
Pinnacle and PinTax) increased from $18.5 million in 1996 to $23.5 million in
1997, an increase of $5.0 million, or 27.0%. Approximately $2 million of the
increase was the result of PinTax, which was acquired in September 1997. The
remainder of the increase was the result of higher flood zone determination
volumes from existing customers. The Company's overall price level for its real
estate information services did not materially change in 1997.
Tracking fees increased from $5.5 million in 1996 to $7.5 million in 1997,
an increase of $2.1 million or 37.7%. The increase was primarily due to higher
volumes of motor vehicle leases tracked for new and existing customers.
Expenses
Loss and LAE was $4.0 million in 1996 (29.5% of net premiums earned) and
$6.5 million in 1997 (34.0% of net premiums earned), an increase of $2.5
million, or 62.0%. The increase was due to an increase in the number and average
size of claims. The average loss per new claim reported increased from $5,513 in
1996 to $7,693 in 1997. The number of new claims increased from 726 reported in
1996 to 843 reported in 1997.
Commissions paid to nonaffiliates decreased from $2.0 million (14.4% of
premiums earned) in 1996 to $1.8 million (9.6% of premiums earned) in 1997, a
decrease of $117,000, or 6.0%. The reduction in commissions paid to
nonaffiliates was a result of relatively higher growth in net written and earned
premiums from clients which do not earn commissions on the Company's insurance
products.
Personnel expenses increased from $18.9 million in 1996 to $23.1 million in
1997, an increase of $4.2 million, or 22.1%. The increase in personnel expenses
was due to an increase in incentive compensation and staff additions in response
to several factors, primarily an increase in the volume of flood zone
determinations and loans tracked. To a lesser extent, the PinTax Acquisition
contributed to additional personnel costs in 1997. Personnel expenses as a
percent of total revenue decreased from 46.6% in 1996 to 43.6% in 1997.
All other expenses increased from $14.2 million in 1996 to $16.9 million in
1997, an increase of $2.7 million, or 19.0%. Approximately $1.4 million of the
1996 expenses was as a result of retention agreements entered into with certain
executives in June 1996. 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. The
22
<PAGE> 24
remaining increase in all other expenses was due to several factors, including
an increase in direct costs related to growth in revenues (e.g., data,
telecommunications cost, postage) and an increase in sales, marketing,
consulting and advertising costs.
As a result of the above factors, income before provision for income taxes
increased from $1.6 million in 1996 to $4.7 million in 1997, an increase of $3.1
million, or 202%.
YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1996
The dollar amounts referred to in this section comparing operating results
for the year ended December 31, 1995 with December 31, 1996 are approximate
amounts stated in millions and are based on the financial statements included
elsewhere in this Report, which amounts are stated in thousands. All percentages
referred to in this section comparing operating results for the year ended
December 31, 1995 with December 31, 1996 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.
Revenue
Total revenue increased from $35.9 million in 1995 to $40.7 million in 1996,
an increase of $4.8 million or 13.2%. Net premiums written decreased from $15.0
million in 1995 to $12.6 million in 1996, a decrease of $2.4 million or 15.5%.
The decrease in net premiums written 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 20.2%. The decrease was partially due to the
increase in reserve for return premiums and also partially due to a decline in
written premiums.
Real estate information services revenue increased from $10.6 million in
1995 to $18.5 million in 1996, an increase of $7.9 million or 74.6%. 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 14.5%. 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 33.8%. The decline in losses and LAE was a direct result of fewer losses and
loss adjustment expenses incurred during 1996 than in 1995. 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 (24.0% of
premiums earned) in 1995 to $2.0 million (14.4% of premiums earned) in 1996, a
decrease of $2.1 million, or 52.1%, 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 12.2%. The increase in personnel expenses
was due to staff additions and increased outside labor in response to the
23
<PAGE> 25
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 16.1%. 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.
Non-recurring expenses decreased from $4.1 million in 1995 to $0 in 1996. In
1995, the Company accrued an additional $4.1 million for the constitutionally
mandated roll-back of insurance premiums under Proposition 103.
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.
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 to meet its liquidity
requirements, including debt service obligations. Dividends payable to National
by GPIC are subject to certain regulatory restrictions which are described
below.
The Company's primary sources of cash are from operating income and lines of
credit. In 1997, the Company derived a substantial portion of its operating cash
from the operating profits from Pinnacle, as well as the net premiums written
from GPIC. The Company has reserved certain amounts of the net written premiums
it received in 1997 for a variety of purposes, including reserves for return
premiums, unearned premiums and loss reserves. 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 December 31, 1997, the Company had cash and short-term investments
aggregating $10.4 million.
Of the Company's cash and short-term investments, $8.7 million is held by
GPIC. 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 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, 1997,
GPIC had net income of $1.7 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
$2.8 million. For 1998, the maximum dividend permitted to be paid by GPIC to
National is approximately $2.6 million. See "Market for Registrant's Common
Equity and Related Stockholder Matters" and Note 14 of Notes to Consolidated
Financial Statements.
In connection with the PinTax Acquisition, National and New Arts entered
into a term note facility (the "Term Facility") with the Company's primary
commercial bank. The Term Facility allows for a maximum borrowing of $11.3
million, including $2 million for any Additional Consideration which may be
payable pursuant to the Agreement on or before May 25, 1998. The Term Facility
matures in May 2003 and calls for interest payments at the rate of the lending
bank's prime rate plus one and one-quarter percent, beginning September 1997.
Principal is paid monthly,
24
<PAGE> 26
beginning May 30, 1998, in accordance with a variable amortization schedule.
Collateral for the loan includes non-insurance company cash deposits of the
Company, the common stock of Pinnacle, as well as the stock of PinTax and of New
Arts. As of December 31, 1997, the Company has utilized $9.3 million of the
$11.3 million Term Facility.
On April 2, 1997, the Company obtained a $5 million revolving credit
facility from the Company's primary commercial bank (the "Revolving Facility").
On September 18, 1997, the Revolving Facility was amended. The primary amendment
to the Revolving Facility was the reduction in borrowing limits to $1 million
from $5 million. As of December 31, 1997, the Company had no borrowings under
the Revolving Facility and was in compliance with the financial covenants of the
Revolving Facility. The Revolving Facility expires March 31, 1999. See Note 7 of
Notes to Consolidated Financial Statements.
In September 1996, the Company concluded a note agreement with the Company's
primary commercial bank providing $2.0 million for the purpose of partially
financing the repurchase of 705,300 shares of its common stock. As of December
31, 1997 the unpaid balance of this note was approximately $333,000. The total
purchase price of the stock was approximately $5.0 million. See Note 7 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, 1997, totaled $27.8
million or $6.73 per share compared to $28.6 million or $7.28 per share at
December 31, 1996.
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, 1997,
the Company's net written premium to policyholder surplus ratio was .8 to 1. See
"Business--Insurance Operations--Insurance Operating Ratios".
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.
There is no public securities market for certain investments held by the
Company. As of December 31, 1997, such investments were limited partnership
interests with an original cost of $220,000.
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.
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
25
<PAGE> 27
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 in 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. 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.
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 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 amount of net written premium and
the rate of cancellation of insurance policies, the addition or loss of
customers, 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 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 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 could have a material impact on the Company's 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Factors Affecting Operating
Results - The Insurance Industry".
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
26
<PAGE> 28
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, "Business - Insurance
Operations".
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 "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 "Business - Regulation - Reinsurance".
Errors and Omissions
Pinnacle 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
27
<PAGE> 29
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.
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. PMSIS and Fastrac 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 is on a claims made and
occurrence 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.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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
Information regarding executive officers called for by this Item is set
forth in a separate item captioned "Executive Officers of the Company" and
included in Part I of this Report. Other information required by this Item will
be contained in the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders, to be filed on or before April 30, 1998, and such
information is incorporated herein by reference.
28
<PAGE> 30
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, to be
filed on or before April 30, 1998, and such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, to be
filed on or before April 30, 1998, and such information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, to be
filed on or before April 30, 1998, and such information is incorporated herein
by reference.
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>
(1) FINANCIAL STATEMENTS:
Report of Independent Accountants....................................... 31
Consolidated Balance Sheets, December 31, 1997 and 1996................. 32
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995....................................... 33
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995................... 34
Consolidated Statement of Cash Flows for the years
ended December 31, 1997, 1996 and 1995................................. 35
Notes to Consolidated Financial Statements.............................. 36
(2) FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement Schedules...... 55
I Summary of Investments Other than Investments in Related Parties... 56
II Condensed Financial Information of Registrant (Parent Company)..... 57
III Supplementary Insurance Information Concerning Property
Casualty Operations .............................................. 60
IV Reinsurance........................................................ 61
</TABLE>
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.
29
<PAGE> 31
(b) REPORTS ON FORM 8-K
National filed a Form 8-K on October 3, 1997 relating to the acquisition
of PinTax, which included as exhibits a Purchase Agreement dated August
15, 1997, Amendment No.1 to the Purchase Agreement dated September 18,
1997, and a press release dated September 18, 1997. National filed a
Form 8-K/A on November 26, 1997 which filed certain financial statements
which were unavailable at the time the initial Form 8-K was filed,
including, (i) American Realty Tax Services, Inc.("ARTS") and American
Realty Tax Services of New York, Inc. ("ARTS-NY") Combined Balance
Sheets as of December 31, 1995 and December 31, 1996, (ii) ARTS and
ARTS-NY Combined Statements of Operations for the years ended December
31, 1995 and December 31, 1996, (iii) ARTS and ARTS-NY Combined
Statements of Shareholders' Deficit commencing January 1, 1995 and
ending December 31, 1996, (iii) ARTS and ARTS-NY Combined Statements of
Cash Flows for the years ended December 31, 1995 and December 31, 1996,
(iv) ARTS and ARTS-NY Combined Balance Sheets as of June 30, 1996 and
June 30, 1997, (v) ARTS and ARTS-NY Combined Statements of Operations
for the six months ended June 30, 1996 and June 30, 1997, (vi) Pro Forma
Combined Financial Statements for the year ended December 31, 1996, and
(vii) Pro Forma Combined Statement of Operations for the year ended
December 31, 1996 and the six months ended June 30, 1997.
(c) EXHIBITS
See Item 14 (a) (3) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14 (a) (2) above.
30
<PAGE> 32
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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
February 6, 1998
31
<PAGE> 33
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1996 1997
------ -------
ASSETS
<S> <C> <C>
Investments:
Fixed maturities at market (amortized cost: $18,293 in 1996 and
$15,098 in 1997)............................................... $18,538 $15,359
Equity securities at market....................................... 2,051 4,200
Short-term investments, at cost (which approximates market)....... 11,984 9,290
------ -------
Total investments............................................. 32,573 28,849
Cash .............................................................. 1,204 1,113
Net premiums and accounts receivable.................................. 5,181 8,990
Accrued interest receivable........................................... 377 449
Net property and equipment............................................ 3,484 5,424
Deferred acquisition costs............................................ 2,186 2,704
Deferred federal income taxes......................................... 421 3,117
Intangible assets..................................................... -- 13,178
Other assets.......................................................... 1,686 2,918
------ -------
Total assets.................................................. $47,112 $66,742
======= =======
LIABILITIES
Reserve for losses and LAE............................................ $ 2,198 $ 3,232
Unearned premiums..................................................... 4,753 6,217
Commissions payable................................................... 584 837
Accrued expenses and other liabilities................................ 4,247 6,125
Drafts payable........................................................ 295 832
Notes payable......................................................... 1,333 9,601
Reserve for return premiums........................................... 2,382 4,399
Reserve for Proposition 103........................................... 2,268 ---
Deferred revenue...................................................... 500 7,719
------- -------
Total liabilities............................................. $18,560 $38,962
======= =======
Commitments (Note 15)
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, 4,032,882 and 3,896,937 in 1997 and 1996,
respectively........................................................ $17,592 $18,610
Retained earnings..................................................... 10,960 9,170
------- --------
Total shareholders' equity.................................... 28,552 27,780
------- -------
Total liabilities and shareholders' equity............................ $47,112 $66,742
======= =======
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
32
<PAGE> 34
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net premiums written ....................... $ 14,956 $ 12,636 $ 20,501
Change in unearned premiums ................ 2,064 949 (1,463)
----------- ----------- -----------
Net premiums earned ........................ 17,020 13,585 19,038
Real estate information services ........... 10,593 18,499 23,492
Tracking fees .............................. 4,786 5,479 7,543
Net commissions income ..................... 1,502 1,145 1,166
Net investment income ...................... 2,042 1,975 1,839
----------- ----------- -----------
Total revenues ..................... 35,943 40,683 53,078
----------- ----------- -----------
Loss and LAE ............................... 6,044 4,002 6,482
Commissions paid to nonaffiliates .......... 4,079 1,954 1,837
Personnel expenses ......................... 16,891 18,948 23,127
All other expenses ......................... 12,252 14,221 16,930
Non-recurring expenses ..................... 4,100 -- --
----------- ----------- -----------
Total expenses ..................... 43,366 39,125 48,376
----------- ----------- -----------
Income (loss) before provision for
(benefit from) income taxes ............. (7,423) 1,558 4,702
Provision for (benefit from) income taxes... (2,559) 284 1,436
----------- ----------- -----------
Net income (loss) .......................... $ (4,864) $ 1,274 $ 3,266
=========== =========== ===========
Earnings per share:
Basic:
Weighted average shares outstanding ...... 4,679,201 4,109,655 3,946,257
Basic EPS ................................ $ (1.04) $ 0.31 $ 0.83
Diluted:
Weighted average shares outstanding ...... 4,679,201 4,141,360 4,127,382
Diluted EPS .............................. $ (1.04) $ 0.31 $ 0.79
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
33
<PAGE> 35
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, 1995 ..................... 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
Net unrealized gain on fixed maturities
and equity securities, net of deferred tax .. -- -- 48 48
Options exercised ............................. 136 1,018 -- 1,018
Net income .................................... -- -- 3,266 3,266
Dividends paid ................................ -- -- (5,104) (5,104)
------- -------- -------- --------
Balance, December 31, 1997 .................... 4,033 $ 18,610 $ 9,170 $ 27,780
======= ======== ======== ========
</TABLE>
Dividends declared per share were $1.30 for the year ended December 31,
1997. 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.
34
<PAGE> 36
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ....................................... $ (4,864) $ 1,274 $ 3,266
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ....................... 2,193 1,758 1,536
Loss on sale of equipment ........................... 1,040 288 --
Change in assets and liabilities net of effects
from the purchase of ARTS:
(Increase) decrease in net premiums and accounts
receivable, and accrued interest receivable .... (89) 339 (2,686)
(Increase) decrease in deferred acquisition costs .. 949 438 (517)
Increase (decrease) in insurance liabilities ....... (3,179) (767) 5,051
Increase (decrease) in reserve for Prop. 103 ....... 4,100 (2,266) (2,268)
(Increase) decrease in tax assets .................. (1,292) 1,169 123
Other, net ......................................... 709 (200) 348
-------- --------- --------
Net cash provided (used) by
operating activities ............................ (433) 2,033 4,853
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments ................................. (43,518) (123,509) (56,382)
Maturity of investments ................................. 45,273 128,138 60,106
Purchase of equipment ................................... (1,350) (1,445) (2,969)
Purchase of ARTS ........................................ -- -- (9,881)
-------- --------- --------
Net cash provided (used) by
investing activities ............................. 405 3,184 (9,126)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes ......................... -- 2,000 9,268
Principal payments on notes payable ..................... -- (667) (1,000)
Repurchase of common stock .............................. -- (5,667) --
Stock options exercised ................................. 6 188 1,018
Dividends to shareholders ............................... -- -- (5,104)
--------- --------- ---------
Net cash provided (used) by
financing activities .............................. 6 (4,146) 4,182
--------- --------- ---------
Net increase (decrease) in cash ............................. (22) 1,071 (91)
Cash at beginning of year ................................... 155 133 1,204
--------- --------- ---------
Cash at end of year ......................................... $ 133 $ 1,204 $ 1,113
========= ========= =========
</TABLE>
The accompanying notes are an
integral part of these consolidated financial statements.
35
<PAGE> 37
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 (the
"Subsidiaries") Pinnacle Data Corporation ("Pinnacle"), Pinnacle Real Estate Tax
Services, Inc. ("PinTax-VA"), Pinnacle Real Estate Tax Services of New York,
Inc. ("PinTax-NY", which together with PinTax-VA are referred to collectively as
"PinTax"), Pinnacle Management Solutions Insurance Services ("PMSIS" formerly
known as Fastrac Systems, Inc. Insurance Agent and Broker), Great Pacific
Insurance Company ("GPIC"), Fastrac Systems, Inc. ("Fastrac") and New Arts
Acquisition, Inc. ("New Arts").
The Subsidiaries have transactions with each other in the ordinary course of
business. PMSIS receives a commission for business it writes which is insured or
reinsured by GPIC and receives fees from GPIC. Certain expenses are shared among
the Subsidiaries for providing insurance Tracking and Outsourcing Services. All
significant intercompany accounts and transactions have been eliminated.
National and its Subsidiaries provide specialized information services
through technology, tracking services, outsourcing services and related
insurance products to mortgage bankers and other financial institutions located
throughout the United States and in Canada. 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 the customers of
the Company to:
o determine if residential or commercial real estate is located inside or
outside a federally-designated Special Flood Hazard Area ("SFHA"), with
respect to real estate which is collateral for loans being financed or
serviced by customers of the Company or for other purposes, (the "Flood
Zone Determination Services");
o obtain real estate tax data from various local, county and state taxing
authorities nationwide with respect to real estate which is collateral
for loans being financed or serviced by the customers of the Company,
facilitate the payment to such taxing authorities by mortgage lenders
and mortgage loan servicing companies from certain escrowed funds
collected for real estate taxes from their borrowers with each monthly
loan payment for real estate taxes to such taxing authorities, and
inform mortgage lenders and mortgage servicing companies whether the
real estate taxes on property securing real estate loans have been paid
and perform certain tasks of the Company's customers on an outsourced
basis (the "Real Estate Tax Services"); and
o monitor the insurance coverage on collateral securing residential
mortgages (predominantly one-to-four unit family dwellings), motor
vehicle and other consumer loans and leases and, to a lesser extent,
commercial mortgages, disburse insurance premiums collected from
borrowers with each monthly loan payment for insurance coverage on
behalf of mortgage lenders and mortgage servicing companies and perform
certain tasks of the Company's customers on an outsourced basis
(collectively, the "Tracking and Outsourcing Services").
When the Tracking and Outsourcing Services indicate that insurance coverage
has lapsed, the customer may contract with the Company to provide specialized,
fire, allied peril or physical damage insurance (generally referred to as
"lender-placed" insurance, formerly referred to by the Company as "force-place"
insurance), which the Company provides through its wholly-owned subsidiary Great
Pacific Insurance Company, in 48 states and the District of Columbia and through
nonaffiliated insurance companies in the remainder of the United States. The
Company also provides flood insurance, for which the risk is assumed by an
agency of the U. S. Government under the National Flood Insurance Program
("NFIP"). In addition, the Company provides fire and allied peril insurance with
respect to properties on which financial institutions have foreclosed, and
physical damage insurance on motor vehicles. Great Pacific Insurance
36
<PAGE> 38
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company is rated "A" ("Excellent") by A.M. Best Company, a nationally recognized
insurance statistical and rating service.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies
adopted by National and its Subsidiaries in the accompanying financial
statements:
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 common stock, preferred stock and limited
partnership interests. 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 carried at market value or at cost in the
event market values are not readily determinable. 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 classified its fixed maturity and equity security investments as
held-to-maturity. Held-to-maturity investments were carried at amortized cost.
The Company's investment policies are designed to 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.
Data processing equipment and purchased software and office furniture and
equipment are depreciated over five (5) years, and motor vehicles 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.
Internal costs associated with software development of the Company's
products have been expensed as incurred. Costs associated with software
development by third parties are capitalized and depreciated over the estimated
useful life of the software.
Intangible assets include only goodwill, which is the excess of cost over
fair market value of the Company's acquired entities. Goodwill is amortized on a
straight-line basis over a period of twenty-five years. The Company evaluates
the recoverability of long-lived assets such as goodwill by measuring the
carrying amount of the assets against the estimated undiscounted future cash
flows associated with them. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are
37
<PAGE> 39
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjusted to their fair values. Based on these evaluations, there were no
adjustments to the carrying value of long-lived assets in 1996 or 1997.
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 refund as defined by law or regulation. In certain circumstances, the
Company grants refunds in excess of the 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.
Real estate information services revenue consists of revenues from Pinnacle
and PinTax. Revenue for Pinnacle is recognized as income in the period in which
Flood Zone Determination Services are performed. For certain customers, Pinnacle
provides "life of loan" services. In these cases, for an up-front additional
fee, Pinnacle is required to provide certain services during the life of the
loan (the period of time the loan remains in a customer's portfolio). For cash
revenues received under "life of loan" agreements, revenues are recognized in
proportion to the variable costs incurred over the life of a loan. Substantially
all of the variable costs incurred to provide such services occur within the
first year of a loan's life. Pinnacle recognizes deferred revenue in reflection
of its future servicing obligation for its "life of loan" customers.
The majority of tax service revenues earned by PinTax are from "life of
loan" servicing contracts, which require customers to pay an up-front, one-time
fee to receive Real Estate Tax Services over the life of a loan. The revenue
from "life of loan" contracts is recognized over the estimated life of the loans
in proportion to the amount of expenses incurred to service the real estate
property tax tracking on the subject loans. Since the bulk of expenses incurred
in providing real estate property tax tracking on the loans occurs in the first
year, a majority of the "life of loan" revenue is recognized within the first
year of servicing. The remainder of the revenue is amortized in accordance with
the estimated rate at which loans are paid off or otherwise are removed from the
servicing portfolio. As a result of this revenue recognition policy, PinTax
records a deferred revenue reserve on its balance sheet. As of December 31,
1997, deferred revenue for "life of loan" tax servicing was approximately $7.0
million. This is approximately the same amount of deferred revenue as of the
date of the PinTax Acquisition.
Tracking fee revenue consists primarily of fees earned in connection with
providing Tracking and Outsourcing Services for Fastrac's motor vehicle leasing
customers. Tracking fee revenue is recognized in the period in which it is
earned.
Commission income is recorded when earned, net of an estimated reserve for
cancellation.
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.
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.
38
<PAGE> 40
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In June 1997, the FASB issued 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 does not believe that SFAS No.
130 will have a material impact on its financial statements.
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 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.
For comparative purposes, certain prior year amounts have been reclassified
to conform to the current year presentation. Such reclassifications had no
impact on the net income (loss) or shareholders' equity.
3. INVESTMENTS
(a) Fixed-maturity investments available for sale (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1997
---------------------------------------------- ----------------------------------------------
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 ........... $ 2,599 $ 10 $-- $ 2,609 $ 1,849 $ 10 $-- $ 1,859
State and municipal
bonds ................ 10,282 235 -- 10,517 8,656 251 -- 8,907
Corporate Bonds ....... -- -- -- -- 1,193 -- -- 1,193
Certificates of deposit 5,331 -- -- 5,331 3,364 -- -- 3,364
Mortgage-backed
securities ........... 81 -- -- 81 36 -- -- 36
------- ------- ----- ------- ------- ------- ----- -------
Total .............. $18,293 $ 245 $-- $18,538 $15,098 $ 261 $-- $15,359
======= ======= ===== ======= ======= ======= ===== =======
</TABLE>
39
<PAGE> 41
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, 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
---------------------------------------- ------------------------------------------
CORPORATE & CORPORATE &
STATE AND U.S. STATE AND U.S.
MUNICIPAL CERTIFICATES GOVT. MUNICIPAL CERTIFICATE GOVT.
AMOUNTS IN THOUSANDS BONDS OF DEPOSIT SECURITIES BONDS OF DEPOSIT SECURITIES
-------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Within one year .............. $ 757 $ -- $ -- $ 762 $ -- $ --
One through five years ....... 6,940 3,364 799 7,106 3,364 808
Six through ten years ........ 2,151 -- 1,050 2,232 -- 1,051
More than ten years .......... -- -- -- -- -- --
Mortgage-backed securities ... -- -- 36 -- -- 36
------- ------- ------- ------- ------- -------
Total........................$ 9,848 $ 3,364 $ 1,885 $10,100 $ 3,364 $ 1,895
======= ======= ======= ======= ======= =======
</TABLE>
There were no sales of fixed-maturity investments in 1996 or 1997.
(b) Equity Securities Available for Sale:
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.
At December 31, 1997 the Company had market rate preferred stock and common
stock with a cost of $3,525,145 and $353,276, respectively, an unrealized gain
(loss) of $126,793 and $(25,151), respectively, and a market value of $3,651,938
and $328,125, respectively. At December 31, 1997, the Company had limited
partnership interests with a cost of $220,000. The unrealized gain or loss on
these interests cannot be ascertained, because market values are not readily
determinable.
(c) The components of investment income are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Fixed maturities and equity securities........ $ 1,181 $ 1,246 $ 1,047
Short-term investments........................ 947 739 655
Net realized gains (losses)................... (3) 17 170
Investment expenses........................... (83) (27) (33)
------- ------- -------
Net investment income......................... $ 2,042 $ 1,975 $ 1,839
======= ======= =======
</TABLE>
40
<PAGE> 42
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1996 1997
-------- --------
<S> <C> <C>
Office furniture and equipment .................. $ 3,240 $ 3,726
Data processing equipment ....................... 6,618 8,360
Software ........................................ 4,579 4,751
Leasehold improvements .......................... 1,023 1,381
Other ........................................... -- 499
-------- --------
15,460 18,717
Less accumulated depreciation and amortization... (11,976) (13,293)
-------- --------
Total .................................... $ 3,484 $ 5,424
======== ========
</TABLE>
Depreciation and amortization expense (in thousands) was $2,160, $1,758, and
$1,536, in 1995, 1996, and 1997 respectively.
5. DEFERRED ACQUISITION COSTS
Changes in deferred acquisition costs are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Deferred acquisition costs, beginning of period... $ 3,573 $ 2,624 $ 2,186
Additions ........................................ 8,648 5,859 9,161
Amortization expense ............................. (9,597) (6,297) (8,643)
------- ------- -------
Deferred acquisition costs, end of period ........ $ 2,624 $ 2,186 $ 2,704
======= ======= =======
</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.
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,
----------------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Reserves for losses and LAE at beginning of year ... $ 3,360 $ 3,055 $ 2,198
------- ------- -------
Losses and LAE:
Provision for losses and LAE for claims
occurring in current year ..................... 6,378 3,971 6,364
Increase (decrease) in estimated losses
and LAE for claims occurring in prior years ... (334) 31 119
------- ------- -------
6,044 4,002 6,483
------- ------- -------
Losses and LAE payments for claims occurring during:
Current year ................................... 4,329 2,487 3,292
Prior years .................................... 2,020 2,372 2,157
------- ------- -------
6,349 4,859 5,449
------- ------- -------
Reserves for losses and LAE at end of year ......... $ 3,055 $ 2,198 $ 3,232
======= ======= =======
</TABLE>
41
<PAGE> 43
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE
In September 1996, a note agreement for $2,000,000 was entered into with the
Company's primary commercial bank (the "Term Note"). The Term 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 Term Note is the outstanding
capital stock of Pinnacle, which consists of 1,000 shares. As of December 31,
1997, the unpaid balance of this note was approximately $333,000.
In connection with the PinTax Acquisition, National and New Arts entered
into a term note facility (the "Term Facility") with the Company's primary
commercial bank. The Term Facility allows for a maximum borrowing of $11.3
million, including $2 million for any Additional Consideration which may be
payable pursuant to the Agreement on or before May 25, 1998. The Term Facility
matures in May 2003 and calls for interest payments at the rate of prime plus
one and one-quarter percent, beginning September 1997. Principal is payable
monthly, beginning May 30, 1998, in accordance with a variable amortization
schedule. Collateral for the loan includes non-insurance company cash deposits
of the Company, the common stock of Pinnacle, as well as the stock of PinTax and
of New Arts. As of December 31, 1997, the Company has utilized $9.3 million of
the $11.3 million Term Facility.
On April 2, 1997, the Company obtained a $5 million revolving credit
facility (the "Revolving Facility") from the Company's primary commercial bank.
On September 18, 1997, the Company amended the Revolving Facility. The primary
amendment to the Revolving Facility was the reduction in borrowing limits to $1
million from $5 million. As of December 31, 1997, the Company had no borrowings
under the Revolving Facility and was in compliance with the financial covenants
of the Revolving Facility.
The same financial covenants govern the Term Note, the Term Facility and the
Revolving Facility. The primary financial covenants are: (i) a minimum tangible
net worth requirement; (ii) a cash flow coverage requirement; and, (iii) a
minimum profitability requirement, whereby the Company must be profitable from
year-to-year and cannot report net losses for two consecutive quarters.
Interest paid for 1995, 1996 and 1997 was $0, $41,025 and $365,352,
respectively.
The minimum principal payments due under all of the Company's notes payable
as of December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Principal
Year Payment
------- --------
<S> <C>
1998............... $ 926
1999............... 965
2000............... 1,063
2001............... 2,004
2002............... 2,209
2003............... 2,434
------
Total.............. $9,601
======
</TABLE>
42
<PAGE> 44
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAX
The components of income tax expense (benefit) are as follows (in
thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Federal
Current ....... $(1,508) $ (829) $ 1,257
Deferred ...... (1,142) 1,091 (147)
Subtotal ... (2,650) 262 1,110
------- ------- -------
State
Current ....... 91 22 150
Deferred ...... -- -- 176
------- ------- -------
Subtotal ... 91 22 326
------- ------- -------
Total ......... $(2,559) $ 284 $ 1,436
======= ======= =======
</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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Tax at federal statutory rate ................... 35% 35% 35%
Tax-Exempt investment income .................... (9) (13) (4)
State tax net of federal benefits ............... -- -- 5
Rate differential on net operating
loss carryback ................................ -- -- (4)
Other ........................................... 8 (4) (1)
--- --- ---
Total ...................................... 34% 18% 31%
=== === ===
</TABLE>
The components of the net deferred tax balance as of December 31, 1995, 1996
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
ASSET (LIABILITY)
-----------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Unearned premium reserve .... $ 388 $ 323 $ 423
Deferred acquisition costs .. (892) (743) (919)
Loss reserve discounting .... 39 90 68
Prepaid expenses ............ (95) (134) 1
Deferred revenue ............ 335 170 3,190
Proposition 103 reserve ..... 1,541 -- --
Accrued liabilities ......... 181 613 412
Depreciation ................ -- -- (132)
Other ....................... 93 102 74
------- ------- -------
Total .................. $ 1,590 $ 421 $ 3,117
======= ======= =======
</TABLE>
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.
43
<PAGE> 45
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-----------------------------------
1995 1996 1997
------- ------ -------
<S> <C> <C> <C>
Unearned premium reserve ........................... $ 140 $ 65 $ (100)
Deferred acquisition costs ......................... (323) (149) 176
Write-down of carrying value of equity securities... 78 -- --
Loss reserve discounting ........................... 23 (51) 22
Prepaid expenses ................................... 140 39 (135)
Deferred revenue ................................... (134) 165 (3,020)
Prop. 103 reserve .................................. (1,394) 1,541 --
Accrued liabilities ................................ 307 (432) 201
Depreciation ....................................... -- -- 132
Other .............................................. 21 (87) 28
------- ------- -------
Total ......................................... $(1,142) $ 1,091 $(2,696)
======= ======= =======
</TABLE>
Taxes paid in 1995, 1996 and 1997 were $91,000, $22,000, and $1,576,296
respectively. Tax refunds received for 1995, 1996 and 1997 were $627,000,
$798,000, and $1,340,638 respectively.
9. EMPLOYEE BENEFIT PLAN
The Company adopted a defined contribution 401(k) plan on July 1, 1996.
All employees of the Company are eligible to participate in the plan at the
beginning of a calendar quarter following completion of ninety days of
continuous employment as defined in the 401(k) plan. 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 and $82,406 for 1997.
10. 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.
11. EARNINGS PER SHARE
In February 1997, FASB 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 implemented SFAS No. 128 in
1997. The impact SFAS No. 128 is set forth in the following tables. The earnings
per share for 1995 and 1996 were restated to reflect SFAS No. 128.
44
<PAGE> 46
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BASIC EPS UNDER SFAS NO. 128
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- ------------
<S> <C> <C> <C>
Weighted average common shares ..... 4,679,201 4,109,655 3,946,257
Net income (loss) (in thousands) ... $ (4,864) $ 1,274 $ 3,266
Per share results:
Net income (loss) ......... $ (1.04) $ 0.31 $ 0.83
DILUTED EPS UNDER SFAS NO. 128
1995 1996 1997
----------- ----------- -----------
Weighted average common shares ..... 4,679,201 4,109,655 3,946,257
Common shares issuable under
outstanding stock options ........ -- 31,705 181,125
----------- ----------- -----------
Total ..................... 4,679,201 4,141,360 4,127,382
=========== =========== ===========
Net income (loss) (in thousands).... $ (4,864) $ 1,274 $ 3,266
Per share results:
Net income (loss) ......... $ (1.04) $ 0.31 $ 0.79
</TABLE>
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 1995, the Company had a loss per share which is calculated
based upon the number of common shares outstanding.
12. 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 1,106,820 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 $1,000, $14,235 and
$189,032 during 1995, 1996, and 1997, respectively. This amount has been
credited directly to common stock.
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
45
<PAGE> 47
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Principles 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 $0 for 1995, $584,000 for 1996 and
$708,327 for 1997. Earnings per share would not have been affected in 1995, but
would have been $0.23 in 1996 and $0.61 in 1997. The pro forma effect on net
income for 1995, 1996 and 1997 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 1997, 1996 and 1995, is estimated at $4.37, $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 1997 and 1996:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Dividend yield............. 0% 0%
Expected volatility........ 42.41% 46.30%
Risk-free interest rates... 5.11%-6.77% 5.73%-6.75%
Expected life.............. 5 years 5 years
</TABLE>
The following table summarizes option activity during 1996 and 1997 for the
1986 Stock Option Plan, as amended, and 1991 Director Option Plan, as amended.
<TABLE>
<CAPTION>
1996 1997
----------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE PER EXERCISE PRICE PER
OPTIONS SHARE OPTIONS SHARE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Shares issuable under outstanding
options at January 1 ................... 771,830 $ 6.66 1,144,783 $ 6.65
Options granted ........................ 566,000 $ 6.14 288,000 $ 8.65
Options exercised ...................... (22,540) $ 6.64 (135,945) $ 6.10
Options canceled or forfeited .......... (170,507) $ 5.64 (327,186) $ 6.67
---------- -------- ---------- --------
Shares issuable under outstanding
options at December 31 ................. 1,144,783 $ 6.65 969,652 $ 7.32
========== ======== ========== ========
Options exercisable at December 31...... 836,970 $ 6.84 723,297 $ 7.63
========== ======== ========== ========
</TABLE>
46
<PAGE> 48
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 or consulting 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, 1997.
<TABLE>
<CAPTION>
AVERAGE WEIGHTED AVERAGE
RANGE OF WEIGHTED NUMBER OF REMAINING LIFE EXERCISE PRICE PER
EXERCISE PRICES OUTSTANDING OPTIONS (YEARS) SHARE
--------------- ------------------- ------- -----
<S> <C> <C> <C>
$5.13 - $7.30 754,402 7.46 $ 6.19
$8.88 - $13.00 211,406 8.49 $ 11.19
$14.58 - $15.25 3,844 4.09 $ 14.75
------- ---- ---------
Total: 969,652 7.67 $ 7.32
======= ==== =========
</TABLE>
Options exercisable:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF NUMBER EXERCISABLE AT AVERAGE EXERCISE
EXERCISE PRICES DECEMBER 31, 1997 PRICE PER SHARE
--------------- ----------------- ---------------
<S> <C> <C>
$5.13 - $7.30 508,047 $ 6.09
$8.88 - $13.00 211,406 $ 11.19
$14.58 - $15.25 3,844 $ 14.75
------- ---------
Total: 723,297 $ 7.63
======= =========
</TABLE>
13. 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
represented 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 7 to Notes to Consolidated Financial Statements.
14. DIVIDEND RESTRICTION
California law limits the payment of dividends to National by GPIC. The
maximum dividend that may be paid without prior approval of the California
Insurance Commissioner is limited to the greater of 10% of policyholders'
surplus
47
<PAGE> 49
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 GPIC at December 31,
1996. Statutory policyholders' surplus and net income of GPIC is as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----------- -------- -------
<S> <C> <C> <C>
Statutory policyholders' surplus...... $ 23,687 $ 26,765 $ 25,580
Net income (loss)..................... $ (1,892) $ 2,758 $ 1,627
</TABLE>
California law further prohibits the payment of dividends without prior
approval of the California Department of Insurance (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 statutory annual
statement filed with the Department, 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.
GPIC paid National approximately $2.5 million in dividends in 1997. There
were no cash dividends paid by GPIC in 1995 or 1996.
15. COMMITMENTS
The Company has entered into operating leases for office space for National
and the Subsidiaries' home office, Fastrac's branch offices in Springfield,
Ohio, Pinnacle's office in Concord, California, PinTax's office in Vienna,
Virginia and other offices. Rental expense under operating leases was
$1,134,000, $1,175,000 and $1,447,000 in 1995, 1996 and 1997, respectively.
National has entered into employment contracts with certain key employees
which are not at-will employment agreements. Base compensation expense (not
including bonus or commission) under such employment contracts was $199,493,
$286,019 and $590,000 in 1995, 1996 and 1997, 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, 1997, National had commitments for such future
compensation with respect to employment contracts with Mark Speizer and Bruce
Cole.
The future minimum payments due under commitments at December 31, 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING EMPLOYMENT
FOR THE YEAR ENDING DECEMBER 31, LEASES AGREEMENTS
-------------------------------- ------ ----------
<S> <C> <C>
1998 ............................................ $1,918 $ 590
1999 ............................................ 1,506 306
2000 ............................................ 583 --
2001 ............................................ 191 --
2002 ............................................ 39 --
------ ------
Total minimum payments $4,237 $ 896
</TABLE>
16. PROPOSITION 103
On October 25, 1995, GPIC entered into a stipulation and consent order with
the California Insurance Department to resolve GPIC's rollback obligation
related to California Proposition 103. Pursuant to that settlement, GPIC 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 GPIC's total written premiums
48
<PAGE> 50
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in California for policies in Proposition 103 lines issued or renewed during the
rollback year. Pursuant to the settlement, the rollback refund constitutes
GPIC's entire rollback obligation and fully discharges GPIC 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 GPIC 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 GPIC from time
to time between November 8, 1989 and the date the settlements were approved.
In October 1997, the amount of the uncashed refund checks were escheated to
the State of California in accordance with its laws. The Company had previously
established adequate reserves to cover such payments.
17. REINSURANCE
GPIC, 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 GPIC in the event any reinsurer
is unable or will not fulfill the obligations assumed under the agreements. GPIC
limits its credit risk associated with reinsurance recoverables by evaluating
the financial condition of members of the reinsurance pool, and diversifying the
pool participants. For the years ended December 31, 1995, 1996, and 1997, there
were no receivables recorded under reinsurance treaties.
For the years ended December 31, 1995, 1996 and 1997, ceded reinsurance
premiums, exclusive of flood reinsurance premiums, were $933,000, $691,000, and
$780,338, respectively, and with respect to losses in such years, there were no
ceded reinsurance losses.
GPIC 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, 1995, 1996, and 1997, ceded
reinsurance premiums for this program were $1,234,000, $2,268,000, and
$2,859,438 respectively.
18. MAJOR CUSTOMERS
During 1995, National and Subsidiaries derived 13% of total revenues from
one customer, all of which was for insurance services. During 1996, National and
Subsidiaries derived 9% of total revenues from one customer, of which all was
for insurance services. During 1997, National and Subsidiaries derived 11.8% of
total revenues from one customer, all of which was for insurance services. In
the second half of 1997 the Company received notice that such customer and one
other customer, which, combined, accounted for 18.8% of consolidated revenues in
1997, would not renew their hazard tracking, outsourcing and lender-placed
insurance contracts.
19. RELATED PARTY TRANSACTIONS
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.
49
<PAGE> 51
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
One of the companies which provides reinsurance to the Company is
Constitution Reinsurance Corporation. Bard E. Bunaes, a director of the Company,
is also Chairman of the Board and Chief Executive Officer of Constitution
Reinsurance Corporation. Constitution Reinsurance Corporation has been a
reinsurer of the Company in excess of 15 years. In 1996 and 1997 premiums paid
to Constitution Reinsurance Corporation by the Company with respect to such
reinsurance totaled approximately $34,000 and $70,000, respectively.
In September 1996 National entered into a consulting agreement (the
"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 was for one
year; and the term was extended for an additional period of one year, which
expires on September 11, 1998. Pursuant to the Consulting Agreement, Scorpion
receives an annual fee of $300,000 plus reimbursement for reasonable
out-of-pocket costs and expenses. Nuno Brandolini is the sole shareholder, a
director and chief executive officer of Scorpion. Kevin McCarthy is a director
and president of Scorpion. Messrs. Brandolini and McCarthy were directors of
National from July 1996 to July 1997.
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 was evidenced by a Convertible
Promissory Note, in the principal amount of $300,000, which earned interest at
the rate of 10% per annum. Mr. Brandolini and Mr. McCarthy, who were directors
of National, are also directors, officers and shareholders of Hydrodynamics. The
transaction was identified and recommended to the Company by Scorpion pursuant
to the Consulting Agreement. In December 1996, Hydrodynamics commenced voluntary
proceedings under Chapter 11 of the federal bankruptcy laws. In February 1997,
Arabella, S.A. ("Arabella") 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. Mr. Brandolini is also a director of Arabella.
In July 1997, an affiliate of Scorpion, known as Scorpion Acquisition, LLC
("Scorpion Acquisition"), sold to Mark A. Speizer certain rights previously
granted to Scorpion Acquisition by Mr. Speizer to acquire shares of National
owned by Mr. Speizer. In consideration for sale of such rights to Mr. Speizer,
Mr. Speizer will pay to Scorpion Acquisition an amount equal to the greater of
$4,000,000 or 50% of the notional profits that would have been earned on a
notional 924,000 shares of Common Stock with a notional cost of $7.75 per share,
each subject to certain defined adjustments. Profits are determined by reference
to the average closing price of Common Stock (and the average closing price of
securities other than Common Stock paid by dividend, spin-off or otherwise on
Common Stock ["Distributed Stock"]) during the fifteen business days preceding
and the fifteen business days following June 30, 2002, or if Scorpion
Acquisition has made an election permitted under its purchase agreement with Mr.
Speizer, that date between January 1, 2000 and June 30, 2002 that is so elected.
Mr. Speizer may pay the purchase price in cash or in shares of National or
shares of Distributed Stock subject to having received any necessary approvals
or exemptions from the California Insurance Commissioner as may be required by
statute or regulation.
In August 1997, National invested $100,000 for a limited partnership
interest in Pizza Partners, L.P., a Delaware limited partnership. Among other
things, such partnership was formed to acquire a number of Pizza Hut restaurants
in Northern California, Oregon and Nevada. The investment was identified and
recommended to the Company by Scorpion pursuant to the Consulting Agreement.
50
<PAGE> 52
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1997, Arabella acquired 300,000 shares of the Company's stock from
Mr. Speizer and was paid $2 million by Mr. Speizer in repayment of a loan made
to Mr. Speizer in May 1996. See Note 20 of Notes to Consolidated Financial
Statements. In November 1997, such shares were transferred to Scorpion
Acquisition by Arabella in exchange for an 80% interest in Scorpion Acquisition.
Mr. Brandolini and Mr. McCarthy each own an 8.4% interest as members of Scorpion
Acquisition. Mr. Paul Caland owns an 80% interest in Scorpion Acquisition, which
interest Mr. Caland acquired from Arabella in December 1997. The interests of
Messrs. Brandolini, McCarthy and Caland in Scorpion Acquisition and the transfer
of the member interests of Arabella to Mr. Caland are based upon information
filed by Scorpion Acquisition and Mr. Caland in a Schedule 13D with the
Securities and Exchange Commission on February 27, 1997.
In January 1998 the Compensation Committee of the Board of Directors granted
each of Mr. Brandolini and Mr. McCarthy an option to purchase 37,500 shares of
the Company's common stock. The grants were made pursuant to the Company's 1986
Stock Option Plan, as amended, and with reference to Mr. Brandolini and Mr.
McCarthy acting as consultants to the Company through Scorpion. The terms and
conditions of the grants are the same as those pertaining to grants to employees
and other consultants of the Company.
20. 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 its wholly-owned subsidiaries. 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.
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 current
proceedings is likely to have a materially adverse effect on the consolidated
financial position of the Company.
22. ACQUISITION
On September 18, 1997, two wholly-owned subsidiaries of the Company,
Pinnacle American Realty Tax Services, Inc., a Delaware corporation
("PARTS-VA"), and Pinnacle American Realty Tax Services of New York, Inc., a
Delaware corporation ("PARTS-NY"), acquired substantially all the assets and
assumed certain liabilities of American Realty Tax Services, Inc., a Virginia
corporation ("ARTS-VA"), and American Realty Tax Services of New York, Inc., a
Virginia corporation ("ARTS-NY") (ARTS-NY and ARTS-VA, collectively "ARTS"). The
acquisition agreement, dated August 15, 1997, as amended (the "Agreement"), was
entered into by and among ARTS, the shareholders of ARTS, the Company, and New
Arts. On October 1, 1997, PARTS-VA changed its name to Pinnacle Real Estate Tax
Services, Inc. and PARTS-NY changed its name to Pinnacle Real Estate Tax
Services of New York, Inc. The business of PinTax is providing Real Estate Tax
Services.
As consideration for the acquisition of certain assets of ARTS. New Arts
paid $9.8 million in cash and agreed to assume certain liabilities of ARTS.
Pursuant to the Agreement, if the cash revenue received by the Company for
certain contracts of PinTax exceeds certain targets for the twelve months ended
and including April 30, 1998, PinTax is required
51
<PAGE> 53
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to pay additional consideration of up to $4 million according to a formula as
set forth in the Agreement ("Additional Consideration"). If such amount is paid,
it will increase goodwill by a like amount. Fifty percent of the Additional
Consideration may be paid in the form of a three year note bearing interest at
eight percent per annum. The remaining fifty percent of the Additional
Consideration may be paid in cash. National has agreed to guarantee the payment
of these obligations.
The PinTax Acquisition was accounted for as a purchase of assets. The fair
market value of the assets acquired from ARTS was approximately $4.4 million.
The fair market value of liabilities assumed was approximately $7.3 million,
including approximately $7 million of deferred revenue related to ARTS' then
existing portfolio of loans. The amount of goodwill recorded as of the date of
PinTax Acquisition was $12.7 million, which is being amortized over a 25-year
period as a result of long standing vendor and customer relationships. Goodwill
is classified on the Company's balance sheet under "Intangible Assets".
The following pro forma financial statements reflect the results of
operations for 1997 and 1996 as though the PinTax Acquisition had occurred at
the beginning of the respective periods. The pro forma figures include the
following adjustments: (i) goodwill amortization expense of $510,000 in 1996 and
$379,000 in 1997; (ii) a reduction in investment income on investments not
purchased as part of the PinTax Acquisition of $635,000 and $11,000 in 1996 and
1997, respectively, which had been credited to ARTS' expenses; and, (iii)
interest on the debt incurred in connections with the PinTax Acquisition of
$868,000 in 1996 and $590,000 in 1997.
Pro Forma Combined Statements of Operations
For the Years Ended December 31, 1996 and December 31, 1997
(unaudited; figures in thousands except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
-----------------------
1996 1997
------- -------
<S> <C> <C>
Revenues ............ $49,082 $58,648
Expenses ............ 48,029 54,361
------- -------
Income before taxes . 1,053 4,287
Tax provision ....... 77 1,266
------- -------
Net income .......... $ 976 $ 3,021
======= =======
Net income per share:
Basic ............ $ 0.24 $ 0.77
======= =======
Diluted .......... $ 0.24 $ 0.73
======= =======
</TABLE>
23. 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 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.
The principal segments of the Company are the following:
Information Services ....The Company provides contract services,
including insurance tracking and outsourcing,
property tax data management and outsourcing, and
flood zone determinations for financial
institutions and others.
52
<PAGE> 54
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Insurance Products ......The Company provides lender-placed insurance for
financial institutions when their borrowers fail
to maintain adequate insurance in force, provides
fire insurance on foreclosed real estate and
provides motor vehicle physical damage insurance.
In addition, the Company issues flood insurance
policies in the federal Write Your Own Program
("WYO Program").
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,
--------------------------------------------------------
1995 1996 1997
--------------- ---------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C>
Information services ..... $15,379 42.8% $23,978 58.9% $31,035 58.5%
Insurance products ....... 20,564 57.2% 16,705 41.1% 22,043 41.5%
------- ----- ------- ----- ------- -----
$35,943 100.0% $40,683 100.0% $53,078 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED PRE-TAX INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Information services ........ $ 13 $ 3,545 $ 6,883
Insurance products .......... 5,559 7,820 9,212
General corporate expenses .. (8,895) (9,807) (11,393)
Non-recurring charges ....... (4,100) -- --
-------- -------- --------
$ (7,423) $ 1,558 $ 4,702
======== ======== ========
</TABLE>
53
<PAGE> 55
Identifiable assets, capital expenditures, and depreciation and amortization
by segment for the years ended as of December 31, 1996 and 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------------------- -----------------------------------------
DEPRECIATION DEPRECIATION
CAPITAL AND CAPITAL AND
ASSETS EXPENDITURES AMORTIZATION ASSETS EXPENDITURES AMORTIZATION
-------- ------------ ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Information Services .. $ 15,338 $ 1,206 $ 1,291 $ 32,658 $ 2,097 $ 1,102
Insurance Products .... 32,321 239 467 32,778 1,400 434
Holding Company ....... (547) -- -- 1,306 -- --
-------- -------- -------- -------- -------- --------
$ 47,112 $ 1,445 $ 1,758 $ 66,742 $ 3,497 $ 1,536
</TABLE>
24. RESULTS BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------
MARCH JUNE SEPT. DEC. MARCH JUNE SEPT. DEC.
31, 30, 30, 31, 31, 30, 30, 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue ...................... $ 10,423 $ 10,132 $ 10,115 $ 10,013 $ 10,914 $ 12,593 $ 13,227 $ 16,342
Income before provision for
(benefit from) income taxes ...... 234 (1,350) 1,371 1,303 1,179 1,335 1,361 828
Net income (loss) .................. 149 (857) 870 1,112 802 838 878 749
Net income (loss) per share-
diluted .......................... $ 0.03 $ (0.18) $ 0.19 $ 0.28 $ 0.20 $ 0.21 $ 0.22 $ 0.18
Net income (loss) per share-basic .. $ 0.03 $ (0.18) $ 0.19 $ 0.28 $ 0.21 $ 0.21 $ 0.22 $ 0.19
</TABLE>
54
<PAGE> 56
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 6, 1998
55
<PAGE> 57
SCHEDULE I
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMOUNT AT
NUMBER OF WHICH SHOWN
SHARES OR MARKET IN THE
PRINCIPAL COST VALUE BALANCE SHEET
--------- ----------- ----------- -----------
<S> <C> <C> <C>
Fixed Maturities:
Bonds and notes:
U.S. Government securities ... $ 1,849,207 $ 1,858,594 $ 1,858,594
Municipalities ............... 6,651,853 6,853,326 6,853,326
States ....................... 2,003,785 2,053,479 2,053,479
Corporate ..................... 1,192,708 1,192,437 1,192,437
Certificates of deposit ...... 3,364,577 3,364,577 3,364,577
Mortgage-backed securities ... 36,533 36,533 36,533
----------- ----------- -----------
Total Fixed Maturities ..... 15,098,663 15,358,946 15,358,946
----------- ----------- -----------
Equity Securities:
Preferred stock
Public Utilities ............. 64,564 1,785,395 1,877,188 1,877,188
Financial Institutions ....... 52,000 1,139,750 1,174,250 1,174,250
Industrial ................... 34,000 600,000 600,500 600,500
Common stock
Industrial ................. 35,000 353,276 328,125 328,125
Other ........................... 220,000 220,000 220,000
----------- ----------- -----------
Total Equity Securities .... 4,098,421 4,200,063 4,200,063
----------- ----------- -----------
Short-term Investments .......... 9,290,085 9,290,085 9,290,085
----------- ----------- -----------
Total Investments .......... $28,487,169 $28,849,094 $28,849,094
=========== =========== ===========
</TABLE>
56
<PAGE> 58
SCHEDULE II
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------ ------------
ASSETS
<S> <C> <C>
Short-term investments and cash .......................... $ (42,845) $ 153,350
Investments in subsidiaries .............................. 27,397,827 25,902,253
Federal and State Income Taxes Receivables ............... -- 484,990
Deferred Federal Income Taxes Receivables ................ -- 153,113
Other assets ............................................. 4,267,506 3,277,279
------------ ------------
Total assets ..................................... $ 31,622,488 $ 29,970,985
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Federal and state income taxes payable ................... $ 316,817 $ --
Accrued Liabilities ...................................... 1,054,814 1,857,222
Deferred federal income taxes ............................ 365,448 --
Notes payable ............................................ 1,333,333 333,333
------------ ------------
Total liabilities ................................ 3,070,412 2,190,555
------------ ------------
Shareholders' equity
Common stock .......................................... 17,591,787 18,610,173
Retained earnings ..................................... 10,960,289 9,170,257
------------ ------------
Total shareholders' equity ....................... 28,552,076 27,780,430
------------ ------------
Total liabilities and shareholders' equity ....... $ 31,622,488 $ 29,970,985
============ ============
</TABLE>
57
<PAGE> 59
SCHEDULE II
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net investment income ...................... $ 67,979 $ 14,495 $ 105,251
Operating expenses ......................... (1,141,735) 29,229 69,978
Provision for (benefit from) income taxes .. (116,145) (991,959) 139,020
Equity in net income of subsidiaries ....... (3,674,831) 2,221,737 2,951,733
----------- ----------- -----------
Net income (loss) .................... $(4,864,732) $ 1,273,502 $ 3,265,982
=========== =========== ===========
</TABLE>
58
<PAGE> 60
SCHEDULE II
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ....................................... $(4,864,732) $ 1,273,502 $ 3,265,982
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed equity in net income of subsidiaries ... 3,674,831 (2,221,737) (2,951,733)
Decrease in taxes payable ............................ (322,198) (241,060) (1,320,368)
Other ................................................ (1,875,270) 5,149,149 1,792,635
----------- ----------- -----------
Net cash provided (used) by operating activities ........ $(3,387,369) $ 3,959,854 $ 786,516
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments ................................. $ -- $ -- $(2,393,731)
Maturity of investments ................................. 3,220,857 143,000 2,173,731
----------- ----------- -----------
Net cash provided (used) by investing activities ........ $ 3,220,857 $ 143,000 $ (220,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital contributions ..................... $ -- $ -- $ 4,495,000
Dividends paid .......................................... -- -- (5,103,706)
Proceeds from stock options exercised ................... 4,992 188,601 1,018,385
Repurchase of common stock .............................. -- (5,667,365) --
Proceeds from (payments to) notes payable ............... -- 1,333,333 (1,000,000)
----------- ----------- -----------
Net cash provided (used) by financing activities ........ 4,992 (4,145,431) (590,321)
----------- ----------- -----------
Net decrease in cash .................................... (161,520) (42,577) (23,805)
Cash at beginning of year ............................... 161,252 (268) (42,845)
----------- ----------- -----------
Cash at end of year ..................................... $ (268) $ (42,845) $ (66,650)
=========== =========== ===========
</TABLE>
59
<PAGE> 61
SCHEDULE III
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION CONCERNING
PROPERTY CASUALTY OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Deferred policy acquisition costs ..................... $ 2,623,562 $ 2,186,586 $ 2,704,326
Reserves for unpaid claims and claims adjustment
Expenses .......................................... 3,054,710 2,198,478 3,231,589
Less reserve discount ................................. -- -- --
Unearned premiums ..................................... 5,703,396 4,753,448 6,216,693
Earned premiums ....................................... 17,020,440 13,585,007 19,037,427
Net investment income ................................. 2,042,225 1,974,925 1,838,888
Claims and claim adjustment expenses incurred
Related to:
Current year ...................................... 6,378,000 3,971,000 6,364,000
Prior year ........................................ (334,000) 31,000 119,000
Amortization of deferred policy acquisition costs ..... 9,597,252 6,296,010 8,643,187
Paid claims and claim adjustment expense .............. 6,349,000 4,859,000 5,449,000
Net premiums written .................................. 14,955,906 12,635,058 20,500,672
</TABLE>
60
<PAGE> 62
SCHEDULE IV
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<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, 1997 $ 20,326,220 $ 780,338 $ (9,689) $19,536,193 (0.0)%
============ ============ ========== =========== ===
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)%
============ ============ ========== =========== ===
Auto physical damage insurance premiums:
Year ended December 31, 1997 $ 672,540 $ -- $ -- $ 672,540 0.0%
============ ============ ========== =========== ===
Year ended December 31, 1996 $ (18,430) $ -- $ -- $ (18,430) 0.0%
============ ============ ========== =========== ===
Year ended December 31, 1995 $ 254,462 $ 10,810 $ (11) $ 243,652 0.0%
============ ============ ========== =========== ===
Flood insurance premiums:
Year ended December 31, 1997 $ 2,859,438 $ 2,859,438 -- -- 0.0%
============ ============ ========== =========== ===
Year ended December 31, 1996 $ 2,267,703 $ 2,267,703 -- -- 0.0%
============ ============ ========== =========== ===
Year ended December 31, 1995 $ 1,234,443 $ 1,234,443 -- -- 0.0%
============ ============ ========== =========== ===
</TABLE>
61
<PAGE> 63
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 26, 1998 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
--------- ----- ----
<S> <C> <C>
/s/ MARK A. SPEIZER Director, Chief Executive Officer, March 26, 1998
- -------------------------- and Chairman of the Board
Mark A. Speizer
/s/ BRUCE A. COLE
- -------------------------- Director and President March 26, 1998
Bruce A. Cole
/s/ GREGORY S. SAUNDERS
- -------------------------- Executive Vice President, Treasurer March 26, 1998
Gregory S. Saunders and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ BARD E. BUNAES
- -------------------------- Director March 26, 1998
Bard E. Bunaes
/s/ LAWRENCE M. GOODMAN
- -------------------------- Director March 26, 1998
Lawrence M. Goodman
/s/ SAUL B. JODEL
- -------------------------- Director March 26, 1998
Saul B. Jodel
</TABLE>
62
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <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, 1997
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 (1996) (6)
10.5 Memoranda of Reinsurance as to First Property Per Risk Excess of
Loss Reinsurance Agreements and the First, Second and Third Property
Catastrophe Excess Reinsurance Agreements (1997) (9)
10.6 Memoranda of Reinsurance as to First Property Per Risk Excess of
Loss Reinsurance Agreements and the First, Second and Third Property
Catastrophe Excess Reinsurance Agreements (1998)
10.7 Second Amendment of John R. Gaulding At-Will Employment Agreement
dated July 10, 1996 10.7 by and John R. Gaulding, National Insurance
Group, its current and future subsidiaries (7)
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 Sublease Agreement dated March 24, 1994 between the Company and PHH
Homequity Corporation for the premises located at 1855 Gateway
Boulevard, Concord, California (5) Office Lease dated January 1,
1998 between Pinnacle Data Corporation and Systron Business
10.14 Center, LLC, for the premises at 2727 Systron Drive, Concord,
California (exhibits omitted).
10.15 Form of Indemnification Agreement between Registrant and its
officers and directors (4)
10.16 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)
</TABLE>
63
<PAGE> 65
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.17 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)
10.18 Mark A. Speizer Employment Agreement dated July 11, 1996 by and
between National and Mark A. Speizer (7)
10.19 Bruce A. Cole Employment Agreement dated July 11, 1996 by and
between National and Bruce A. Cole (7)
10.20 Employment Agreement effective August 12, 1996 by and between
National and Robert P. Barbarowicz (9)
10.21 Consulting Agreement dated September 11, 1996 by and between
National and Scorpion Holdings, Inc. (8)
10.22 Employment Agreement dated March 10, 1997 by and between National
and Gregory S. Saunders (9)
10.23 Employment Agreement dated May 7, 1997 by and between National and
Douglas H. Helm (10)
10.24 Assets Purchase Agreement by and among New ARTS Acquisition, Inc.,
National Insurance Group, American Realty Tax Services, Inc.,
American Realty Tax Services of New York, Inc., and Certain
Shareholders dated August 15, 1997 and Amendment No. 1 to Assets
Purchase Agreement dated September 18, 1997 (11)
10.25 Credit Terms and Conditions dated April 2, 1997, by and between
National Insurance Group and Imperial Bank and Amendment No. 1 to
Credit Terms and Conditions dated September 17, 1997, by and between
National Insurance Group and Imperial Bank (12)
10.26 Credit Terms and Conditions dated September 11, 1997, by and between
New Arts Acquisition, Inc. and Imperial Bank (12)
10.27 Note dated September 11, 1997, made by New Arts Acquisition, Inc.
payable to Imperial Bank in the original principal amount of
$11,268,000 (12)
10.28 Addendum to Note dated September 11, 1997, made by New Arts
Acquisition, Inc. (12)
10.29 Note dated September 11, 1997, made by National Insurance Group
payable to Imperial Bank in the original principal amount of
$1,000,000 (12)
10.30 Letter Amendment dated March 20, 1998, which amends the Note dated
September 11, 1997, made by National Insurance Group payable to
Imperial Bank in the original principal amount of $1,000,000.
10.31 Continuing Guarantee dated September 11, 1997, by National Insurance
Group for the benefit of Imperial Bank (12)
10.32 General Security Agreement dated September 11, 1997, by New Arts
Acquisition, Inc. for the benefit of Imperial Bank (12)
10.33 Pledge Agreement dated September 10, 1996, by and between National
Insurance Group and Imperial Bank, as amended by Amendment No. 1 to
Pledge Agreement dated April 2, 1997, and as further amended by
Amendment No. 2 to Pledge Agreement dated September 18, 1997 (12)
10.34 401(k) Plan, First Amendment to 401(k) Plan and Participation
Agreements (9) 10.34 401(k) Plan, as amended, dated as of October 1,
1997, ValuSelect Trust Agreement, and Adoption Agreement
11.1 Computation of Weighted Average Shares Outstanding and Earnings
per Share
64
<PAGE> 66
21.1 Subsidiaries of Company
24.1 Power of Attorney
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for September 30, 1997
27.3 Restated Financial Data Schedule for June 30, 1997
27.4 Restated Financial Data Schedule for March 31, 1997
27.5 Restated Financial Data Schedule for December 31, 1996
27.6 Restated Financial Data Schedule for September 30, 1996
27.7 Restated Financial Data Schedule for June 30, 1996
27.8 Restated Financial Data Schedule for March 31, 1996
27.9 Restated Financial Data Schedule for December 31, 1995
- ---------------
(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.
(9) Incorporated by reference to exhibits filed with the Company's Form 10-K
for the fiscal year ended December 31, 1996.
(10) Incorporated by reference to exhibits filed with the Company's Form 10-Q
for the quarter ended June 30, 1997.
(11) Incorporated by reference to exhibits filed with the Company's Form 8-K
dated September 18, 1997.
(12) Incorporated by reference to exhibits filed with the Company's Form 10-Q
for the quarter ended September 30, 1997.
THE REGISTRANT WILL FURNISH ANY EXHIBIT UPON THE PAYMENT OF A REASONABLE
FEE, WHICH FEE SHALL BE LIMITED TO THE REGISTRANT'S REASONABLE EXPENSES IN
FURNISHING SUCH EXHIBIT.
65
<PAGE> 1
EXHIBIT 10.1
NATIONAL INSURANCE GROUP
1986 STOCK OPTION PLAN
(AS AMENDED THROUGH JULY 11, 1997)
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 compensated for
such consulting services, and any director of the Company whether compensated
for such services or not; provided that
<PAGE> 2
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 1,106,820 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 regulations promulgated thereunder ("Officers"),
who are not Directors, and Employees who are neither Directors nor Officers.
-2-
<PAGE> 3
(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: (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
-3-
<PAGE> 4
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 determine 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:
(i) No Employee shall be granted, in any fiscal
year of the Company, Options to purchase more than 150,000 Shares.
-4-
<PAGE> 5
(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 price on such exchange on the date of grant of
the Option, as reported in the Wall Street Journal.
-5-
<PAGE> 6
(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 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
-6-
<PAGE> 7
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
(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
-7-
<PAGE> 8
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 adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
-8-
<PAGE> 9
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:
(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.
-9-
<PAGE> 10
(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 amend ment 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 aforementioned 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.
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 lia-
-10-
<PAGE> 11
bility 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 consent, 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-98-01332
Renewal of: C-97-01332
REASSURED: NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
South San Francisco, California
CONTRACT: FIRST PER RISK EXCESS OF LOSS REINSURANCE CONTRACT
Effective January 1, 1998
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, 1998 to
January 1, 1999, 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.
Page 1 OF 10
<PAGE> 2
Number: C-98-01332
Renewal of: C-97-01332
TERRITORY: This reinsurance shall cover wherever the Reassured's
policies apply.
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 Net Earned Premium Income.
MINIMUM
AND DEPOSIT
PREMIUM: Deposit Premium of $175,000 payable in equal quarterly
installments of $43,750 each on January 1, April 1, July
1, and October 1, 1998.
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,
Page 2 OF 10
<PAGE> 3
Number: C-98-01332
Renewal of: C-97-01332
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 (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. Seepage and Pollution as per ISO wording, or so
deemed;
p. Transmission and Distribution Lines.
GENERAL
CONDITIONS: Definition of Loss Occurrence Clause (Property Business) to
include LPO 515 definition of hours clause as attached, and as
follows:
- 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
Page 3 OF 10
<PAGE> 4
Number: C-98-01332
Renewal of: C-97-01332
Definition of Occurrence (Casualty Business)
Extra Contractual Obligations (100%)
Excess of Policy Limits (100%)
Definition of Net Loss Clause (which shall include defense
costs but not limited to expenses incurred in
determination of coverage, and Declaratory Judgment
Expenses)
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
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
Page 4 OF 10
<PAGE> 5
Number: C-98-01332
Renewal of: C-97-01332
authority to bind the participation of such Reinsurer.
Page 5 OF 10
<PAGE> 6
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01332
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
FIRST PROPERTY PER RISK EXCESS OF LOSS REINSURANCE CONTRACT
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share Name
- -------------------------------------------------- ----- ----
<S> <C> <C>
Constitution Reinsurance Corporation 20.00% Cronin
New York, New York
FEIN# 13-5009848
NAIC# 21032
Continental Casualty Company 7.00% Kristen
Chicago, Illinois
FEIN# 36-2114545
NAIC# 20443
Employers Mutual Casualty Company 1.50% Freese
Des Moines, Iowa
FEIN# 42-0234980
NAIC# 21415
First Excess & Reinsurance Corporation 5.00% Kurtzweil
Jefferson City, Missouri
FEIN# 43-1037123
NAIC# 32018
Folksamerica Reinsurance Company 5.00% Luger
New York, New York
FEIN# 13-2997499
NAIC# 38776
Hartford Fire Insurance Company 7.00% Rettig
Hartford, Connecticut
FEIN# 06-0383750
NAIC# 19682
through Hartford Re Management Company
Hartford, Connecticut
</TABLE>
Page 6 OF 10
<PAGE> 7
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01332
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share Name
- -------------------------------------------------- ----- ----
<S> <C> <C>
PMA Reinsurance Corporation 6.00% Stoner
Philadelphia, Pennsylvania
FEIN# 23-2153760
NAIC# 39675
Republic Western Insurance Company 3.00% Thapa
Phoenix, Arizona
FEIN# 86-0274508
NAIC# 31089
St. Paul Fire and Marine Insurance Company 10.00% Schiffer
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% Norris
New York, New York
FEIN# 13-2758523
NAIC# 20362
through Sumitomo Marine Re Management, Inc.
New York, New York
Sydney Reinsurance Corporation 10.00% Sullivan
Philadelphia, Pennsylvania
FEIN# 23-1641984
NAIC# 10219
USF Re Insurance Company 13.50% Dik
Boston, Massachusetts
FEIN# 04-1590940
NAIC# 11835
Vesta Fire Insurance Corporation 10.00% Etheridge
Birmingham, Alabama
FEIN# 63-0598629
NAIC# 11762
------
Total Placement 100.00%
</TABLE>
Page 7 OF 10
<PAGE> 8
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01332
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
FIRST PROPERTY PER RISK EXCESS OF LOSS REINSURANCE CONTRACT
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
<S> <C>
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
Hartford Fire Insurance Company 7.00%
Hartford, Connecticut
FEIN# 06-0383750
NAIC# 19682
through Hartford Re Management Company
Hartford, Connecticut
</TABLE>
Page 8 OF 10
<PAGE> 9
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01332
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
<S> <C>
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
Sydney Reinsurance Corporation 10.00%
Philadelphia, Pennsylvania
FEIN# 23-1641984
NAIC# 10219
USF Re Insurance Company 13.50%
Boston, Massachusetts
FEIN# 04-1590940
NAIC# 11835
Vesta Fire Insurance Corporation 10.00%
Birmingham, Alabama
FEIN# 63-0598629
NAIC# 11762
------
Total Placement 100.00%
</TABLE>
Page 9 OF 10
<PAGE> 10
REINSURANCE COVER NOTE NO. C-98-01332
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, 1998
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: March 17, 1998
----------------------------------
Page 10 OF 10
<PAGE> 11
EXHIBIT A
DEFINITION OF LOSS OCCURRENCE (PROPERTY)
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.
- 1 -
<PAGE> 12
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 Preamble,
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.
- 2 -
<PAGE> 13
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
1. This Contract does not cover any loss or liability accruing to the Reassured
directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of
Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear
Energy Risks.
2. Without in any way restricting the operation of Paragraph 1. of this Clause,
this Contract does not cover any loss or liability accruing to the Reassured,
directly or indirectly, and whether as Insurer or Reinsurer, from any insurance
against Physical Damage (including business interruption or consequential loss
arising out of such Physical Damage) to:
a. Nuclear reactor power plants including all auxiliary property on the
site, or
b. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor installations,
and critical facilities as such, or
c. Installations for fabricating complete fuel elements or for
processing substantial quantities of prescribed substances, and for
reprocessing, salvaging, chemically separating, storing or disposing of
spent nuclear fuel or waste materials, or
d. Installations other than those listed in Paragraph 2.c. above using
substantial quantities of radioactive isotopes or other products of
nuclear fission.
3. Without in any way restricting the operation of Paragraphs 1. and 2. of this
Clause, this Contract does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this Paragraph 3. shall not
operate:
a. Where the Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
b. Where the said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused.
4. Without in any way restricting the operation of Paragraphs 1., 2. and 3. of
this Clause, this Contract does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurers or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. This Clause shall not extend to risks using radioactive isotopes in any form
where the nuclear exposure is not considered by the Reassured to be the primary
hazard.
6. The term "prescribed substances" shall have the meaning given to it by the
Atomic Energy Control Act R.S.C. 1985 (c), A-16 or by any law amendatory
thereof.
7. Reassured to be sole judge of what constitutes:
a. Substantial quantities, and
b. The extent of installation, plant or site.
- 1 -
<PAGE> 14
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
8. Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4.
of this Clause, this Contract does not cover any loss or liability accruing to
the Reassured, directly or indirectly, and whether as Insurer or Reinsurer
caused:
a. By any nuclear incident as defined in the Nuclear Liability Act or
any other nuclear liability act, law or statute, or any law amendatory
thereof or nuclear explosion, except for ensign loss or damage which
results directly from fire, lightning or explosion of natural, coal or
manufactured gas;
b. By contamination by radioactive material.
NOTE: Without in any way restricting the operation of Paragraphs 1., 2., 3. and
4. of this Clause, Paragraph 8. of this Clause shall only apply to all original
contracts of the Reassured whether new, renewal or replacement which became
effective on or after December 31, 1992.
- 2 -
<PAGE> 15
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
1. This reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy Risks.
2. Without in any way restricting the operation of Paragraph 1. of this Clause,
this reinsurance does not cover any loss or liability accruing to the Reassured,
directly or indirectly and whether as Insurer or Reinsurer, from any insurance
against Physical Damage (including business interruption or consequential loss
arising out of such Physical Damage) to:
a. Nuclear reactor power plants including all auxiliary property on the
site, or
b. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor installations,
and "critical facilities" as such, or
c. Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material," and for
reprocessing, salvaging, chemically separating, storing or disposing of
"spent" nuclear fuel or waste materials, or
d. Installations other than those listed in Paragraph 2.c. above using
substantial quantities of radioactive isotopes or other products of
nuclear fission.
3. Without in any way restricting the operations of Paragraphs 1. and 2. hereof,
this reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this Paragraph 3. shall not
operate:
a. Where Reassured does not have knowledge of such nuclear reactor power
plant or nuclear installation, or
b. Where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January 1960
this SubParagraph 3.B. shall only apply provided the said radioactive
contamination exclusion provision has been approved by the Governmental
Authority having jurisdiction thereof.
4. Without in any way restricting the operations of Paragraphs 1., 2. and 3.
hereof, this reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. It is understood and agreed that this Clause shall not extend to risks using
radioactive isotopes in any form where the nuclear exposure is not considered by
the Reassured to be the primary hazard.
- 1 -
<PAGE> 16
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
6. The term "special nuclear material" shall have the meaning given it in the
Atomic Energy Act of 1954 or by any law amendatory thereof.
7. Reassured to be the sole judge of what constitutes:
a. Substantial quantities, and
b. The extent of installation, plant or site.
NOTE: Without in any way restricting the operation of Paragraph 1. hereof, it is
understood and agreed that:
(a) all policies issued by the Reassured on or before December 31, 1957
shall be free from the application of the other provisions of this
Clause until expiry date of December 31, 1960 whichever first occurs
whereupon all the provisions of this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by the
Reassured on or before December 31, 1958 shall be free from the
application of the other provisions of this Clause until expiry date or
December 31, 1960 whichever first occurs whereupon all the provisions of
this Clause shall apply.
NOTES: 1) The words printed in italic text in the Limited Exclusion
Provision and in the Broad Exclusion Provision shall apply only
in relation to original liability policies which include a
Limited Exclusion Provision or a Broad Exclusion Provision
containing those words.
2) Wherever used herein the term "Company" shall be understood to
mean "Reassured," "Reinsured" or whatever other term is used in
the attached reinsurance Agreement to designate the reinsured
company.
- 2 -
<PAGE> 17
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
1. This Contract does not cover any loss or liability accruing to the Reassured
as a member of, or subscriber to, any association of insurers or reinsurers
formed for the purpose of covering nuclear energy risks or as a direct or
indirect reinsurer of any such member, subscriber or association.
2. Without in any way restricting the operation of Paragraph 1. of this Clause,
it is agreed that for all purposes of this Contract all the original liability
contracts of the Reassured, whether new, renewal or replacement, of the
following classes, namely:
Personal Liability,
Farmers Liability,
Storekeepers Liability,
which become effective on or after December 31, 1984, shall be deemed to
include, from their inception dates and thereafter, the following provision:
LIMITED EXCLUSION PROVISION
This Policy does not apply to bodily injury or property damage with respect to
which an Insured is also insured under a contract of nuclear energy liability
insurance (whether the Insured is unnamed in such contract and whether or not it
is legally enforceable by the Insured) issued by the Nuclear Insurance
Association of Canada or any other group or pool of insurers or would be an
Insured under any such policy but for its termination upon exhaustion of its
limit of liability.
With respect to property, loss of use of such property shall be deemed to be
property damage.
3. Without in any way restricting the operation of Paragraph 1. of this Clause
it is agreed that for all purposes of this Contract all the original liability
contracts of the Reassured, whether new, renewal or replacement, of any class
whatsoever (other than Personal Liability, Farmers Liability, Storekeepers
Liability, or Automobile Liability contracts), which become effective on or
after December 31, 1984, shall be deemed to include, from their inception dates
and thereafter, the following provision:
BROAD EXCLUSION PROVISION
It is agreed that this Policy does not apply:
a. To liability imposed by or arising under the Nuclear Liability
Act; nor
b. To bodily injury or property damage with respect to which an
Insured under this policy is also insured under a contract of
nuclear energy liability insurance (whether the Insured is
unnamed in such contract and whether or not it is legally
enforceable by the Insured) issued by the Nuclear Insurance
Association of Canada or any other insurer or group or pool of
insurers or would be an Insured under any such policy but for
its termination upon exhaustion of its limit of liability; nor
- 1 -
<PAGE> 18
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
c. To bodily injury or property damage resulting directly or
indirectly from the nuclear energy hazard arising from:
(1) the ownership, maintenance, operation or use of a
nuclear facility by or on behalf of an Insured;
(2) the furnishing by an Insured of services, materials,
parts or equipment in connection with the planning,
construction, maintenance, operation or use of any
nuclear facility; and
(3) the possession, consumption, use, handling, disposal or
transportation of fissionable substances, or of other
radioactive material (except radioactive isotopes, away
from a nuclear facility, which have reached the final
stage of fabrication so as to be usable for any
scientific, medical, agricultural, commercial or
industrial purpose) used, distributed, handled, or sold
by an Insured.
AS USED IN THIS POLICY
1. The term "nuclear energy hazard" means the radioactive, toxic, explosive or
other hazardous properties of radioactive material;
2. The term "radioactive material" means uranium, thorium, plutonium, neptunium,
their respective derivatives and compounds, radioactive isotopes of other
elements and any other substances that the Atomic Energy Control Board may, by
regulation, designate as being prescribed substances capable of releasing atomic
energy, or as being requisite for the production, use or application of atomic
energy;
3. The term "nuclear facility" means:
a. Any apparatus designed or used to sustain nuclear fission in a
self-supporting chain reaction or to contain a critical mass of
plutonium, thorium, and uranium, or any one or more of them;
b. Any equipment or device designed or used for (i) separating the
isotopes of plutonium, thorium and uranium, or any one or more of
them, (ii) processing or utilizing spent fuel, or (iii) handling,
processing or packaging waste;
c. Any equipment or device used for the processing, fabricating or
alloying of plutonium, thorium or uranium enriched in the isotope
uranium 233 or in the isotope uranium 235, or any one or more of
them if at any time the total amount of such material in the
custody of the Insured at the premises where such equipment or
device is located consists of or contains more than 25 grams of
plutonium or uranium 233 or any combination thereof, or more than
250 grams of uranium 235;
d. Any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste radioactive material;
- 2 -
<PAGE> 19
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
and includes the site on which any of the foregoing is located, together with
all operations conducted thereon and all premises used for such operations.
4. The term "fissionable substance" means any prescribed substance that is, or
from which can be obtained, a substance capable of releasing atomic energy by
nuclear fission.
5. With respect to property, loss of use of such property shall be deemed to be
property damage.
- 3 -
<PAGE> 20
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
1. This reinsurance does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.
2. Without in any way restricting the operation of Paragraph 1. of this Clause
it is understood and agreed that for all purposes of this reinsurance all the
original policies of the Reassured (new, renewal and replacement) of the classes
specified in Clause II of this Paragraph 2. from the time specified in Clause
III in this Paragraph 2. shall be deemed to include the following provision
(specified as the Limited Exclusion Provision):
Limited Exclusion Provision*
I. It is agreed that the policy does not apply under any liability coverage
to injury, sickness, disease, death or destruction, bodily injury or
property damage with respect to which an insured under the policy is
also an insured under a nuclear energy liability policy issued by
Nuclear Energy Liability Insurance Association, Mutual Atomic Energy
Liability Underwriters or Nuclear Insurance Association of Canada, or
would be an insured under any such policy but for its termination upon
exhaustion of its limit of liability.
II. Family Automobile Policies (liability only), Special Automobile Policies
(private passenger automobiles, liability only), Farmers Comprehensive
Personal Liability Policies (liability only), Comprehensive Personal
Liability Policies (liability only) or policies of a similar nature; and
the liability portion of combination forms related to the four classes
of policies stated above, such as the Comprehensive Dwelling Policy and
the applicable types of Homeowners Policies.
III. The inception dates and thereafter of all original policies as described
in II. above, whether new, renewal or replacement, being policies which
either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the Limited
Exclusion Provision set out above;
provided this paragraph 2 shall not be applicable to Family Automobile
Policies, Special Automobile Policies, or policies or combination
policies of a similar nature, issued by the Reassured on New York risks,
until 90 days following approval of the Limited Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
3. Except for those classes of policies specified in Clause II of paragraph 2
and without in any way restricting the operation of paragraph 1 of this Clause,
it is understood and agreed that for all purposes of this reinsurance the
original liability policies of the Reassured (new, renewal and replacement)
affording the following coverages:
- 1 -
<PAGE> 21
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
Owners, Landlords and Tenants Liability, Contractual Liability, Elevator
Liability, Owners or Contractors (including railroad) Protective
Liability, Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability, Garage
Liability, Automobile Liability (including Massachusetts Motor Vehicle
or Garage Liability)
shall be deemed to include with respect to such coverages, from the time
specified in Clause V of this paragraph 3, the following provision (specified as
the Broad Exclusion Provision):
Broad Exclusion Provision*
It is agreed that the policy does not apply:
I. Under any Liability Coverage, to injury, sickness, disease, death or
destruction, bodily injury or property damage
(a) with respect to which an insured under the policy is also an
insured under a nuclear energy liability policy issued by Nuclear
Energy Liability Insurance Association, Mutual Atomic Energy
Liability Underwriters or Nuclear Insurance Association of
Canada, or would be an insured under any such policy but for its
termination upon exhaustion of its limit of liability; or
(b) resulting from the hazardous properties of nuclear material and
with respect to which (1) any person or organization is required
to maintain financial protection pursuant to the Atomic Energy
Act of 1954, or any law amendatory thereof, or (2) the insured
is, or had this policy not be issued would be, entitled to
indemnity from the United States of America, or any agency
thereof, under any agreement entered into by the United States of
America, or any agency thereof, with any person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary Payments
Provision relating to immediate medical or surgical relief, first aid to
expenses incurred with respect to bodily injury, sickness, disease or death,
bodily injury resulting from the hazardous properties of nuclear material and
arising out of the operation of a nuclear facility by any person or
organization.
III. Under any Liability coverage, to injury, sickness, disease, death or
destruction, bodily injury or property damage resulting from the hazardous
properties of nuclear material, if
(a) the nuclear material (1) is at any nuclear facility owned by, or
operated by or on behalf of, an insured or (2) has been
discharged or dispersed therefrom;
(b) the nuclear material is contained in spent fuel or waste at any
time possessed, handled, used, processed, stored, transported or
disposed of by or on behalf on an insured; or
- 2 -
<PAGE> 22
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
(c) the injury, sickness, disease, death or destruction, bodily
injury or property damage arises out of the furnishing by an
insured of services, materials, parts or equipment in connection
with the planning, construction, maintenance, operation or use of
any nuclear facility, but if such facility is located within the
United States of America, its territories, or possessions or
Canada, this exclusion (c) applies only to injury to or
destruction of property at such nuclear facility / property
damage to such nuclear facility and any property there at.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive
properties; "nuclear material" means source material, special nuclear material
or by-product material; "source material," "special nuclear material," and
"byproduct material" have the meanings given them in the Atomic Energy Act of
1954 or in any law amendatory thereof; "spent fuel" means any fuel element or
fuel component, solid or liquid, which has been used or exposed to radiation in
a nuclear reactor; "waste" means any waste material (1) containing byproduct
material and (2) resulting from the operation by any person or organization of
any nuclear facility included within the definition of nuclear facility under
paragraph (a) or (b) thereof; "nuclear facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating the
isotopes of uranium or plutonium, (2) processing or utilizing
spent fuel, or (3) handling, processing or packaging waste,
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total
amount of such material in the custody of the insured at the
premises where such equipment or device is located consists of or
contains more than 25 grams of plutonium or uranium 233 or any
combination thereof, or more than 250 grams of uranium 235,
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste,
and includes the site on which any of the foregoing is located, all
operations conducted on such site and all premises used for such
operations; "nuclear reactor" means any apparatus designed or used to
sustain nuclear fission in a self-supporting chain reaction or to
contain a critical mass of fissionable material;
With respect to injury to or destruction of property, the word "injury
or "destruction" includes all forms of radioactive contamination of
property. "Property damage" includes all forms of radioactive
contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph 3, whether new, renewal or
replacement, being policies which become effective on or after 1st May,
1960, provided this paragraph 3 shall not be applicable to
- 3 -
<PAGE> 23
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
(i) Garage and Automobile Policies issued by the Reassured on New
York risks, or
(ii) statutory liability insurance required under Chapter 90, General
Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by the
Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operation of paragraph 1 of this Clause,
it is understood and agreed that paragraphs 2 and 3 are not applicable to
original liability policies of the Reassured in Canada and that with respect to
such policies this Clause shall be deemed to include the Nuclear Energy
Liability Exclusion Provisions adopted by the Canadian Underwriters' Association
or the Independent Insurance Conference of Canada
NOTES: 1) The words printed in italic text in the Limited Exclusion
Provision and in the Broad Exclusion Provision shall apply
only in relation to original liability policies which
include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
2) Wherever used herein the term "Company" shall be
understood to mean "Reassured," "Reinsured" or whatever
other term is used in the attached reinsurance Agreement
to designate the reinsured company.
- 4 -
<PAGE> 24
POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE
SECTION A
Excluding:
(a) All Business derived directly or indirectly from any Pool,
Association or Syndicate which maintains its own reinsurance
facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory) formed after
March 1, 1968 for the purpose of insuring Property whether on a
country-wide basis or in respect of designated areas. This
exclusion shall not apply to so-called Automobile Insurance Plans
or other Pools formed to provide coverage for Automobile Physical
Damage.
SECTION B
It is agreed that business written by the Company for the same perils, which is
known at the time to be insured by, or in excess of underlying amounts placed in
the following Pools, Association or Syndicates, whether by way of insurance or
reinsurance, is excluded hereunder:
Industrial Risk Insurers; Association Factory Mutuals; Improved Risk
Mutuals.
Any Pool, Association or Syndicate formed for the purpose of writing
Oil, Gas or Petro- Chemical Plants and/or Oil or Gas Drilling Rigs.
United States Aircraft Insurance Group, Canadian Aircraft Insurance
Group, Associated Aviation Underwriters, American Aviation Underwriters.
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk in
question is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket basis.
(c) To Contingent business Interruption, except when the Company is
aware that the key location is known at the time to be insured in
any Pool, Association or Syndicate named above, other than as
provided for under Section B (a).
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (other than Railroad
Schedules) and Builders Risks on the classes or risks specified
in this subsection (d) only.
NOTE: Wherever used herein the term "Company" shall be understood to
mean "Company," "Reinsured," "Reassured" or whatever other term
is used in the attached reinsurance document to designate the
reinsured company of companies.
- 1 -
<PAGE> 25
INSOLVENCY FUNDS EXCLUSION CLAUSE
1. This Contract excludes all liability of the Reassured arising, by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or governed; which
provides for any assessment of or payment or assumption by the Reassured of part
or all of any claim, debt, charge, fee, or other obligation of any insurer, or
its successors or assigns, which has been declared by any competent authority to
be insolvent, or which is otherwise deemed unable to meet any claim, debt,
charge, fee or other obligation in whole or in part.
- 1 -
<PAGE> 26
Number: C-98-01371
Renewal of: C-97-01371
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, 1998
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, 1998 to
January 1, 1999, 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 8
<PAGE> 27
Number: C-98-01371
Renewal of: C-97-01371
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: 1.030% of Gross Net Earned Premium Income.
MINIMUM
AND DEPOSIT
PREMIUM: Deposit Premium of $215,000 payable in equal quarterly
installments of $53,750 each at January 1, April 1,
July 1, and October 1, 1998.
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;
PAGE 2 OF 8
<PAGE> 28
Number: C-98-01371
Renewal of: C-97-01371
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.
REINSURERS: 100% placement through Towers Perrin Reinsurance.
See attached Schedule for listing of Reinsurers and their
respective participations.
PAGE 3 OF 8
<PAGE> 29
Number: C-98-01371
Renewal of: C-97-01371
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> 30
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01371
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
FIRST PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share Name
- -------------------------------------------------- ----- ----
<S> <C> <C>
Constitution Reinsurance Corporation 8.50% Cronin
New York, New York
FEIN# 13-5009848
NAIC# 21032
Folksamerica Reinsurance Company 8.00% Luger
New York, New York
FEIN# 13-2997499
NAIC# 38776
Hartford Fire Insurance Company 10.00% Rettig
Hartford, Connecticut
FEIN# 06-0383750
NAIC# 19682
through Hartford Re Management Company
Hartford, Connecticut
Nationwide Mutual Insurance Company 7.50% Wilson
Columbus, Ohio
FEIN# 31-4177100
NAIC# 23787
Republic Western Insurance Company 5.00% Thapa
Phoenix, Arizona
FEIN# 86-0274508
NAIC# 31089
St. Paul Fire and Marine Insurance Company 8.00% Schiffer
St. Paul, Minnesota
FEIN# 41-0406690
NAIC# 24767
through St. Paul Re, Inc.
New York, New York
Sydney Reinsurance Corporation 10.00% Sullivan
Philadelphia, Pennsylvania
FEIN# 23-1641984
NAIC# 10219
</TABLE>
PAGE 5 OF 8
<PAGE> 31
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01371
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share Name
- -------------------------------------------------- ----- ----
<S> <C> <C>
USF Re Insurance Company 10.00% Dik
Boston, Massachusetts
FEIN# 04-1590940
NAIC# 11835
Vesta Fire Insurance Corporation 25.00% Etheridge
Birmingham, Alabama
FEIN# 63-0598629
NAIC# 11762
Winterthur Reinsurance Corporation of America 8.00% Rivera
New York, New York
FEIN# 13-3531373
NAIC# 10006
------
Total Placement 100.00%
</TABLE>
PAGE 6 OF 8
<PAGE> 32
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01371
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
FIRST PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
<S> <C>
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
Hartford Fire Insurance Company 10.00%
Hartford, Connecticut
FEIN# 06-0383750
NAIC# 19682
through Hartford Re Management Company
Hartford, Connecticut
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 Re, Inc.
New York, New York
Sydney Reinsurance Corporation 10.00%
Philadelphia, Pennsylvania
FEIN# 23-1641984
NAIC# 10219
</TABLE>
PAGE 6 OF 8
<PAGE> 33
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01371
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
<S> <C>
USF Re Insurance Company 10.00%
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%
</TABLE>
PAGE 7 OF 8
<PAGE> 34
REINSURANCE COVER NOTE NO. C-98-01371
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
FIRST PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EFFECTIVE JANUARY 1, 1998
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: March 17, 1998
---------------------------------------
PAGE 8 OF 8
<PAGE> 35
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.
4. No individual losses occasioned by an event that would be covered by 72 or
120 hours
- 1 -
<PAGE> 36
clauses may be included in any "Loss Occurrence" claimed under the 168 hours
provision.
- 2 -
<PAGE> 37
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
1. This Contract does not cover any loss or liability accruing to the Reassured
directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of
Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear
Energy Risks.
2. Without in any way restricting the operation of Paragraph 1. of this Clause,
this Contract does not cover any loss or liability accruing to the Reassured,
directly or indirectly, and whether as Insurer or Reinsurer, from any insurance
against Physical Damage (including business interruption or consequential loss
arising out of such Physical Damage) to:
a. Nuclear reactor power plants including all auxiliary property on
the site, or
b. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and critical facilities as such, or
c. Installations for fabricating complete fuel elements or for
processing substantial quantities of prescribed substances, and
for reprocessing, salvaging, chemically separating, storing or
disposing of spent nuclear fuel or waste materials, or
d. Installations other than those listed in Paragraph 2.c. above
using substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operation of Paragraphs 1. and 2. of this
Clause, this Contract does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this Paragraph 3. shall not
operate:
a. Where the Reassured does not have knowledge of such nuclear
reactor power plant or nuclear installation, or
b. Where the said insurance contains a provision excluding coverage
for damage to property caused by or resulting from radioactive
contamination, however caused.
4. Without in any way restricting the operation of Paragraphs 1., 2. and 3. of
this Clause, this Contract does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurers or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. This Clause shall not extend to risks using radioactive isotopes in any form
where the nuclear exposure is not considered by the Reassured to be the primary
hazard.
6. The term "prescribed substances" shall have the meaning given to it by the
Atomic Energy Control Act R.S.C. 1985 (c), A-16 or by any law amendatory
thereof.
7. Reassured to be sole judge of what constitutes:
a. Substantial quantities, and
b. The extent of installation, plant or site.
- 1 -
<PAGE> 38
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
8. Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4.
of this Clause, this Contract does not cover any loss or liability accruing to
the Reassured, directly or indirectly, and whether as Insurer or Reinsurer
caused:
a. By any nuclear incident as defined in the Nuclear Liability Act
or any other nuclear liability act, law or statute, or any law
amendatory thereof or nuclear explosion, except for ensign loss
or damage which results directly from fire, lightning or
explosion of natural, coal or manufactured gas;
b. By contamination by radioactive material.
NOTE: Without in any way restricting the operation of Paragraphs 1.,
2., 3. and 4. of this Clause, Paragraph 8. of this Clause shall
only apply to all original contracts of the Reassured whether
new, renewal or replacement which became effective on or after
December 31, 1992.
- 2 -
<PAGE> 39
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
1. This reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy Risks.
2. Without in any way restricting the operation of Paragraph 1. of this Clause,
this reinsurance does not cover any loss or liability accruing to the Reassured,
directly or indirectly and whether as Insurer or Reinsurer, from any insurance
against Physical Damage (including business interruption or consequential loss
arising out of such Physical Damage) to:
a. Nuclear reactor power plants including all auxiliary property on
the site, or
b. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
c. Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material,"
and for reprocessing, salvaging, chemically separating, storing
or disposing of "spent" nuclear fuel or waste materials, or
d. Installations other than those listed in Paragraph 2.c. above
using substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operations of Paragraphs 1. and 2. hereof,
this reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this Paragraph 3. shall not
operate:
a. Where Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
b. Where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January
1960 this SubParagraph 3.B. shall only apply provided the said
radioactive contamination exclusion provision has been approved
by the Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of Paragraphs 1., 2. and 3.
hereof, this reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. It is understood and agreed that this Clause shall not extend to risks using
radioactive isotopes in any form where the nuclear exposure is not considered by
the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in the
Atomic Energy Act of 1954 or by any law amendatory thereof.
- 1 -
<PAGE> 40
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
7. Reassured to be the sole judge of what constitutes:
a. Substantial quantities, and
b. The extent of installation, plant or site.
NOTE: Without in any way restricting the operation of Paragraph 1.
hereof, it is understood and agreed that:
(a) all policies issued by the Reassured on or before December
31, 1957 shall be free from the application of the other
provisions of this Clause until expiry date of December
31, 1960 whichever first occurs whereupon all the
provisions of this Clause shall apply.
(b) with respect to any risk located in Canada policies issued
by the Reassured on or before December 31, 1958 shall be
free from the application of the other provisions of this
Clause until expiry date or December 31, 1960 whichever
first occurs whereupon all the provisions of this Clause
shall apply.
NOTES: 1) The words printed in italic text in the Limited Exclusion
Provision and in the Broad Exclusion Provision shall apply
only in relation to original liability policies which
include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
2) Wherever used herein the term "Company" shall be
understood to mean "Reassured," "Reinsured" or whatever
other term is used in the attached reinsurance Agreement
to designate the reinsured company.
- 2 -
<PAGE> 41
POOLS, ASSOCIATIONS, SYNDICATES EXCLUSION CLAUSE
(FLORIDA AMENDED)
SECTION A
It is agreed that the following is excluded hereunder:
(a) All business derived directly or indirectly from any Pool,
Association or Syndicate which maintains its own reinsurance
facilities.
(b) Any Pool or Scheme, (whether voluntary or mandatory) formed after
1st March 1968 for the purpose of insuring property whether on a
countrywide basis or in respect of designated areas. This
exclusion shall not apply to so-called Automobile Insurance Plans
or other Pools formed to provide coverage for Automobile Physical
Damage.
SECTION B
It is agreed that business written by the Reassured for the same perils, which
is known at the time to be insured by, or in excess of underlying amounts placed
in the following Pools, Associations or Syndicates, whether by way of insurance
or reinsurance, is excluded hereunder:
Industrial Risk Insurers
Associated Factory Mutuals
Improved Risk Mutuals
Any Pool, Association or Syndicate formed for the purpose of writing
oil, gas or petro- chemical plants and/or oil or gas drilling rigs
United States Aircraft Insurance Group
Canadian Aircraft Insurance Group
Associated Aviation Underwriters
American Aviation Underwriters
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk in
question is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket Basis.
(c) To Contingent Business Interruption, except when the Reassured is
aware that the key location is known at the time to be insured in
any Pool, Association or Syndicate named above.
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (other than Railroad
Schedules), and Builder's Risks on the classes of risks specified
in this subsection (d) only.
- 1 -
<PAGE> 42
SECTION C
NEVERTHELESS, the Reinsurers specifically agree that liability accruing to the
Reassured from its participation in Residual Market Mechanisms including but
limited to:
(a) The following so-called "Coastal Pools":
Alabama Insurance Underwriting Association Florida Windstorm
Insurance Underwriting Association (FWUA) Louisiana Insurance
Underwriting Association Mississippi Insurance Underwriting
Association North Carolina Insurance Underwriting Association
South Carolina Windstorm and Hail Underwriting Association Texas
Catastrophe Property Insurance Association
(b) All "Fair Plan" and "Rural Risk Plan" business,
and
(c) Florida Property and Casualty Joint Underwriting Association
(FPCJUA) and Residential Property and Casualty Joint
Underwriting Association (RPCJUA),
for all perils otherwise protected hereunder shall not be excluded, except that
this reinsurance does not include any increase in such liability resulting from:
(1) The inability of any participant in such Residual Market
Mechanisms to meet its liability,
(2) Any claim against such Residual Market Mechanisms or any
participant therein, including the Reassured, whether by
way of subrogation or otherwise, brought by or on behalf
of any insolvency fund (as defined in the Insolvency Funds
Exclusion Clause in this Contract).
SECTION D
Notwithstanding SECTION C above, in respect of the FWUA, FPCJUA and RPCJUA,
where an assessment is made against the Reassured by the FWUA, the FPCJUA, the
RPCJUA, or any combination thereof, the maximum loss that the Reassured may
include in the Ultimate Net Loss in respect of any loss occurrence hereunder
shall not exceed the lesser of:
(1) The Reassured's assessment from the relevant entity (FWUA,
FPCJUA and/or RPCJUA) for the accounting year in which the loss
occurrence commenced, or
(2) The product of the following:
(a) The Reassured's percentage participation in the relevant
entity for the accounting year in which the loss
occurrence commenced; and
(b) The relevant entity's total losses in such loss
occurrence.
Any assessments for accounting years subsequent to that in which the loss
occurrence commenced may not be included in the Ultimate Net Loss hereunder.
Moreover, notwithstanding
- 2 -
<PAGE> 43
SECTION C above, in respect of the FWUA, the FPCJUA and/or the RPCJUA, the
Ultimate Net Loss hereunder shall not include any monies expended to purchase or
retire bonds as a consequence of being a member of the FWUA, the FPCJUA and/or
RPCJUA.
For the purposes of this Contract, the Reassured may not include in the Ultimate
Net Loss any assessment or any percentage assessment levied by the FWUA, the
FPCJUA and/or the RPCJUA to meet the obligations of an insolvent insurer member
or other party, or to meet any obligations arising from the deferment by the
FWUA, FPCJUA and/or RPCJUA of the collection of monies.
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company," "Reinsured," "Reassured" or
whatever other term is used in the attached reinsurance document to designate
the reinsured company or companies.
"Agreement" shall be understood to mean "Agreement," "Contract," "Policy" or
whatever other term is used to designate the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers," "Underwriters" or
whatever other term is used in the attached reinsurance document to designate
the reinsurer or reinsurers.
- 3 -
<PAGE> 44
INSOLVENCY FUNDS EXCLUSION CLAUSE
1. This Contract excludes all liability of the Reassured arising, by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or governed; which
provides for any assessment of or payment or assumption by the Reassured of part
or all of any claim, debt, charge, fee, or other obligation of any insurer, or
its successors or assigns, which has been declared by any competent authority to
be insolvent, or which is otherwise deemed unable to meet any claim, debt,
charge, fee or other obligation in whole or in part.
- 1 -
<PAGE> 45
Number: C-98-01402
Renewal of: C-97-01402
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, 1998
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, 1998 to
January 1, 1999, 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 2 OF 8
<PAGE> 46
Number: C-98-01402
Renewal of: C-97-01402
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: 1.430% of Gross Net Earned Premium Income.
MINIMUM
AND DEPOSIT
PREMIUM: Deposit Premium of $300,000 payable in equal quarterly
installments of $75,000 at January 1, April 1, July 1, and
October 1, 1998.
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 3 OF 8
<PAGE> 47
Number: C-98-01402
Renewal of: C-97-01402
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
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.
REINSURERS: 100% placement through Towers Perrin Reinsurance.
See attached Schedule for listing of Reinsurers and their
respective participations.
PAGE 4 OF 8
<PAGE> 48
Number: C-98-01402
Renewal of: C-97-01402
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 5 OF 8
<PAGE> 49
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01402
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
SECOND PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share Name
- -------------------------------------------------- ----- ----
<S> <C> <C>
Constitution Reinsurance Corporation 5.00% Cronin
New York, New York
FEIN# 13-5009848
NAIC# 21032
Continental Casualty Company 14.50% Kristen
Chicago, Illinois
FEIN# 36-2114545
NAIC# 20443
Employers Mutual Casualty Company 2.25% Freese
Des Moines, Iowa
FEIN# 42-0234980
NAIC# 21415
First Excess & Reinsurance Corporation 7.50% Kurtzweil
Jefferson City, Missouri
FEIN# 43-1037123
NAIC# 32018
Folksamerica Reinsurance Company 8.00% Luger
New York, New York
FEIN# 13-2997499
NAIC# 38776
Insurance Company of the West 8.00% Dean
San Diego, California
FEIN# 95-2769232
NAIC# 27847
Nationwide Mutual Insurance Company 7.50% Wilson
Columbus, Ohio
FEIN# 31-4177100
NAIC# 23787
</TABLE>
PAGE 6 OF 8
<PAGE> 50
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01402
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share Name
- -------------------------------------------------- ----- ----
<S> <C> <C>
Reliance Insurance Company 2.10% Barrows
Philadelphia, Pennsylvania
FEIN# 23-0580680
NAIC# 24457
through Reliance Reinsurance Corporation
Philadelphia, Pennsylvania
St. Paul Fire and Marine Insurance Company 8.00% Schiffer
St. Paul, Minnesota
FEIN# 41-0406690
NAIC# 24767
through St. Paul Re, Inc.
New York, New York
United Fire & Casualty Company 0.50% Stanford
Cedar Rapids, Iowa
FEIN# 42-0644327
NAIC# 13021
USF Re Insurance Company 8.15% Dik
Boston, Massachusetts
FEIN# 04-1590940
NAIC# 11835
Vesta Fire Insurance Corporation 25.00% Etheridge
Birmingham, Alabama
FEIN# 63-0598629
NAIC# 11762
Winterthur Reinsurance Corporation of America 3.50% Rivera
New York, New York
FEIN# 13-3531373
NAIC# 10006
-------
Total Placement 100.00%
</TABLE>
PAGE 7 OF 8
<PAGE> 51
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01402
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
SECOND PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
<S> <C>
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
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
</TABLE>
PAGE 6 OF 8
<PAGE> 52
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01402
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
<S> <C>
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 Re, Inc.
United Fire & Casualty Company 0.50%
Cedar Rapids, Iowa
FEIN# 42-0644327
NAIC# 13021
USF Re Insurance Company 8.15%
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%
</TABLE>
PAGE 7 OF 8
<PAGE> 53
REINSURANCE COVER NOTE NO. C-98-01402
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
SECOND PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EFFECTIVE JANUARY 1, 1998
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: March 17, 1998
---------------------------------------
PAGE 8 OF 8
<PAGE> 54
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.
- 1 -
<PAGE> 55
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.
- 2 -
<PAGE> 56
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
1. This Contract does not cover any loss or liability accruing to the Reassured
directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of
Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear
Energy Risks.
2. Without in any way restricting the operation of Paragraph 1. of this Clause,
this Contract does not cover any loss or liability accruing to the Reassured,
directly or indirectly, and whether as Insurer or Reinsurer, from any insurance
against Physical Damage (including business interruption or consequential loss
arising out of such Physical Damage) to:
a. Nuclear reactor power plants including all auxiliary property on
the site, or
b. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and critical facilities as such, or
c. Installations for fabricating complete fuel elements or for
processing substantial quantities of prescribed substances, and
for reprocessing, salvaging, chemically separating, storing or
disposing of spent nuclear fuel or waste materials, or
d. Installations other than those listed in Paragraph 2.c. above
using substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operation of Paragraphs 1. and 2. of this
Clause, this Contract does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this Paragraph 3. shall not
operate:
a. Where the Reassured does not have knowledge of such nuclear
reactor power plant or nuclear installation, or
b. Where the said insurance contains a provision excluding coverage
for damage to property caused by or resulting from radioactive
contamination, however caused.
4. Without in any way restricting the operation of Paragraphs 1., 2. and 3. of
this Clause, this Contract does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurers or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. This Clause shall not extend to risks using radioactive isotopes in any form
where the nuclear exposure is not considered by the Reassured to be the primary
hazard.
6. The term "prescribed substances" shall have the meaning given to it by the
Atomic Energy Control Act R.S.C. 1985 (c), A-16 or by any law amendatory
thereof.
7. Reassured to be sole judge of what constitutes:
a. Substantial quantities, and
b. The extent of installation, plant or site.
- 1 -
<PAGE> 57
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
8. Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4.
of this Clause, this Contract does not cover any loss or liability accruing to
the Reassured, directly or indirectly, and whether as Insurer or Reinsurer
caused:
a. By any nuclear incident as defined in the Nuclear Liability Act
or any other nuclear liability act, law or statute, or any law
amendatory thereof or nuclear explosion, except for ensign loss
or damage which results directly from fire, lightning or
explosion of natural, coal or manufactured gas;
b. By contamination by radioactive material.
NOTE: Without in any way restricting the operation of Paragraphs 1.,
2., 3. and 4. of this Clause, Paragraph 8. of this Clause shall
only apply to all original contracts of the Reassured whether
new, renewal or replacement which became effective on or after
December 31, 1992.
- 2 -
<PAGE> 58
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
1. This reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy Risks.
2. Without in any way restricting the operation of Paragraph 1. of this Clause,
this reinsurance does not cover any loss or liability accruing to the Reassured,
directly or indirectly and whether as Insurer or Reinsurer, from any insurance
against Physical Damage (including business interruption or consequential loss
arising out of such Physical Damage) to:
a. Nuclear reactor power plants including all auxiliary property on
the site, or
b. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
c. Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material,"
and for reprocessing, salvaging, chemically separating, storing
or disposing of "spent" nuclear fuel or waste materials, or
d. Installations other than those listed in Paragraph 2.c. above
using substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operations of Paragraphs 1. and 2. hereof,
this reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this Paragraph 3. shall not
operate:
a. Where Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
b. Where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January
1960 this SubParagraph 3.B. shall only apply provided the said
radioactive contamination exclusion provision has been approved
by the Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of Paragraphs 1., 2. and 3.
hereof, this reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. It is understood and agreed that this Clause shall not extend to risks using
radioactive isotopes in any form where the nuclear exposure is not considered by
the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in the
Atomic Energy Act of 1954 or by any law amendatory thereof.
- 1 -
<PAGE> 59
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
7. Reassured to be the sole judge of what constitutes:
a. Substantial quantities, and
b. The extent of installation, plant or site.
NOTE: Without in any way restricting the operation of Paragraph 1.
hereof, it is understood and agreed that:
(a) all policies issued by the Reassured on or before December 31,
1957 shall be free from the application of the other provisions
of this Clause until expiry date of December 31, 1960 whichever
first occurs whereupon all the provisions of this Clause shall
apply.
(b) with respect to any risk located in Canada policies issued by the
Reassured on or before December 31, 1958 shall be free from the
application of the other provisions of this Clause until expiry
date or December 31, 1960 whichever first occurs whereupon all
the provisions of this Clause shall apply.
NOTES: 1) The words printed in italic text in the Limited Exclusion
Provision and in the Broad Exclusion Provision shall apply
only in relation to original liability policies which
include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
2) Wherever used herein the term "Company" shall be
understood to mean "Reassured," "Reinsured" or whatever
other term is used in the attached reinsurance Agreement
to designate the reinsured company.
- 2 -
<PAGE> 60
POOLS, ASSOCIATIONS, SYNDICATES EXCLUSION CLAUSE
(FLORIDA AMENDED)
SECTION A
It is agreed that the following is excluded hereunder:
(a) All business derived directly or indirectly from any Pool,
Association or Syndicate which maintains its own reinsurance
facilities.
(b) Any Pool or Scheme, (whether voluntary or mandatory) formed after
1st March 1968 for the purpose of insuring property whether on a
countrywide basis or in respect of designated areas. This
exclusion shall not apply to so-called Automobile Insurance Plans
or other Pools formed to provide coverage for Automobile Physical
Damage.
SECTION B
It is agreed that business written by the Reassured for the same perils, which
is known at the time to be insured by, or in excess of underlying amounts placed
in the following Pools, Associations or Syndicates, whether by way of insurance
or reinsurance, is excluded hereunder:
Industrial Risk Insurers
Associated Factory Mutuals
Improved Risk Mutuals
Any Pool, Association or Syndicate formed for the purpose of writing
oil, gas or petro-chemical plants and/or oil or gas drilling rigs
United States Aircraft Insurance Group
Canadian Aircraft Insurance Group
Associated Aviation Underwriters
American Aviation Underwriters
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk in
question is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket Basis.
(c) To Contingent Business Interruption, except when the Reassured is
aware that the key location is known at the time to be insured in
any Pool, Association or Syndicate named above.
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (other than Railroad
Schedules), and Builder's Risks on the classes of risks specified
in this subsection (d) only.
SECTION C
NEVERTHELESS, the Reinsurers specifically agree that liability accruing to the
Reassured from its participation in Residual Market Mechanisms including but
limited to:
- 1 -
<PAGE> 61
(a) The following so-called "Coastal Pools":
Alabama Insurance Underwriting Association Florida Windstorm
Insurance Underwriting Association (FWUA) Louisiana Insurance
Underwriting Association Mississippi Insurance Underwriting
Association North Carolina Insurance Underwriting Association
South Carolina Windstorm and Hail Underwriting Association Texas
Catastrophe Property Insurance Association
(b) All "Fair Plan" and "Rural Risk Plan" business,
and
(c) Florida Property and Casualty Joint Underwriting Association
(FPCJUA) and Residential Property and Casualty Joint Underwriting
Association (RPCJUA),
for all perils otherwise protected hereunder shall not be excluded, except that
this reinsurance does not include any increase in such liability resulting from:
(1) The inability of any participant in such Residual Market
Mechanisms to meet its liability,
(2) Any claim against such Residual Market Mechanisms or any
participant therein, including the Reassured, whether by
way of subrogation or otherwise, brought by or on behalf
of any insolvency fund (as defined in the Insolvency Funds
Exclusion Clause in this Contract).
SECTION D
Notwithstanding SECTION C above, in respect of the FWUA, FPCJUA and RPCJUA,
where an assessment is made against the Reassured by the FWUA, the FPCJUA, the
RPCJUA, or any combination thereof, the maximum loss that the Reassured may
include in the Ultimate Net Loss in respect of any loss occurrence hereunder
shall not exceed the lesser of:
(1) The Reassured's assessment from the relevant entity (FWUA, FPCJUA
and/or RPCJUA) for the accounting year in which the loss
occurrence commenced, or
(2) The product of the following:
(a) The Reassured's percentage participation in the relevant
entity for the accounting year in which the loss
occurrence commenced; and
(b) The relevant entity's total losses in such loss
occurrence.
Any assessments for accounting years subsequent to that in which the loss
occurrence commenced may not be included in the Ultimate Net Loss hereunder.
Moreover, notwithstanding SECTION C above, in respect of the FWUA, the FPCJUA
and/or the RPCJUA, the Ultimate Net Loss hereunder shall not include any monies
expended to purchase or retire bonds as a consequence of being a member of the
FWUA, the FPCJUA and/or RPCJUA.
- 2 -
<PAGE> 62
For the purposes of this Contract, the Reassured may not include in the Ultimate
Net Loss any assessment or any percentage assessment levied by the FWUA, the
FPCJUA and/or the RPCJUA to meet the obligations of an insolvent insurer member
or other party, or to meet any obligations arising from the deferment by the
FWUA, FPCJUA and/or RPCJUA of the collection of monies.
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company," "Reinsured," "Reassured" or
whatever other term is used in the attached reinsurance document to designate
the reinsured company or companies.
"Agreement" shall be understood to mean "Agreement," "Contract," "Policy" or
whatever other term is used to designate the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers," "Underwriters" or
whatever other term is used in the attached reinsurance document to designate
the reinsurer or reinsurers.
- 3 -
<PAGE> 63
INSOLVENCY FUNDS EXCLUSION CLAUSE
1. This Contract excludes all liability of the Reassured arising, by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or governed; which
provides for any assessment of or payment or assumption by the Reassured of part
or all of any claim, debt, charge, fee, or other obligation of any insurer, or
its successors or assigns, which has been declared by any competent authority to
be insolvent, or which is otherwise deemed unable to meet any claim, debt,
charge, fee or other obligation in whole or in part.
- 1 -
<PAGE> 64
Number: C-98-01493
Renewal of: C-97-01493
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, 1998
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, 1998 to
January 1, 1999, 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 1 OF 9
<PAGE> 65
Number: C-98-01493
Renewal of: C-97-01493
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: 0.720% of Gross Net Earned Premium Income.
MINIMUM
AND DEPOSIT
PREMIUM: Deposit Premium of $150,000 payable in equal quarterly
installments of $37,500 at January 1, April 1, July 1, and
October 1, 1998.
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;
PAGE 2 OF 9
<PAGE> 66
Number: C-98-01493
Renewal of: C-97-01493
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.
REINSURERS: 100% placement through Towers Perrin Reinsurance.
See attached Schedule for listing of Reinsurers and their
respective participations.
PAGE 3 OF 9
<PAGE> 67
Number: C-98-01493
Renewal of: C-97-01493
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 9
<PAGE> 68
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01493
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
THIRD PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share Name
- -------------------------------------------------- ----- ----
<S> <C> <C>
Constitution Reinsurance Corporation 5.00% Cronin
New York, New York
FEIN# 13-5009848
NAIC# 21032
Employers Mutual Casualty Company 2.25% Freese
Des Moines, Iowa
FEIN# 42-0234980
NAIC# 21415
First Excess & Reinsurance Corporation 5.50% Kurtzweil
Jefferson City, Missouri
FEIN# 43-1037123
NAIC# 32018
Hartford Fire Insurance Company 7.00% Rettig
Hartford, Connecticut
FEIN# 06-0383750
NAIC# 19682
through Hartford Re Company
Hartford, Connecticut
Insurance Company of the West 8.00% Dean
San Diego, California
FEIN# 95-2769232
NAIC# 27847
Nationwide Mutual Insurance Company 7.50% Wilson
Columbus, Ohio
FEIN# 31-4177100
NAIC# 23787
PMA Reinsurance Corporation 7.00% Stoner
Philadelphia, Pennsylvania
FEIN# 23-2153760
NAIC# 39675
</TABLE>
PAGE 5 OF 9
<PAGE> 69
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01493
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share Name
- -------------------------------------------------- ----- ----
<S> <C> <C>
Republic Western Insurance Company 5.00% Thapa
Phoenix, Arizona
FEIN# 86-0274508
NAIC# 31089
St. Paul Fire and Marine Insurance Company 8.00% Schiffer
St. Paul, Minnesota
FEIN# 41-0406690
NAIC# 24767
through St. Paul Re, Inc.
New York, New York
The Sumitomo Marine & Fire Insurance Company Ltd. 3.25% Norris
New York, New York
FEIN# 13-2758523
NAIC# 20362
through Sumitomo Marine Re Management, Inc.
New York, New York
Sydney Reinsurance Corporation 15.00% Sullivan
Philadelphia, Pennsylvania
FEIN# 23-1641984
NAIC# 10219
United Fire & Casualty Company 3.00% Stanford
Cedar Rapids, Iowa
FEIN# 42-0644327
NAIC# 13021
USF Re Insurance Company 7.50% Dik
Boston, Massachusetts
FEIN# 04-1590940
NAIC# 11835
Vesta Fire Insurance Corporation 16.00% Etheridge
Birmingham, Alabama
FEIN# 63-0598629
NAIC# 11762
------
Total Placement 100.00%
</TABLE>
PAGE 6 OF 9
<PAGE> 70
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01493
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
THIRD PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
<S> <C>
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
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
</TABLE>
PAGE 7 OF 9
<PAGE> 71
SCHEDULE
REINSURERS ATTACHING TO COVER NOTE NO. C-98-01493
<TABLE>
<CAPTION>
Direct Placement through Towers Perrin Reinsurance Share
- -------------------------------------------------- -----
<S> <C>
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 Re, Inc.
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
United Fire & Casualty Company 3.00%
Cedar Rapids, Iowa
FEIN# 42-0644327
NAIC# 13021
USF Re Insurance Company 7.50%
Boston, Massachusetts
FEIN# 04-1590940
NAIC# 11835
Vesta Fire Insurance Corporation 16.00%
Birmingham, Alabama
FEIN# 63-0598629
NAIC# 11762
------
Total Placement 100.00%
</TABLE>
PAGE 8 OF 9
<PAGE> 72
REINSURANCE COVER NOTE NO. C-98-01493
FOR
NATIONAL INSURANCE GROUP COMPANIES
GREAT PACIFIC INSURANCE COMPANY
SOUTH SAN FRANCISCO, CALIFORNIA
THIRD PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EFFECTIVE JANUARY 1, 1998
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: March 17, 1998
---------------------------------------
PAGE 9 OF 9
<PAGE> 73
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.
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.
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<PAGE> 74
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
1. This Contract does not cover any loss or liability accruing to the Reassured
directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of
Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear
Energy Risks.
2. Without in any way restricting the operation of Paragraph 1. of this Clause,
this Contract does not cover any loss or liability accruing to the Reassured,
directly or indirectly, and whether as Insurer or Reinsurer, from any insurance
against Physical Damage (including business interruption or consequential loss
arising out of such Physical Damage) to:
a. Nuclear reactor power plants including all auxiliary property on
the site, or
b. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and critical facilities as such, or
c. Installations for fabricating complete fuel elements or for
processing substantial quantities of prescribed substances, and
for reprocessing, salvaging, chemically separating, storing or
disposing of spent nuclear fuel or waste materials, or
d. Installations other than those listed in Paragraph 2.c. above
using substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operation of Paragraphs 1. and 2. of this
Clause, this Contract does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this Paragraph 3. shall not
operate:
a. Where the Reassured does not have knowledge of such nuclear
reactor power plant or nuclear installation, or
b. Where the said insurance contains a provision excluding coverage
for damage to property caused by or resulting from radioactive
contamination, however caused.
4. Without in any way restricting the operation of Paragraphs 1., 2. and 3. of
this Clause, this Contract does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurers or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. This Clause shall not extend to risks using radioactive isotopes in any form
where the nuclear exposure is not considered by the Reassured to be the primary
hazard.
6. The term "prescribed substances" shall have the meaning given to it by the
Atomic Energy Control Act R.S.C. 1985 (c), A-16 or by any law amendatory
thereof.
7. Reassured to be sole judge of what constitutes:
a. Substantial quantities, and
b. The extent of installation, plant or site.
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<PAGE> 75
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
8. Without in any way restricting the operation of Paragraphs 1., 2., 3. and 4.
of this Clause, this Contract does not cover any loss or liability accruing to
the Reassured, directly or indirectly, and whether as Insurer or Reinsurer
caused:
a. By any nuclear incident as defined in the Nuclear Liability Act
or any other nuclear liability act, law or statute, or any law
amendatory thereof or nuclear explosion, except for ensign loss
or damage which results directly from fire, lightning or
explosion of natural, coal or manufactured gas;
b. By contamination by radioactive material.
NOTE: Without in any way restricting the operation of Paragraphs 1.,
2., 3. and 4. of this Clause, Paragraph 8. of this Clause shall
only apply to all original contracts of the Reassured whether
new, renewal or replacement which became effective on or after
December 31, 1992.
- 3 -
<PAGE> 76
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
1. This reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy Risks.
2. Without in any way restricting the operation of Paragraph 1. of this Clause,
this reinsurance does not cover any loss or liability accruing to the Reassured,
directly or indirectly and whether as Insurer or Reinsurer, from any insurance
against Physical Damage (including business interruption or consequential loss
arising out of such Physical Damage) to:
a. Nuclear reactor power plants including all auxiliary property on
the site, or
b. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
c. Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material,"
and for reprocessing, salvaging, chemically separating, storing
or disposing of "spent" nuclear fuel or waste materials, or
d. Installations other than those listed in Paragraph 2.c. above
using substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operations of Paragraphs 1. and 2. hereof,
this reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this Paragraph 3. shall not
operate:
a. Where Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
b. Where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January
1960 this SubParagraph 3.B. shall only apply provided the said
radioactive contamination exclusion provision has been approved
by the Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of Paragraphs 1., 2. and 3.
hereof, this reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. It is understood and agreed that this Clause shall not extend to risks using
radioactive isotopes in any form where the nuclear exposure is not considered by
the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in the
Atomic Energy Act of 1954 or by any law amendatory thereof.
- 1 -
<PAGE> 77
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
7. Reassured to be the sole judge of what constitutes:
a. Substantial quantities, and
b. The extent of installation, plant or site.
NOTE: Without in any way restricting the operation of Paragraph 1.
hereof, it is understood and agreed that:
(a) all policies issued by the Reassured on or before December 31,
1957 shall be free from the application of the other provisions
of this Clause until expiry date of December 31, 1960 whichever
first occurs whereupon all the provisions of this Clause shall
apply.
(b) with respect to any risk located in Canada policies issued by the
Reassured on or before December 31, 1958 shall be free from the
application of the other provisions of this Clause until expiry
date or December 31, 1960 whichever first occurs whereupon all
the provisions of this Clause shall apply.
NOTES: 1) The words printed in italic text in the Limited Exclusion
Provision and in the Broad Exclusion Provision shall apply
only in relation to original liability policies which
include a Limited Exclusion Provision or a Broad Exclusion
Provision containing those words.
2) Wherever used herein the term "Company" shall be
understood to mean "Reassured," "Reinsured" or whatever
other term is used in the attached reinsurance Agreement
to designate the reinsured company.
- 2 -
<PAGE> 78
INSOLVENCY FUNDS EXCLUSION CLAUSE
1. This Contract excludes all liability of the Reassured arising, by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund, plan, pool, association, fund
or other arrangement, howsoever denominated, established or governed; which
provides for any assessment of or payment or assumption by the Reassured of part
or all of any claim, debt, charge, fee, or other obligation of any insurer, or
its successors or assigns, which has been declared by any competent authority to
be insolvent, or which is otherwise deemed unable to meet any claim, debt,
charge, fee or other obligation in whole or in part.
- 1 -
<PAGE> 79
POOLS, ASSOCIATIONS, SYNDICATES EXCLUSION CLAUSE
(FLORIDA AMENDED)
SECTION A
It is agreed that the following is excluded hereunder:
(a) All business derived directly or indirectly from any Pool,
Association or Syndicate which maintains its own reinsurance
facilities.
(b) Any Pool or Scheme, (whether voluntary or mandatory) formed after
1st March 1968 for the purpose of insuring property whether on a
countrywide basis or in respect of designated areas. This
exclusion shall not apply to so-called Automobile Insurance Plans
or other Pools formed to provide coverage for Automobile Physical
Damage.
SECTION B
It is agreed that business written by the Reassured for the same perils, which
is known at the time to be insured by, or in excess of underlying amounts placed
in the following Pools, Associations or Syndicates, whether by way of insurance
or reinsurance, is excluded hereunder:
Industrial Risk Insurers
Associated Factory Mutuals
Improved Risk Mutuals
Any Pool, Association or Syndicate formed for the purpose of writing
oil, gas or petro-chemical plants and/or oil or gas drilling rigs
United States Aircraft Insurance Group
Canadian Aircraft Insurance Group
Associated Aviation Underwriters
American Aviation Underwriters
Section B does not apply:
(a) Where the Total Insured Value over all interests of the risk in
question is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock
and/or Contents written on a Blanket Basis.
(c) To Contingent Business Interruption, except when the Reassured is
aware that the key location is known at the time to be insured in
any Pool, Association or Syndicate named above.
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (other than Railroad
Schedules), and Builder's Risks on the classes of risks specified
in this subsection (d) only.
- 1 -
<PAGE> 80
SECTION C
NEVERTHELESS, the Reinsurers specifically agree that liability accruing to the
Reassured from its participation in Residual Market Mechanisms including but
limited to:
(a) The following so-called "Coastal Pools":
Alabama Insurance Underwriting Association Florida Windstorm
Insurance Underwriting Association (FWUA) Louisiana Insurance
Underwriting Association Mississippi Insurance Underwriting
Association North Carolina Insurance Underwriting Association
South Carolina Windstorm and Hail Underwriting Association Texas
Catastrophe Property Insurance Association
(b) All "Fair Plan" and "Rural Risk Plan" business,
and
(c) Florida Property and Casualty Joint Underwriting Association
(FPCJUA) and Residential Property and Casualty Joint Underwriting
Association (RPCJUA),
for all perils otherwise protected hereunder shall not be excluded, except that
this reinsurance does not include any increase in such liability resulting from:
(1) The inability of any participant in such Residual Market
Mechanisms to meet its liability,
(2) Any claim against such Residual Market Mechanisms or any
participant therein, including the Reassured, whether by
way of subrogation or otherwise, brought by or on behalf
of any insolvency fund (as defined in the Insolvency Funds
Exclusion Clause in this Contract).
SECTION D
Notwithstanding SECTION C above, in respect of the FWUA, FPCJUA and RPCJUA,
where an assessment is made against the Reassured by the FWUA, the FPCJUA, the
RPCJUA, or any combination thereof, the maximum loss that the Reassured may
include in the Ultimate Net Loss in respect of any loss occurrence hereunder
shall not exceed the lesser of:
(1) The Reassured's assessment from the relevant entity (FWUA, FPCJUA
and/or RPCJUA) for the accounting year in which the loss
occurrence commenced, or
(2) The product of the following:
(a) The Reassured's percentage participation in the relevant
entity for the accounting year in which the loss
occurrence commenced; and
(b) The relevant entity's total losses in such loss
occurrence.
Any assessments for accounting years subsequent to that in which the loss
occurrence commenced may not be included in the Ultimate Net Loss hereunder.
Moreover, notwithstanding SECTION C above, in respect of the FWUA, the FPCJUA
and/or the RPCJUA,
- 2 -
<PAGE> 81
the Ultimate Net Loss hereunder shall not include any monies expended to
purchase or retire bonds as a consequence of being a member of the FWUA, the
FPCJUA and/or RPCJUA.
For the purposes of this Contract, the Reassured may not include in the Ultimate
Net Loss any assessment or any percentage assessment levied by the FWUA, the
FPCJUA and/or the RPCJUA to meet the obligations of an insolvent insurer member
or other party, or to meet any obligations arising from the deferment by the
FWUA, FPCJUA and/or RPCJUA of the collection of monies.
NOTES: Wherever used herein the terms:
"Reassured" shall be understood to mean "Company," "Reinsured," "Reassured" or
whatever other term is used in the attached reinsurance document to designate
the reinsured company or companies.
"Agreement" shall be understood to mean "Agreement," "Contract," "Policy" or
whatever other term is used to designate the attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers," "Underwriters" or
whatever other term is used in the attached reinsurance document to designate
the reinsurer or reinsurers.
- 3 -
<PAGE> 1
OFFICE LEASE
between
SYSTRON BUSINESS CENTER, LLC
Landlord
and
PINNACLE DATA COPORATION
Tenant
January 1, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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Article 1 REAL PROPERTY, BUILDING, AND PREMISES.............................................................2
1.1 Lease of Premises............................................................................2
1.2 Appurtenant Rights...........................................................................2
1.3 Landlord's Reservation of Rights.............................................................2
1.4 Preparation of Premises; Acceptance..........................................................2
1.5 Rentable Area................................................................................2
1.6 Right of First Offer.........................................................................2
Article 2 LEASE TERM........................................................................................3
2.1 Lease Term. .................................................................................3
2.2 Confirmation of Lease Information............................................................3
2.3 Lease Year...................................................................................3
2.4 Delay in Delivery of Premises................................................................3
2.5 Option To Extend Term........................................................................4
Article 3 BASE RENT.........................................................................................5
3.1 Definition of "Base Rent"--Limited Setoff....................................................5
3.2 Initial Payment; Proration...................................................................5
3.3 Application of Payments......................................................................5
Article 4 ADDITIONAL RENT...................................................................................5
4.1 Additional Rent; Rent........................................................................5
4.2 Definitions..................................................................................5
4.3 Calculation and Payment of Additional Rent...................................................9
4.4 Taxes and Other Charges for Which Tenant Is Directly Responsible.............................9
4.5 Landlord's Books and Records; Tenant's Audit Rights..........................................9
Article 5 SECURITY DEPOSIT.................................................................................10
Article 6 USE..............................................................................................10
6.1 Permitted Use. .............................................................................10
6.2 Rules and Regulations.......................................................................10
6.3 Additional Restrictions on Use..............................................................10
Article 7 COMPLIANCE WITH LAWS.............................................................................10
7.1 Definition of "Laws and Orders."............................................................10
7.2 Repairs, Replacements, Alterations, and Improvements........................................10
7.3 Collateral Estoppel.........................................................................10
Article 8 HAZARDOUS MATERIAL...............................................................................11
8.1 Use of Hazardous Material...................................................................11
8.2 Indemnification.............................................................................11
8.4 Remediation Obligations; Tenant's Rights on Cleanup by Landlord.............................11
8.5 Definition of "Hazardous Material.".........................................................11
Article 9 UTILITIES AND SERVICES...........................................................................11
9.1 Standard Tenant Utilities and Services......................................................11
9.2 Overstandard Tenant Use.....................................................................12
9.3 Interruption of Utilities...................................................................12
Article 10 REPAIRS AND MAINTENANCE..........................................................................12
10.1 Tenant's Repair and Maintenance Obligations................................................12
10.2 Landlord's Repair and Maintenance Obligations..............................................13
Article 11 ALTERATIONS AND ADDITIONS........................................................................13
11.1 Landlord's Consent to Alterations..........................................................13
11.2 Compliance of Alterations With Laws and Insurance Requirements.............................14
11.3 Manner of Construction.....................................................................14
11.4 Payment for Improvements...................................................................14
11.5 Construction Insurance.....................................................................14
11.6 Landlord's Property........................................................................14
11.7 Initial Improvements.......................................................................15
Article 12 COVENANT AGAINST LIENS...........................................................................15
Article 13 EXCULPATION, INDEMNIFICATION, AND INSURANCE......................................................15
13.2 Exculpation................................................................................15
13.3 Indemnification............................................................................15
13.4 Compliance With Insurer Requirements.......................................................16
13.5 Tenant's Liability Coverage................................................................16
13.6 Tenant's Workers' Compensation and Employer Liability Coverage.............................17
13.7 Tenant's First Party Insurance.............................................................17
13.8 Other Insurance Coverage...................................................................18
13.9 Form of Policies and Additional Requirements...............................................18
13.10 Waiver of Subrogation......................................................................18
13.11 Disclosures Regarding Real Property........................................................18
Article 14
DAMAGE AND DESTRUCTION ..........................................................................19
14.1 Repair of Damage by Landlord...............................................................19
14.2 Repair Period Notice.......................................................................19
14.3 Landlord's Option To Terminate or Repair...................................................19
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TABLE OF CONTENTS
(CONTINUED)
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14.4 Tenant's Option To Terminate..................................................................19
14.5 Rent Abatement Due to Casualty................................................................19
14.6 Damage Near End of Term.......................................................................19
14.7 Effective Date of Termination; Rent Apportionment.............................................19
14.8 Waiver of Statutory Provisions................................................................19
Article 15 CONDEMNATION........................................................................................20
15.1 Definition of "Condemnation.".................................................................20
15.2 Effect on Rights and Obligations..............................................................20
15.3 Termination of Lease..........................................................................20
15.4 Effect of Condemnation if Lease Is Not Terminated.............................................20
15.5 Allocation of Award...........................................................................20
15.6 Temporary Taking.............................................................................21
Article 16 ASSIGNMENT AND SUBLEASING...........................................................................21
16.1 Restricted Transfers..........................................................................21
16.2 Transfer Procedure............................................................................21
16.3 Landlord's Consent............................................................................22
16.4 Transfer Premium..............................................................................22
16.5 Effect of Transfer............................................................................22
16.6 Transfers of Ownership Interests and Other Organizational Changes.............................22
Article 17 SURRENDER OF PREMISES...............................................................................23
17.1 Surrender of Premises.........................................................................23
17.2 Removal of Tenant Property by Tenant..........................................................23
Article 18 HOLDING OVER........................................................................................23
18.1 Holdover Rent.................................................................................23
Article 19 ESTOPPEL CERTIFICATES ...........................................................23
19.1 Obligation To Provide Estoppel Certificates...................................................23
19.2 Failure To Deliver............................................................................23
Article 20 SUBORDINATION, NONDISTURBANCE, AND ATTORNMENT.......................................................24
20.1 Automatic Subordination; Nondisturbance Agreement To Include Specified Terms..................24
20.2 Subordination Agreement.......................................................................24
20.3 Attornment....................................................................................24
20.4 Notice of Default; Right To Cure..............................................................24
Article 21 DEFAULTS AND REMEDIES...............................................................................24
21.1 Tenant's Default..............................................................................24
21.2 Replacement of Statutory Notice Requirements..................................................24
21.3 Landlord's Remedies on Tenant's Default.......................................................25
21.4 Form of Payment After Default.................................................................25
21.5 Efforts To Relet..............................................................................25
21.6 Acceptance of Rent Without Waiving Rights.....................................................25
21.7 Tenant's Remedies on Landlord's Default.......................................................25
Article 22 LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS....................................................26
22.1 Landlord's Right To Perform Tenant's Obligations..............................................26
22.2 Reimbursement by Tenant.......................................................................26
Article 23 LATE PAYMENTS.......................................................................................26
23.1 Late Charges..................................................................................26
23.2 Interest......................................................................................26
Article 24 NONWAIVER...........................................................................................26
24.1 Nonwaiver.....................................................................................26
24.2 Acceptance and Application of Payment; Not Accord and Satisfaction............................26
Article 25 DISPUTE RESOLUTION..................................................................................26
25.1 Waiver of Right to Jury Trial.................................................................26
25.2 Resolving Disagreement Over Fair Market Rental Value..........................................27
Article 26 ATTORNEY FEES AND COSTS.............................................................................27
26.1 Attorney Fees and Costs.......................................................................28
Article 27 LANDLORD'S ACCESS TO PREMISES.......................................................................28
27.1 Landlord's Access to Premises.................................................................28
27.2 Restrictions on Entry; Tenant's Waiver........................................................28
27.3 Method of Entry...............................................................................28
27.4 Emergency Entry...............................................................................28
Article 28 SIGNS...............................................................................................28
28.1 Building Name; Landlord's Signage Rights......................................................28
28.2 Tenant's Signage Rights.......................................................................28
Article 29 TENANT PARKING......................................................................................29
29.1 Number of Parking Spaces......................................................................29
29.2 Changes in Location, Layout, and Service......................................................29
Article 30 MISCELLANEOUS.......................................................................................29
30.1 Captions......................................................................................29
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30.2 Word Usage...................................................................................29
30.3 Counting Days................................................................................29
30.4 Entire Agreement; Amendments.................................................................29
30.5 Exhibits.....................................................................................29
30.6 Partial Invalidity...........................................................................29
30.7 Binding Effect...............................................................................29
30.8 Independent Covenants........................................................................29
30.9 Governing Law................................................................................29
30.10 Notices......................................................................................29
30.11 Force Majeure--Specific Exceptions...........................................................30
30.12 Time of the Essence..........................................................................30
30.13 Modifications Required by Landlord's Lender..................................................30
30.14 Recording....................................................................................30
30.15 Liability of Landlord........................................................................30
30.16 Transfer of Landlord's Interest..............................................................30
30.17 Submission of Lease..........................................................................31
30.18 Legal Authority..............................................................................31
30.19 Right To Lease...............................................................................31
30.20 No Air Rights................................................................................31
30.21 Brokers......................................................................................31
</TABLE>
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<PAGE> 5
OFFICE LEASE
This Office Lease is made by the Landlord and Tenant named below, who
agree as follows:
Part I
SUMMARY OF BASIC LEASE INFORMATION
The basic terms of this Lease are:
1. Date of Lease: January 1, 1998
2. Landlord: Systron Business Center, LLC, a California limited
liability company
3. Tenant: Pinnacle Data Corporation, a California corporation
4. Premises and Building:
(a) Building (Section 1.1): 2727 Systron Drive, Concord, CA.
The "Building" located on the Real Property is shown on the attached Exhibit A.
(b) Total Number of Rentable Square Feet in the Building
(Section 1.1): 90,948
(c) Premises (Section 1.1): Approximately 30,000 Rentable
Square Feet of space located in the Building, as shown on Exhibit A.
(d) Expansion of Premises (Section 1.6): Tenant has a right of
first refusal to expand the Premises to include additional space that may become
available, as shown on Exhibit A, during the term of the Lease, such right of
first refusal to be exercised in accordance with Section 1.6.
5. Lease Term:
(a) Duration (Section 3.1): Ten (10) years and zero (0) months.
(b) Lease Commencement Date (Section 3.1): March 15, 1998.
(c) Lease Expiration Date (Section 2.1): The last day of the
month in which the tenth (10th) anniversary of the Lease Commencement Date
occurs.
(d) Optional Term Extensions (Section 2.5): Two (2) extensions
for five (5) years each.
6. Base Rent (Section 3.1): (Measured From Lease Commencement
Date) Base Rent is subject to adjustment as set forth in Section 3.1.
<TABLE>
<CAPTION>
Months Monthly Base Rent
- ------ -----------------
<S> <C>
3/15/98-10/31/98 Rental Abatement
11/1/98-2/28/03 $40,500
3/1/03-8/31/05 $42,000
9/1/05-Lease Expiration Date $45,000
</TABLE>
7. Additional Rent (Article 4): Tenant's Share of Increased Direct
Expenses (Section 4.2.6): Approximately 32.99%.
8. Security Deposit (Article 5): None
9. Permitted Use (Section 6.1): General office.
10. Liability insurance (minimum) (Section 13.5.10):
(a) General aggregate limit: $3,000,000.
(b) Personal injury and advertising injury limit: $3,000,000.
(c) Each occurrence limit: $2,000,000
(d) Fire damage liability limit (any one fire): $2,000,000.
11. Late charge and interest (Article 23):
(a) Late charge (Section 23.1): Three percent (3%).
(b) Interest on delinquent Rent (Section 23.2): Wall Street
Journal Prime Rate (or if such rate is no longer published such other prime rate
reasonably selected by Landlord) plus two percent (2%).
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2.4 Delay in Delivery of Premises. If Substantial Completion of the
Tenant Improvements has not occurred by the Outside Date, as defined in Section
2.4.1, Tenant's sole remedy, in addition to those stated in Section 3.1, shall
be to terminate this Lease as provided in this Section 2.4.
2.4.1. Definition of "Outside Date." For purposes of this Section
2.4, the Outside Date shall be April 15, 1998, as extended by the number of days
of Tenant Delays described in Exhibit B and by the number of days of Force
Majeure delays as defined in Section 30.11.
2.4.2. Tenant's Termination Notice. If Substantial Completion of
the work that Landlord is required to do pursuant to the Leasehold Improvement
Agreement has not occurred by the Outside Date, Tenant's sole remedy shall be
the right to deliver a notice to Landlord ("Outside Date Termination Notice")
electing to terminate this Lease effective on Landlord's receipt of the Outside
Date Termination Notice ("Effective Date"). The Outside Date Termination Notice
must be delivered by Tenant to Landlord, if at all, no earlier than the Outside
Date and no later than thirty (30) days after the Outside Date.
2.5 Option To Extend Term. Landlord grants to Tenant two (2) options
to extend the Lease Term (each, an Extension Option) for a period of five (5)
years (each an Option Term) each, subject to the conditions described in this
Section 2.5. Tenant shall have no other right to extend the term beyond the last
Option Term.
2.5.1. Conditions of Option. Each Extension Option shall be
subject to the following conditions:
(a) The Extension Option may be exercised only by
written notice delivered by Tenant to Landlord as provided in Section 2.5.3 and
only if, as of the date of delivery of the notice or as of the commencement of
the applicable Option Term, Tenant is not in Default under this Lease after the
expiration of any applicable cure periods.
(b) The rights contained in this Section 2.5 may be
exercised only by the originally named Tenant.
(c) If Tenant properly exercises the Extension Option,
the Lease Term, as it applies to the entire Premises then leased by Tenant,
shall be extended for the applicable Option Term.
2.5.2. Option Rent. The Rent payable by Tenant during the Option
Term ("Option Rent") shall be equal to ninety-five percent (95%) of the Fair
Market Rental Value of the Premises as of the commencement of the applicable
Option Term. For purposes of this Section 2.5, Fair Market Rental Value of the
Premises shall be the rental rate, including all escalations, at which tenants
lease comparable space as of the commencement of the Option Term. No
over-standard tenant improvements installed by Tenant will have an impact on the
determination of the Fair Market Rental Value. For purposes of this Section
2.5.2, "comparable space" shall be office space that is:
(a) Not subleased; (b) not subject to another tenant's
expansion rights; (c) comparable in size, location, floor
height and quality to the Premises; (d) leased for a term
comparable to the Option Term; and (e) located in comparable
buildings in the Concord/Walnut Creek area.
2.5.3. Exercise of Option. The Extension Option must be exercised
by Tenant, if at all, only at the time and in the manner provided in this
Section 2.5.3.
2.5.3.1 Interest Notice. If Tenant wishes to exercise an
Extension Option, Tenant shall deliver written notice ("Interest Notice") to
Landlord no less than six (6) months before the expiration of the initial Lease
Term.
2.5.3.2 Option Rent Notice. After receipt of Tenant's
Interest Notice, Landlord shall deliver notice ("Option Rent Notice") to Tenant
no less than four (4) months before the expiration of the initial Lease Term,
stating the Option Rent, based on Landlord's determination of the Fair Market
Rental Value of the Premises as of the date that is four (4) months before the
commencement date of the Option Term.
2.5.3.3 Exercise Notice. If Tenant wishes to exercise the
Extension Option, Tenant must, on or before the earlier of (a) the date
occurring ninety (90) days before the expiration of the initial Lease Term or
the first Option Term, as the case may be or (b) the date occurring thirty (30)
days after Tenant's receipt of the Option Rent Notice, exercise the Extension
Option by delivering written notice ("Exercise Notice") to Landlord.
2.5.3.4 Objection to Option Rent. If Tenant wishes to
contest the Option Rent stated in the Option Rent Notice, Tenant must provide,
with the Exercise Notice, written notice to Landlord that Tenant objects to the
stated Option Rent. If Tenant provides such written objection, the parties shall
follow the procedure described in Section 25.2, and the Option Rent shall be
determined as set forth in that Section.
2.5.3.5 Failure To Deliver Timely Notice. If Tenant fails to
deliver a timely Interest Notice:
(a) Tenant shall not lose its right to exercise the
Extension Option and shall still be entitled to deliver the Exercise Notice; (b)
Landlord shall not be required to deliver the Option Rent Notice; (c) Tenant
shall be considered to have objected to the Option Rent; and (d) The parties
shall follow the procedure described in Section 25.2, and the Option Rent shall
be determined as set forth in that Section.
2.5.4. Amendment to Lease. If Tenant timely exercises its
Extension Option, Landlord and Tenant shall, within fifteen (15) days after the
Option Rent is determined under this Section 2.5 or Article 25, execute an
amendment to this Lease extending the Lease Term on the terms and conditions set
forth in this Section 2.5. Such amendment shall provide for the Base Year to be
adjusted to the first year of each Option Term.
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(d) The cost of licenses, certificates, permits, and
inspections.
(e) The cost of contesting the validity or
applicability of any government enactments that may affect the Operating
Expenses.
(f) The costs incurred in connection with the
implementation and operation of a transportation system management program or
similar program.
(g) The cost of insurance carried by Landlord, in
amounts reasonably determined by Landlord, provided, however, that earthquake
insurance shall be maintained only to the extent it is available at a
commercially reasonable price and, if earthquake insurance is not included in
the Base Year but is subsequently carried by Landlord, the Base Year Operating
Expenses will be adjusted as if earthquake insurance had been carried.
(h) Fees, charges, and other costs including management
fees (or amounts in lieu of such fees), which management fees shall not exceed
three percent (3%) of rents, consulting fees, legal fees, and accounting fees of
all persons engaged by Landlord or otherwise reasonably incurred by Landlord in
connection with the operation, management, maintenance, and repair of the Real
Property.
(i) The cost of parking area maintenance, repair, and
restoration, including resurfacing, repainting, restriping, and cleaning.
(j) Wages, salaries, and other compensation and
benefits of all persons providing services to the Real Property, including those
engaged in the operation, maintenance, or security of the Real Property plus
employer's Social Security taxes, unemployment taxes, insurance, and any other
taxes imposed on Landlord that may be levied on those wages, salaries, and other
compensation and benefits. Notwithstanding anything to the contrary in this
Section 4.2.3.1(j), Landlord's general overhead expenses shall not be included
in Operating Expenses. If any of Landlord's employees provide services for more
than one building of Landlord, only the prorated portion of those employees'
wages, salaries, other compensation and benefits, and taxes reflecting the
percentage of their working time devoted to the Real Property shall be included
in Operating Expenses.
(k) Payments under any easement, license, operating
agreement, declaration, restrictive covenant, or instrument relating to the
sharing of costs by the Real Property.
(l) Amortization (including interest on the unamortized
cost at a rate equal to the floating commercial loan rate announced from time to
time by Bank of America, N.T.&S.A. (or such other bank reasonably selected by
Landlord) as its prime rate plus two (2) percentage points per annum of the cost
of acquiring or renting personal property used in the maintenance, repair, and
operation of the Building and Real Property.
(m) The cost of capital improvements or other costs
incurred in connection with the Real Property that are intended as a
labor-saving device or to effect other economies in the maintenance or operation
of all or part of the Real Property to the extent of Landlord's reasonable
estimate of savings in Operating Expenses as a result of such costs. All such
permitted capital expenditures shall be amortized (including interest on the
unamortized cost at the rate stated in Section (l)) over their useful life, as
reasonably determined by Landlord.
(n) The cost to clean, paint and waterproof the Real
Property. Notwithstanding the foregoing, to the extent that any such costs are
considered capital expenditures per Generally Accepted Accounting Principles,
such capital expenditures shall be amortized (including interest on the
unamortized costs at the rate stated in Section (l)) over their useful life as
reasonably determined by Landlord.
4.2.4. Adjustment of Operating Expenses. Operating Expenses shall
be adjusted as follows:
4.2.4.1 Gross-Up Adjustment When Building Is Less Than Fully
Occupied. If the occupancy of the Building during any part of the Base Year is
less than 100 percent, Landlord shall make an appropriate adjustment of the
variable components of Operating Expenses for the Base Year, as reasonably
determined by Landlord using sound accounting and management principles, to
determine the amount of Operating Expenses that would have been incurred had the
Building been 100 percent occupied. This amount shall be considered to have been
the amount of Operating Expenses for the Base Year. For purposes of this Section
4.2.4.1, "variable components" include only those component expenses that are
affected by variations in occupancy levels.
4.2.4.2 Exclusions From Operating Expenses. Despite any other
provision of Section 4.2, Operating Expenses shall not include:
(a) Depreciation, interest, or amortization on
mortgages or ground lease payments, except as otherwise stated in this Section
4.2.
(b) Legal fees incurred in negotiating and enforcing
tenant leases.
(c) Real estate brokers' leasing commissions.
(d) Initial improvements or alterations to tenant
spaces.
(e) The cost of providing any service directly to and
paid directly by any tenant.
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(f) Any costs expressly excluded from Operating
Expenses elsewhere in this Lease.
(g) Costs of any items for which Landlord receives
reimbursement from insurance proceeds or a third party. Insurance proceeds shall
reduce Operating Expenses in the year in which they are received, except that
any deductible amount under any insurance policy shall be included within
Operating Expenses.
(h) Costs of capital improvements, except as otherwise
stated in this Section 4.2.
4.2.4.3 Additional Operating Expense Exclusions. Despite any
other provision of Section 4.2, Operating Expenses shall also not include:
(a) Interest, principal, depreciation, attorney fees,
costs of environmental investigations or reports, points, fees, and other lender
costs and closing costs on any mortgage or mortgages, ground lease payments, or
other debt instrument encumbering the Real Property.
(b) Insurance premiums to the extent of any refunds of
those premiums.
(c) Any bad debt loss, rent loss, or reserves for bad
debt or rent loss.
(d) Landlord's costs of electricity and other
utilities, items, benefits, and services that are provided to other tenants or
occupants at no special cost but that are only offered or provided to Tenant at
a special or increased cost.
(e) Interest or penalties resulting from late payment
of any operating expense by Landlord due to Landlord's negligence or willful
misconduct (unless Landlord in good faith disputes a charge and subsequently
loses or settles that dispute) or due to the negligence or willful misconduct of
another tenant.
(f) Costs, fees, and compensation paid to Landlord, or
to Landlord's subsidiaries or affiliates, for services in or to the Real
Property to the extent that they exceed the charges for comparable services
rendered by an unaffiliated third party of comparable skill, competence,
stature, and reputation.
(g) Costs associated with:
(1) Operation of the business of the ownership of
the Real Property or entity that constitutes Landlord or Landlord's property
manager, as distinguished from the cost of Building operations, including the
costs of partnership or corporate accounting and legal matters; defending or
prosecuting any lawsuit with any mortgagee, lender, ground lessor, broker,
tenant, occupant, or prospective tenant or occupant; selling or syndicating any
of Landlord's interest in the Real Property; and disputes between Landlord and
Landlord's property manager;
(2) Landlord's general corporate or partnership
overhead and general administrative expenses, including the salaries of
management personnel who are not directly related to the Real Property and
primarily engaged in the operation, maintenance, and repair of the Real
Property, except to the extent that those costs and expenses are included in the
management fees, so long as these costs do not exceed reasonable industry
standards; or
(3) Wages, salaries, and other compensation paid
to any executive employee of Landlord or Landlord's property manager above the
grade of building manager for the Building or paid to any off-site personnel, so
long as these costs do not exceed reasonable industry standards.
(h) Advertising and promotional expenditures primarily
directed toward leasing tenant space in the Real Property.
(i) Leasing commissions, space-planning costs, attorney
fees and costs, disbursements, and other expenses:
(1) Incurred in connection with leasing, other
negotiations, or disputes with tenants, occupants,
prospective tenants, or other prospective occupants of
the Building; or (2) associated with the enforcement of
any leases.
(j) Costs incurred (including permit, license, and
inspection fees but excluding utilities) or cash consideration paid in
renovating or otherwise improving, decorating, painting, or redecorating space
for tenants, prospective tenants, or other occupants or in renovating or
redecorating vacant space available for those tenants, prospective tenants, or
other occupants. This exclusion does not apply to remove from Operating Expenses
the costs of ordinary maintenance supplied to the tenants of the Building or the
costs for renovating or otherwise improving, decorating, painting, or
redecorating the common areas of the Real Property.
(k) Costs arising from:
(1) Hazardous Material, as defined in Section 8.5, that was
installed by Landlord, its agents, or employees and that, at the time of
installation, Landlord knew or should have known was Hazardous Material; or (2)
despite any other provision of this Lease (including any provision relating to
capital expenditures), the presence of any Hazardous Material in or about the
Premises, Building, or Real Property (including Hazardous Material in the
ground, water, or soil) that was not placed in the Premises, Building, or Real
Property by Tenant and/or Tenant Parties as defined in Section 13.1.
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(l) Expenses, costs, and disbursements relating to, or
arising directly or indirectly from, the testing for or analysis, handling,
removal, treatment, disposal, remediation, or replacement of asbestos or
asbestos-containing materials in, on, around, beneath, or from the Real
Property.
(m) Costs incurred because the Building or common areas
violate any valid, applicable building code, regulation, or law in effect and as
interpreted by government authorities before the date of this Lease.
(n) Except as provided in Section 4.2.3.1(m) Capital
improvement, capital replacement, or related costs.
4.2.5. Tax Expenses. "Tax Expenses" means all federal, state,
county, or local government or municipal taxes, fees, charges, or other
impositions of every kind (whether general, special, ordinary, or extraordinary)
that are paid or incurred by Landlord during any Expense Year (without regard to
any different fiscal year used by any government or municipal authority) because
of or in connection with the ownership, leasing, and operation of the Real
Property. Tax Expenses shall include taxes, fees, and charges such as real
property taxes, general and special assessments, transit taxes, leasehold taxes,
and taxes based on the receipt of rent (including gross receipts or sales taxes
applicable to the receipt of rent, unless required to be paid by Tenant);
personal property taxes imposed on the fixtures, machinery, equipment,
apparatus, systems, and equipment; appurtenances; furniture; and other personal
property used in connection with the Real Property. Tax Expenses shall also
include taxes, assessments or charges imposed on a real property tax bill for
the Real Property for the implementation and operation of a transportation
system management program or similar program, in each case if required by law.
4.2.5.1 Adjustment of Taxes. Tenant hereby acknowledges that
title to the Real Property was transferred to Landlord during 1997 before the
execution of this Lease, that the Real Property has been or is in the process of
being permanently reassessed (as distinguished from a so-called "Proposition 8"
reassessment) to reflect Landlord's purchase price for the Real Property and
that Tax Expenses for the Base Year shall take into account such reassessment.
In addition, for purposes of this Lease, Tax Expenses shall be calculated as if
the tenant improvements in the Building were fully constructed and the Real
Property, the Building, and all tenant improvements in the Building were fully
assessed for real estate tax purposes for the entire Base Year. These provisions
shall survive the Lease Expiration Date or other termination of this Lease.
4.2.5.2 Included Tax Expenses. Tax Expenses shall include:
(a) Any assessment, tax, fee, levy, or charge in
addition to, or in partial or total substitution of, any assessment, tax, fee,
levy, or charge previously included within the definition of "real property
tax." Tenant and Landlord acknowledge that Proposition 13 was adopted by the
voters of the State of California in June 1978 and that assessments, taxes,
fees, levies, and charges may be imposed by government agencies for services
such as fire protection; street, sidewalk, and road maintenance; conservation;
refuse removal; and other government services formerly provided without charge
to property owners or occupants. In further recognition of the decrease in the
level and quality of government services and amenities as a result of
Proposition 13 (or as a result of any other restriction on real property taxes
whether by law or by choice of the applicable legislative or assessing body),
Tax Expenses shall also include any government or private assessments (or the
Building's contribution toward a government or private cost-sharing agreement)
for the purpose of augmenting or improving the quality of services and amenities
normally provided by government agencies. Tenant and Landlord intend that all
new and increased assessments, taxes, fees, levies, and charges and all similar
assessments, taxes, fees, levies, and charges be included within the definition
of "Tax Expenses" for purposes of this Lease.
(b) Any assessment, tax, fee, levy, or charge allocable
to, or measured by, the area of the Premises or the rent payable under this
Lease, including any gross income tax with respect to the receipt of that rent,
or on or relating to the possession, leasing, operating, management,
maintenance, alteration, repair, use, or occupancy by Tenant of the Premises or
any portion of the Premises.
(c) Any assessment, tax, fee, levy, or charge on this
transaction or any document to which Tenant is a party, creating or transferring
an interest or an estate in the Premises.
(d) Any possessory taxes charged or levied in place of
real property taxes.
4.2.5.3 Contest Costs; Refunds. Any expenses incurred by
Landlord in attempting to protest, reduce, or minimize Tax Expenses shall be
included in Tax Expenses in the Expense Year in which those expenses are paid.
Such tax refunds shall be deducted from Tax Expenses in the Expense Year in
which they are received by Landlord.
4.2.5.4 Excluded Taxes. Despite any other provision of
Section 4.2.5 (except as provided in Section 4.2.5.2 or levied entirely or
partially in lieu of Tax Expenses), the following shall be excluded from Tax
Expenses:
(a) All excess profits taxes, franchise taxes, gift
taxes, capital stock taxes, inheritance and succession taxes, estate taxes,
federal and state income taxes, and other taxes applied or measured by
Landlord's general or net income (as opposed to rents, receipts, or income
attributable to operations at the Building);
(b) Any items included as Operating Expenses; and
(c) Any items paid by Tenant under Section 4.4.
4.2.5.5 Proposition 13 Protection. Despite any other
provision of this Lease, if during the Lease Term, any sale, refinancing, or
change in ownership of all or part of the Real Property is consummated and, as a
result, all or part of the Real Property is reassessed ("Reassessment") for real
estate tax purposes by the appropriate government authority, the terms of this
Section 4.2.5.5 shall apply. Tenant hereby acknowledges that title to the Real
Property was transferred to Landlord
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during 1997 before the execution of this Lease, that the Real Property has been
or is in the process of being permanently reassessed (as distinguished from a
so-called "Proposition 8" reassessment) to reflect Landlord's purchase price for
the Real Property and that Tax Expenses for the Base Year shall take into
account to such reassessment.
(a) Tenant shall not be obligated to pay any portion of
the Tax Increase relating to a Reassessment occurring during the Term.
(b) For purposes of this Section 4.2.5.5, the term "Tax
Increase" shall mean that portion of the Tax Expenses, as calculated immediately
following the Reassessment, that is attributable solely to the Reassessment.
Accordingly, a Tax Increase shall not include any portion of the Tax Expenses,
as calculated immediately following the Reassessment, that is:
(1) Attributable to the initial assessment of the value of the
Real Property, the Base Building, or the tenant improvements located in the
Building; (2) attributable to assessments or adjustments to assessments pending
immediately before the Reassessment that were conducted during, and included in,
that Reassessment or that were otherwise rendered unnecessary following the
Reassessment; or (3) attributable to the annual inflationary increase in real
estate taxes.
4.2.6. Tenant's Share. "Tenant's Share" means the percentage
stated in Summary Section 7(a). Tenant's Share is calculated by multiplying the
number of Rentable Square Feet of the Premises by 100 and dividing the product
by the total Rentable Square Feet in the Building. If either the Premises or the
Building is expanded or reduced, Tenant's Share shall be appropriately adjusted.
Tenant's Share for the Expense Year in which that change occurs shall be
determined on the basis of the number of days during the Expense Year in which
each such Tenant's Share was in effect.
4.3 Calculation and Payment of Additional Rent. Tenant's Share of any
Direct Expenses for any Expense Year shall be calculated and paid as follows:
4.3.1. Calculation. Tenant shall pay Tenant's Share of Direct
Expenses for each Expense Year in the manner stated in Section 4.3.2.
4.3.2. Statement of Actual Increased Direct Expenses and Payment
by Tenant. Landlord shall endeavor to give to Tenant on or before the first day
of April following the end of each Expense Year a statement ("Statement")
stating the Direct Expenses incurred or accrued for that preceding Expense Year
and the amount of the Increased Direct Expenses. On receipt of the Statement for
each Expense Year ending during the Lease Term, Tenant shall pay, with its next
installment of Base Rent due, the full amount of Tenant's Share of such
Increased Direct Expenses, less the amounts (if any) paid during that Expense
Year as Estimated Increased Direct Expenses (as defined in Section 4.3.3).
Landlord's failure to furnish the Statement for any Expense Year in a timely
manner shall not prejudice Landlord from enforcing its rights under this Article
4. Even if the Lease Term has expired and Tenant has vacated the Premises, if
when the final determination is made of Tenant's Share of the Increased Direct
Expenses for the Expense Year in which this Lease terminates it is determined
that Tenant owes Tenant's Share of Increased Direct Expenses, Tenant shall
immediately pay to Landlord the amount calculated under Section 4.3.1. The
provisions of this Section 4.3.2 shall survive the expiration or earlier
termination of the Lease Term.
Tenant shall not be obligated to pay the amount of Increased
Direct Expenses with respect to any Expense Year if Landlord fails to deliver to
Tenant a Statement with respect to such Expense Year within one (1) year after
the end of such Expense Year. Landlord may deliver a corrected Statement to
Tenant with respect to any Expense Year if the corrected Statement is delivered
to Tenant within eighteen (18) months after the end of such Expense Year, and
Tenant shall pay the Increased Direct Expenses as provided on the corrected
Statement. Notwithstanding the foregoing, Landlord may deliver a Statement or
corrected Statement to Tenant with respect to Tax Expenses for any Expense Year
within ninety (90) days after receipt of a bill for Tax Expenses for any prior
Expense Year. If any corrected Statement shall evidence a refund due to Tenant,
Landlord shall promptly deliver the same together with such refund to Tenant,
notwithstanding the expiration of the aforesaid periods.
4.3.3. Statement of Estimated Increased Direct Expenses. Landlord
shall give Tenant a yearly expense estimate statement ("Estimate Statement")
stating Landlord's reasonable estimate ("Estimate") of the total amount of
Increased Direct Expenses for the then current Expense Year and Tenant's Share
of such Increased Direct Expenses ("Estimated Expenses").
Landlord's failure to furnish the Estimate Statement for any Expense
Year in a timely manner shall not preclude Landlord from enforcing its rights to
collect Increased Direct Expenses under this Article 4. Tenant shall pay with
each installment of Base Rent due, one-twelfth (1/12) of the Estimated Expenses
for the then-current Expense Year. Until a new Estimate Statement is furnished,
Tenant shall pay monthly, along with the monthly Base Rent installments, an
amount equal to one twelfth (1/12th) of the total Estimated Expenses stated in
the previous Estimate Statement delivered by Landlord to Tenant.
4.3.4. Refund of Overpayment of Direct Expenses. If the Statement
shows that the Direct Expenses for any Expense Year ending or beginning within
the Lease Term is less than the Estimated Expenses actually paid by Tenant for
that Expense Year, Landlord shall credit Tenant's next payment of Base Rent and
Estimated Expenses with the amount by which Tenant's payments of Estimated
Expenses exceed the actual Direct Expenses due for that Expense Year. If the
Statement shows that Tenant's payments of Estimated Expenses exceed the actual
Direct Expenses due for that Expense Year by more than three and one-half
percent (3 1/2%), the Landlord shall pay to Tenant annual interest on the
overpaid amount, from the date overpaid until credited or refunded, at
theinterest rate stated in Section 23.2 of this Lease. If the Statement is
provided to Tenant after the end of the Lease Term, Landlord shall include with
the Statement a refund of the amount by which Tenant's payments of Estimated
Expenses exceed the actual Direct Expenses due for that Expense Year, along with
any interest due in accordance with this Section 4.3.4.
4.4 Taxes and Other Charges for Which Tenant Is Directly Responsible.
Tenant shall reimburse Landlord, on demand, as Additional Rent for any taxes
required to be paid by Landlord that are not already included in Tax Expenses
(excluding state,
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local, and federal personal or corporate income taxes measured by the net income
of Landlord from all sources and estate and inheritance taxes) regardless of
whether such taxes are now customary or within the contemplation of the parties
to this Lease, when those taxes are:
(a) Measured by or reasonably attributable to:
(1) The cost or value of Tenant's equipment, furniture,
fixtures, and other personal property located in the Premises; or (2) the cost
or value of any leasehold improvements made in or to the Premises by or for
Tenant (to the extent that the cost or value of those leasehold improvements
exceeds the cost or value of a building-standard build-out, as determined by
Landlord, regardless of whether title to those improvements is vested in Tenant
or Landlord); or
(b) Assessed either on this transaction or on any document to
which Tenant is a party that creates or transfers an interest or an estate in
the Premises.
4.5 Landlord's Books and Records; Tenant's Audit Rights. Tenant and
its authorized representatives may examine, inspect, audit, and copy the records
of Landlord regarding each Statement at Landlord's office during normal business
hours within six (6) months after the furnishing of the Statement. Unless Tenant
takes written exception to any item within one (1) year after the furnishing of
that Statement, the Statement shall be considered as final and accepted by
Tenant except that Landlord may, at any time during the one-year period,
following the delivery of the statement submit a corrected Statement to Tenant
if Operating Expenses and Tax Expenses on the original Statement were overstated
or understated.
Tenant and its authorized representatives shall have the right, at
Tenant's cost and on no less than ten (10) days' prior written notice to
Landlord and during Landlord's normal business hours, to audit Landlord's
records regarding Operating Expenses and Tax Expenses. Such an audit shall be
performed at Landlord's principal accounting offices by a certified public
accounting firm. That firm's primary business must be certified public
accounting and may not be compensated on the basis of the amount of Direct
Expenses saved by Tenant as a result of such audit, and that firm shall be
selected by Tenant and approved by Landlord. Landlord's approval shall not be
unreasonably delayed or withheld. There shall be no more than one (1) audit of
Operating Expenses or Tax Expenses for any twelve-month (12-month) period.
To facilitate an audit by Tenant, Landlord shall keep its books and
records applicable to Operating Expenses and Tax Expenses available to Tenant on
a reasonable basis for the longer of (1) two (2) years after the Lease
Expiration Date or (2) one (1) year after the resolution of any dispute
concerning Operating Expenses and Tax Expenses. Any audit of Operating Expenses
and Tax Expenses for any calendar year must be begun one (1) year after
Landlord's delivery of the Statement for that year, or the right to audit
Operating Expenses and Tax Expenses for that year shall be deemed waived.
Tenant agrees diligently to pursue and complete (or to drop) any
audit begun by Tenant, and Landlord agrees it shall not unreasonably interfere
with the execution of Tenant's audit rights. Tenant shall bear all fees and
costs of the audit, unless the parties determine that Operating Expenses and Tax
Expenses taken as a whole for the Real Property for any Expense Year, were
overstated by more than three and one-half percent (3.5%). In that event,
Landlord shall pay for the reasonable costs of that audit. Pending resolution of
any disputes over Operating Expenses and Tax Expenses, Tenant shall pay to
Landlord any Additional Rent alleged to be due from Tenant as reflected on
Landlord's Statement or any invoice issued on the basis of Landlord's Statement.
Article 5
SECURITY DEPOSIT
[Intentionally Omitted]
Article 6
USE
6.1 Permitted Use. Tenant shall use and occupy the Premises solely
for the "Permitted Use," as defined in the Summary. Tenant shall not use or
occupy, or permit the Premises to be used or occupied, for any other purpose
without Landlord's prior written consent, which may be withheld in Landlord's
sole and absolute discretion.
6.2 Rules and Regulations. Tenant shall comply with the rules
attached to this Lease as Exhibit D and any reasonable non discriminatory
amendments or additions promulgated by Landlord from time to time for the
safety, care, and cleanliness of the Premises, Building, and Real Property or
for the preservation of good order ("Rules and Regulations") as long as the
Rules and Regulations do not take precedence over the specific terms and
conditions of this Lease. Landlord shall not be responsible to Tenant for the
failure of any other tenants or occupants of the Building to comply with the
Rules and Regulations.
6.3 Additional Restrictions on Use. In addition to complying with
other provisions of this Lease concerning use of the Premises:
(a) Tenant shall not use or allow any person to use the
Premises for any purpose that is contrary to the Rules and Regulations, that
violates any Laws and Orders, that constitutes waste or nuisance, that would
unreasonably interfere with another occupant's permitted use of the Building or
that does not comply with the standards set forth in Section 6.4;
(b) Tenant shall not use or allow any person to use the
Premises for any purpose that violates any recorded covenants, conditions, and
restrictions that now or later affect the Real Property; and
(c) Tenant shall not use or allow any person to use the
Premises for any purpose, use or manner of use that would generate unreasonable
noise, unreasonable risk of fire or unreasonable odors, or for any purpose that
would directly or materially interfere with other tenants' permitted uses of
their demised premises.
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Article 7
COMPLIANCE WITH LAWS
7.1 Definition of "Laws and Orders." For purposes of this Lease, the
term "Laws and Orders" includes all federal, state, county, city, or government
agency laws, statutes, ordinances, standards, rules, requirements, or orders now
in force or hereafter enacted, promulgated, or issued. The term also includes
government measures regulating or enforcing public access or occupational or
health or safety standards for employers, employees, landlords, or tenants.
7.2 Repairs, Replacements, Alterations, and Improvements. Tenant, at
Tenant's sole expense, shall promptly make all repairs, replacements,
alterations, or improvements needed to comply with all Laws and Orders to the
extent that the Laws and Orders relate to or are triggered by (a) Tenant's
particular use of the Premises, or (b) any Alterations made in the Premises.
Except for compliance required as a result of Tenant's particular use of the
Premises and/or any Alternation made in the Premises, Landlord, at Landlord's
sole expense, shall promptly make all repairs, replacements, alterations, or
improvements in the Premises and/or the Common Area needed to comply with all
Laws and Orders.
7.3 Collateral Estoppel. The judgment of any court of competent
jurisdiction, or the admission of Tenant in any judicial or administrative
action or proceeding that Tenant has violated any Laws and Orders shall be
conclusive, between Landlord and Tenant, of that fact, whether or not Landlord
is a party to that action or proceeding.
Article 8
HAZARDOUS MATERIAL
8.1 Use of Hazardous Material. Tenant shall not cause or permit any
Hazardous Material, as defined in Section 8.5, to be generated, brought onto,
used, stored, or disposed of in or about the Premises or the Real Property by
Tenant or its agents, employees, contractors, subtenants, or invitees, except
for such office products that are required in the ordinary course of Tenant's
business conducted on the Premises or are otherwise approved by Landlord. Tenant
shall:
(a) Use, store, and dispose of all such Hazardous Material in
strict compliance with all applicable statutes, ordinances, and regulations in
effect during the Lease Term that relate to public health and safety and
protection of the environment ("Environmental Laws"), including those
Environmental Laws identified in Section 8.4; and
(b) Comply at all times during the Lease Term with all
Environmental Laws.
8.2 Indemnification. Tenant shall, at Tenant's sole expense and with
counsel reasonably acceptable to Landlord, indemnify, defend, and hold harmless
the Landlord and the Landlord's shareholders, directors, officers, employees,
partners, affiliates, and agents with respect to all losses arising out of or
resulting from the release of any Hazardous Material in or about the Premises or
the Real Property, or the violation of any Environmental Law, by Tenant or
Tenant's agents, contractors, or invitees. This indemnification includes all
losses, liabilities, obligations, penalties, fines, claims, actions (including
remedial or enforcement actions of any kind and administrative or judicial
proceedings, orders, or judgments), damages (including consequential and
punitive damages), and costs (including attorney, consultant, and expert fees
and expenses) resulting from the release or violation. This indemnification
shall survive the expiration or termination of this Lease.
8.3 Indemnification by Landlord. Tenant acknowledges receipt of the
"Report of Soil and Groundwater Assessment, ASE Job No. 3106, Former
Systron/Donner/Whittaker Facility," prepared by AquaScience Engineers, dated May
29, 1997 ("Environmental Report"). Landlord shall, at Landlord's sole expense
and with counsel reasonably acceptable to Tenant, indemnify, defend, and hold
harmless the Tenant Parties to the extent of all losses arising out of or
resulting from the release of any Hazardous Material in or about the Premises or
the Real Property or the violation of any Environmental Law occurring before the
Lease Commencement Date, including without limitation the Hazardous Material
identified in the Environmental Report, and all losses arising out of or
resulting from the release of any Hazardous Material in or about the Premises or
the Real Property or the violation of any Environmental Law by Landlord Parties
or any party other than Tenant, occurring after the Lease Commencement Date.
This indemnification includes all losses, liabilities, obligations, penalties,
fines, claims, actions (including remedial or enforcement actions of any kind
and administrative or judicial proceedings, orders, or judgments), damages
(including consequential and punitive damages), and costs (including attorney,
consultant, and expert fees and expenses) resulting from the release or
violation. This indemnification shall survive the expiration or termination of
this Lease.
8.4 Remediation Obligations; Tenant's Rights on Cleanup by Landlord.
If the presence of any Hazardous Material brought onto the Premises or the Real
Property by Tenant or by Tenant's employees, agents, contractors, or invitees
results in contamination of the Real Property, Tenant shall promptly take all
necessary actions, at Tenant's sole expense, to return the Real Property to the
condition that existed before the introduction of such Hazardous Material.
Tenant shall first obtain Landlord's approval of the proposed remedial action.
This provision does not limit the indemnification obligations set forth in
Section 8.2.
8.5 Definition of "Hazardous Material." As used in this Article 8,
the term "Hazardous Material" shall mean any hazardous or toxic substance,
material, or waste that is or becomes regulated by the United States, the State
of California, or any local government authority having jurisdiction over the
Building. Hazardous Material includes:
(a) Any "hazardous substance," as that term is defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(CERCLA) (42 United States Code Sections 9601-9675); (b) "Hazardous waste," as
that term is defined in the Resource Conservation and Recovery Act of 1976
(RCRA) (42 United States Code Sections 6901-6992k); (c) any pollutant,
contaminant, or hazardous, dangerous, or toxic chemical, material, or substance,
within the meaning of any other applicable federal, state, or local law,
regulation, ordinance, or requirement (including consent decrees and
administrative orders imposing liability or standards of conduct concerning any
hazardous, dangerous, or toxic waste, substance,
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or material, now or hereafter in effect); (d) petroleum products; (e)
radioactive material, including any source, special nuclear, or byproduct
material as defined in 42 United States Code Sections 2011-2297g-4; (f) asbestos
in any form or condition; and
(g) polychlorinated biphenyls ("PCBs") and substances or
compounds containing PCBs.
Article 9
UTILITIES AND SERVICES
9.1 Standard Tenant Utilities and Services. Subject to applicable
government rules, regulations, and guidelines and the rules or actions of the
public utility furnishing the service, Landlord shall provide the following
utilities and services unless otherwise stated in this Lease:
9.1.1. Heating and Air-Conditioning.
9.1.1.1 Hours and Specifications. Landlord shall provide
heating, ventilation, and air-conditioning ("HVAC") on Mondays through Fridays
from 8 a.m. through 7 p.m. ("Building Hours") except for the dates of
observation of New Year's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas Day, and other locally and nationally recognized
holidays that are observed by a majority of the Comparable Buildings
("Holidays").
9.1.2. Electricity. Landlord shall provide electricity for
lighting and power in the Premises during Building Hours except for Holidays.
All costs for electricity for lighting and power used by Tenant outside of
Building Hours or on Holdidays shall be paid by Tenant. Electricity for Tenant's
lighting and other power purposes shall be at a nominal 208/220 volts. No
electrical circuit for the supply of power shall require a current capacity
exceeding twenty (20) amperes. Landlord shall replace lamps, starters, and
ballasts for Building Standard lighting fixtures within the Premises on Tenant's
request. The cost of such replacement shall be included in Operating Expenses.
Tenant shall replace lamps, starters, and ballasts for non-Building Standard
lighting fixtures within the Premises at Tenant's expense. All lighting
installed as a part of the initial Tenant Improvements shall be considered
"Building Standard".
9.1.3. Water. Landlord shall provide city water from the regular
outlets for drinking, lavatory, and toilet purposes.
9.1.4. Janitorial Services. Landlord shall provide janitorial
services in and about the Premises and the restrooms in the Common Areas serving
the Premises on Mondays through Fridays, except on Holidays, in accordance with
the specifications attached to this Lease as Exhibit E.
9.2 Overstandard Tenant Use. Tenant shall not, without Landlord's
prior written consent, use heat-generating machines, machines other than normal
fractional horsepower office machines, or equipment or lighting other than
building standard lights in the Premises that may materially adversely affect
the temperature otherwise maintained by the air-conditioning system or
materially increase the water normally furnished to the Premises by Landlord
under Section 9.1.
Landlord shall have the right to install supplementary
air-conditioning units or other facilities at locations in the Premises
reasonably approved by Tenant, including supplementary or additional metering
devices. Within thirty (30) days after billing by Landlord, Tenant shall pay
Landlord's actual cost for such supplementary facilities, including the cost of
(a) installation, operation, and maintenance; and (b) increased wear and tear on
existing equipment.
If Tenant uses water, electricity, heat, or air-conditioning in
excess of that required to be supplied by Landlord under Section 9.1, Tenant
shall pay to Landlord, within thirty (30) days after billing, Landlord's actual
cost of providing such excess service, without profit or overhead but including
the cost of (a) installation, operation, and maintenance of equipment installed
to supply the excess service; and (b) increased wear and tear on existing
equipment caused by Tenant's excess consumption. Landlord may install devices to
separately meter any increased use. Within thirty (30) days after billing by
Landlord, Tenant shall pay the increased cost directly to Landlord, including
the cost of the additional metering devices.
Tenant's use of electricity shall never exceed the capacity of the
feeders serving the Building and Premises or the risers or wiring installation.
Landlord and Tenant agree that Tenant's use shall not be considered to exceed
such capacity as long as Tenant's use of lighting fixtures and incidental use
equipment in the Premises does not exceed 20 watts of connected load per
rentable square foot of the Premises to the applicable bus riser. If Tenant
wishes to use heat, ventilation, or air-conditioning during hours other than
those for which Landlord is obligated to supply such utilities under Section
9.1, Tenant shall give Landlord reasonable prior notice of Tenant's desired use,
and Landlord shall supply such utilities to Tenant at an hourly cost to Tenant
as shall be calculated to reimburse Landlord for Landlord's actual cost of
supplying such utilities, without profit or overhead but including the cost of
increased wear and tear on existing equipment caused by such non- Building-Hour
use. Amounts payable by Tenant to Landlord under this Section 9.2 for use of
additional utilities and services shall be considered Additional Rent under this
Lease and shall be billed on a monthly basis.
9.3 Interruption of Utilities. Except as provided in Section 21.7.2,
Tenant agrees that Landlord shall not be liable for damages, by abatement of
Rent or otherwise, for failure to furnish or delay in furnishing any service
(including telephone and telecommunication services) or for diminution in the
quality or quantity of any service when the failure, delay, or diminution is
entirely or partially caused by:
(a) Repairs, replacements, or improvements; (b) strike,
lockout, or other labor trouble; (c) inability to secure electricity, gas,
water, or other fuel at the Building after reasonable effort to do so; (d)
accident or casualty; (e) act or Default of Tenant or other parties; or (f) any
other cause beyond Landlord's reasonable control.
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Such failure, delay, or diminution shall not be considered to constitute an
eviction or a disturbance of Tenant's use and possession of the Premises or
relieve Tenant from paying Rent or performing any of its obligations under this
Lease, subject to Section 21.7.2.
Landlord shall not be liable under any circumstances for a loss of or
injury to property or for injury to or interference with Tenant's business,
including loss of profits through, in connection with, or incidental to a
failure to furnish any of the utilities or services under this Article 9.
Landlord may comply with mandatory or voluntary controls or guidelines
promulgated by any government entity relating to the use or conservation of
energy, water, gas, light, or electricity or the reduction of automobile or
other emissions without creating any liability of Landlord to Tenant under this
Lease, subject to Section 21.7.2, as long as compliance with voluntary controls
or guidelines does not materially and unreasonably interfere with Tenant's use
of the Premises.
Article 10
REPAIRS AND MAINTENANCE
10.1 Tenant's Repair and Maintenance Obligations. Subject to Articles
14 and 15, and except as provided in Section 10.2, Tenant shall, at Tenant's
sole expense and in accordance with the terms of this Lease (including Article
11), repair and maintain in good order and condition (reasonable wear and tear
excepted) the interior of the entire Premises, including without limitation all
heating, ventilation, air conditioning, plumbing, electricity, life safety, rest
rooms, lavatories, and other Building systems located within the Premises.
Despite the foregoing, if Landlord is responsible for construction of
the improvements under the Leasehold Improvement Agreement, Tenant shall not be
responsible for the repair of any latent defects in such improvements that
Landlord was required to construct to the extent that such defects existed as of
the Lease Commencement Date and were of such a nature that Tenant could not
normally discover them in the exercise of reasonable diligence in Tenant's
inspection of the Premises on or before the Lease Commencement Date and are
reported to Landlord within one (1) year after the Commencement Date. Any repair
and maintenance work affecting the Building systems shall be performed only by
the contractor used by Landlord in the Real Property for such work, unless that
contractor is unwilling or unable to perform the work, in which event Tenant may
use the services of another qualified contractor reasonably approved by
Landlord.
Landlord may, but need not, make such repairs and maintenance if:
(a) Tenant fails to perform any repair and maintenance obligation
within thirty (30) days after written notice by Landlord to Tenant of the need
for such repairs and maintenance; or
(b) Tenant fails to commence any repair and maintenance
obligation for which the reasonable completion period exceeds thirty (30) days,
and to diligently prosecute this obligation to completion.
Within thirty (30) days after a written demand from Landlord (including a
reasonably particularized statement), Tenant shall pay Landlord Landlord's
reasonable, actual, out-of-pocket costs incurred in connection with the repairs
and maintenance plus interest at the Lease Rate from the date these costs are
incurred until the date of Tenant's repayment. Despite any other provision of
this Section 10.1, in the event of an emergency Landlord shall have the right to
perform any Tenant repair and maintenance obligation that Tenant fails to
perform promptly. Within thirty (30) days after written demand (including a
reasonably particularized statement), Tenant shall pay Landlord Landlord's
reasonable costs incurred in connection with the repair and maintenance
obligation.
10.2 Landlord's Repair and Maintenance Obligations. Subject to
Articles 14 and 15, Landlord shall, as part of the Operating Expenses (to the
extent permitted by Article 4), repair and maintain in good order and condition
(reasonable wear and tear excepted):
(a) All portions of the Building that are outside the Premises,
including the structural portions of the Premises, areas and building systems
above the ceiling of the Premises and on the inside of each of the walls to the
Premises, the roof and foundations, the life safety systems, and any maintenance
of perimeter walls, including glazing of exterior windows; b) All other Common
Areas located on the Real Property.
Repairs shall be made promptly after written notice from Tenant or other actual
notice to Landlord of the need for such repair to keep the applicable portion of
the Premises, Building, Real Property, and other items in the condition
described in this clause. Landlord shall not be in Default of its repair and
maintenance obligations under this Section 10.2 if Landlord performs the repairs
and maintenance within thirty (30) days after written notice by Tenant to
Landlord of the need for such repairs and maintenance, except that in the event
Tenant notifies Landlord that repairs are required on an emergency basis to
prevent injury to persons, significant damage to property, or material
interference with Tenant's operation of its business, then Landlord shall
commence the repair as soon as is reasonably possible. If, due to the nature of
the particular repair or maintenance obligation, more than thirty (30) days are
reasonably required to complete it, Landlord shall not be in Default under this
Section 10.2 if Landlord begins work within this thirty-day (30-day) period and
diligently prosecutes this work to completion. Except as provided in Section
21.7.2, no abatement of rent and no liability of Landlord shall result for any
injury to or interference with Tenant's business arising from the making of or
failure to make any repairs, replacements, alterations, or improvements in or to
any portion of the Premises, Building, Real Property, fixtures, appurtenances,
or equipment. Tenant waives and releases its rights, including its right to make
repairs at Landlord's expense, under California Civil Code Sections 1941-1942 or
any similar law, statute, or ordinance now or hereafter in effect.
Article 11
ALTERATIONS AND ADDITIONS
11.1 Landlord's Consent to Alterations. Tenant may not make any
improvements, alterations, additions, or changes to the Premises ("Alterations")
without obtaining Landlord's prior written consent.
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11.1.1. Consent Procedure. Tenant shall request such consent by
written notice to Landlord, which must be accompanied by the plans and
specifications for the proposed work. Landlord shall either give or withhold its
consent within fifteen (15) days of the receipt by Landlord of Tenant's request
for consent.
11.1.2. Reasonable Consent. Landlord shall not unreasonably
withhold its consent to proposed Alterations. The Alterations for which Landlord
may reasonably withhold consent include but are not limited to those that would
or could:
(a) Affect the structure of the Building; (b) affect the
Building systems of the Building; (c) result in Landlord's being required under
Laws and Orders to perform any work that Landlord could otherwise avoid or defer
("Additional Required Work"), unless Tenant agrees in writing to pay for the
entire cost of the design and construction of the Additional Required Work; (d)
result in a material increase in the demand for utilities or services that
Landlord is required to provide, unless Tenant agrees to pay the additional
cost; or (e) cause an increase in the premiums for hazard or liability insurance
carried by Landlord, unless Tenant agrees to pay the amount of the increase in
premiums.
11.1.3. Costs of Review. If it is reasonably necessary for
Landlord to obtain the assistance of architects, engineers, or other consultants
to evaluate the proposed Alterations, Tenant shall reimburse Landlord for
amounts paid by Landlord for the reasonable fees and costs of those consultants
in reviewing the proposed Alterations.
11.1.4. Minor Alterations. Despite any other provision of this
Section 11.1 but subject to all other provisions of this Article 11, Tenant
shall be permitted to make Alterations to the interior improvements of the
Premises without Landlord's prior written consent but only if:
(a) At least fifteen (15) days before construction is begun,
Tenant gives Landlord written notice of the nature and extent of the intended
Alterations, specifying the contractor that Tenant intends to use; (b) the
proposed Alterations do not affect the exterior appearance or structure of the
Building or the Building systems or otherwise require a building permit; (c) the
proposed Alterations could not result in Landlord's being required to perform
any Additional Required Work; (d) the proposed Alterations do not involve the
installation of stairways, vaults, or other equipment or improvements that would
cost more to remove than ordinary improvements for general office use; (e) the
proposed Alterations do not involve or affect any asbestos or
asbestos-containing materials in the Building; and (f) the particular
Alteration, together with all other Alterations made within twelve (12) months
of the particular Alteration, does not cost more than Twenty Thousand Dollars
($20,000) in the aggregate.
11.1.5. Removal of Alterations. When Tenant requests Landlord's
consent to a proposed Alteration, or before the commencement of any Alteration
for which Landlord's consent is not required, Tenant may ask Landlord in writing
whether Landlord will require that the Alteration be removed on expiration or
earlier termination of the Lease Term. Landlord shall respond to this inquiry in
writing within fifteen (15) days. If Landlord states in its response that it
will not require removal, Tenant shall not be required to remove this
Alteration.
11.2 Compliance of Alterations With Laws and Insurance Requirements.
Tenant shall cause all Alterations to comply with the following:
(a) Applicable Laws and Orders; and (b) applicable
requirements of a fire-rating bureau.
Tenant shall also comply with those requirements in the course of
constructing the Alterations. Before beginning construction of any Alteration,
Tenant shall obtain a valid building permit and any other permits that may be
required by any government entity having jurisdiction over the Premises. Tenant
shall provide copies of those permits to Landlord before the work begins.
Tenant shall, at Tenant's sole expense, perform any Additional
Required Work which shall be subject to the same requirements as any Alteration.
If any Additional Required Work must be performed outside the Premises, Landlord
may elect to perform that work at Tenant's expense.
11.3 Manner of Construction. Tenant shall build Alterations entirely
within the Premises and in conformance with Landlord's construction rules and
regulations, using only contractors and subcontractors reasonably approved in
writing by Landlord. All work relating to any Alterations shall be done in a
good and workmanlike manner, using new materials equivalent in quality to those
used in the construction of the initial improvements to the Premises. All work
shall be diligently prosecuted to completion.
Tenant shall ensure that all work is performed in a manner that does
not obstruct access to or through the Real Property or its Common Areas and that
does not interfere either with other tenants' use of their premises or with any
other work being undertaken or the Real Property. Tenant shall take all measures
necessary to ensure that labor peace is maintained at all times.
Within twenty (20) days after completion of any Alterations, Tenant
shall deliver to Landlord a reproducible copy of the drawings of Alterations as
built.
11.4 Payment for Improvements. Tenant shall promptly pay all charges
and costs incurred in connection with any Alteration, as and when required by
the terms of any agreements with contractors, designers, or suppliers. At least
seven (7) days before beginning construction of any Alteration, Tenant shall
give Landlord written notice of the expected commencement date of that
construction to permit Landlord to post and record a notice of
nonresponsibility.
On completion of any Alteration, Tenant shall:
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(a) Cause a timely notice of completion to be recorded in
the office of the recorder of the county in which the Building is located, in
accordance with Civil Code Section 3093 or any successor statute;
(b) Deliver to Landlord evidence of full payment and final
unconditional waivers of all liens for labor, services, or materials; and
(c) Reimburse Landlord for any actual expenses paid to third
parties or for additional expenses reasonably incurred by Landlord in connection
with the construction of any Alteration (in addition to the expenses described
in Section 11.1.3).
11.5 Construction Insurance. Before construction begins, Tenant shall
deliver to Landlord reasonable evidence that damage to, or destruction of, the
Alterations during construction will be covered either by the policies that
Tenant is required to carry under Article 13 or by a policy of builder's
all-risk insurance in an amount approved by Landlord.
If Landlord requires Tenant to provide builder's all-risk insurance
for the proposed Alterations, Tenant shall provide a copy of the policy, any
endorsements, and an original certificate of insurance that complies with
Section 13.9.3.
Tenant shall cause each contractor and subcontractor to maintain all
workers' compensation insurance required by law and liability insurance
(including property damage) in amounts reasonably required by Landlord. Tenant
shall provide evidence of that insurance to Landlord before construction begins.
11.6 Landlord's Property.
By written notice to Tenant at least either sixty (60) days before
expiration of the Lease Term or fifteen (15) days after any earlier termination
of this Lease, Landlord may require Tenant, at Tenant's sole expense, to remove
any Alterations specified by Landlord and restore the Premises to their
configuration and condition before the Alterations were made (unless Landlord
previously notified Tenant that such removal would not be required, under
Section 11.1.5). If Tenant fails to complete that restoration before expiration
of the Lease Term or, in the case of earlier termination, within fifteen (15)
days after written notice from Landlord requesting the restoration, Landlord may
do so and charge the cost of the restoration to Tenant.
11.7 Initial Improvements. The construction of the initial
improvements to the Premises shall be governed by the terms of the Leasehold
Improvement Agreement, attached to this Lease as Exhibit B, and not the terms of
this Article 11.
Article 12
COVENANT AGAINST LIENS
Tenant shall not be the cause of any liens or allow such liens to
exist, attach to, be placed on, or encumber Landlord's or Tenant's interest in
the Premises, Building, or Real Property by operation of law or otherwise.
Tenant shall not suffer or permit any lien of mechanics, material suppliers, or
others to be placed against the Premises, Building, or Real Property with
respect to work or services performed or claimed to have been performed for
Tenant or materials furnished or claimed to have been furnished to Tenant or to
the Premises on behalf of or for the benefit of Tenant. Landlord has the right
at all times to post and keep posted on the Premises any notice that it
considers necessary for protection from such liens.
If any such lien attaches or Tenant receives notice of any such lien,
Tenant shall cause the lien to be released and removed of record within ten (10)
days after Landlord's demand. Despite any other provision of this Lease, if the
lien is not released and removed within ten (10) days after Landlord delivers
notice of the lien to Tenant, Landlord may immediately take all action necessary
to release and remove the lien, without any duty to investigate the validity of
it. All expenses (including reasonable attorney fees) incurred by Landlord in
connection with release of the lien shall be considered Additional Rent under
this Lease and be immediately due and payable by Tenant.
Article 13
EXCULPATION, INDEMNIFICATION, AND INSURANCE
13.1 Definition of "Tenant Parties" and "Landlord Parties." For
purposes of this Article 13, the term "Tenant Parties" refers singularly and
collectively to Tenant and Tenant's officers, directors, shareholders, partners,
trustees, members, agents, employees, and independent contractors as well as to
all persons and entities claiming through any of these persons or entities. The
term "Landlord Parties" refers singularly and collectively to Landlord and
Landlord's officers, directors, shareholders, partners, trustees, members,
agents, employees, and independent contractors as well as to all persons and
entities claiming through any of these persons or entities.
13.2 Exculpation.
13.2.1. Exculpation. To the fullest extent permitted by law,
Tenant, on its behalf and on behalf of all Tenant Parties, waives all claims (in
law, equity, or otherwise) against Landlord Parties arising out of, knowingly
and voluntarily assumes the risk of, and agrees that Landlord Parties shall not
be liable to Tenant Parties for any of the following to the extent the same
occur on or about the Premises:
(a) The injury or death of any person; or
(b) The loss of, injury or damage to, or
destruction of any tangible or intangible property,
including the resulting loss of use, economic losses, and consequential or
resulting damage of any kind from any cause.
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This exculpation clause shall not apply to claims against Landlord
Parties to the extent that a final judgment of a court of competent jurisdiction
establishes that the injury, loss, damage, or destruction was proximately caused
by Landlord Parties' negligence, fraud, willful injury to person or property, or
violation of law.
13.3 Indemnification.
13.3.1. Tenant's Indemnification of Landlord Parties. To the
fullest extent permitted by law but subject to this Section 13.3, Tenant shall,
at Tenant's sole expense and with counsel reasonably acceptable to Landlord,
indemnify, defend, and hold harmless Landlord Parties from and against all
Claims, as defined in Section 13.3.2, from any cause arising out of or relating
(directly or indirectly) to this Lease, the tenancy created under this Lease, or
the Premises, including:
(a) The use or occupancy, or manner of use or
occupancy, of the Premises or Real Property by Tenant Parties;
(b) Any act, error, omission, or negligence of Tenant
Parties in, on, or about the Real Property;
(c) Tenant's conducting of its business;
(d) Any alterations, activities, work, or things done,
omitted, or permitted by Tenant Parties in, at, or about the Premises or Real
Property, including the violation of or failure to comply with any applicable
laws, statutes, ordinances, standards, rules, regulations, orders, decrees, or
judgments in existence on the Lease Commencement Date or enacted, promulgated,
or issued after the date of this Lease, except to the extent that compliance
with such legal requirements is expressly made the responsibility of Landlord in
Article 7 or 10, and
(e) Any breach or Default in performance of any
obligation on Tenant's part to be performed under this Lease.
13.3.2. Definition of Claims. For purposes of this Lease,
"Claims" means any and all claims, losses, costs, damage, expenses, liabilities,
liens, actions, causes of action (whether in tort or contract, law or equity, or
otherwise), charges, assessments, fines, and penalties of any kind (including
consultant and expert expenses, court costs, and attorney fees actually
incurred).
13.3.3. Type of Injury or Loss. This indemnification extends to
and includes Claims for:
(a) Injury to any persons (including death at any time
resulting from that injury);
(b) Loss of, injury or damage to, or destruction of
tangible property (including all loss of use resulting from that loss, injury,
damage, or destruction); and
(c) Economic losses and consequential or resulting
damage.
13.3.4. Indemnification; Consequential Damages. Despite any other
provision of this Lease:
(a) Tenant's indemnification in Section 13.3.1 shall
not apply to any Claim caused by or arising out of the negligence of Landlord
Parties or to the extent that a Claim against Landlord Parties actually arises
out of the misconduct of Landlord Parties; and
(b) Nothing in this Lease shall impose any obligation
on Landlord to be responsible or liable for, and Tenant releases Landlord from
all liability for, consequential damages suffered by Tenant.
13.3.5. Relationship of Indemnity to Other Lease Obligations.
Tenant's agreement to indemnify Landlord under this Article 13 are not intended
to and shall not:
(a) Restrict, limit, or modify the parties' respective
insurance and other obligations under this Lease, such indemnity covenants being
independent of the parties' insurance and other obligations;
(b) Be restricted, limited, or modified by compliance
with their respective insurance requirements and other obligations under this
Lease;
(c) Relieve any insurance carrier of its obligations
under policies required to be carried under this Lease, to the extent that such
policies cover, or if carried would have covered, the matters subject to the
parties' respective indemnification obligations; or
(d) Supersede any inconsistent agreement of the parties
set forth in any other provision of this Lease.
13.3.6. Attorney Fees. The prevailing party shall be entitled to
recover its actual attorney fees and court costs incurred in enforcing the
indemnification clauses set forth in this Section 13.3.
13.4 Compliance With Insurer Requirements. Tenant shall, at Tenant's
sole expense, comply with all reasonable requirements, guidelines, rules,
orders, and similar mandates and directives in effect on the Lease Commencement
Date that (a) have been disclosed to Tenant by Landlord and (b) pertain to
Tenant's business operations, conduct, or use of the Premises and the Building,
whether imposed by Tenant's insurers, Landlord's insurers, or both. If Tenant's
business operations, conduct, or use of the Premises, other than for normal
office purposes, later cause any increase in the premium for any insurance
policies carried
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by Landlord, Tenant shall, within ten (10) Business Days after receipt of
written notice from Landlord, reimburse Landlord for the increase. Tenant shall,
at Tenant's sole expense, comply with all rules, orders, regulations, or
requirements of the American Insurance Association (formerly the National Board
of Fire Underwriters) and of any similar body in effect during the term of this
Lease and any renewal term that (a) have been disclosed to Tenant by Landlord
and (b) pertain to Tenant's business operations, conduct, or use of the Premises
or the Building.
13.5 Tenant's Liability Coverage. Tenant shall, at Tenant's sole
expense, maintain the coverages set forth in this Section 13.5.
13.5.1. Commercial General Liability Insurance. Tenant shall
obtain commercial general liability insurance written on an "occurrence" policy
form, covering bodily injury, property damage, personal injury, and advertising
injury arising out of or relating (directly or indirectly) to Tenant's business
operations, conduct, assumed liabilities, or use or occupancy of the Premises or
the Building.
13.5.2. Broad Form Coverage. Tenant's liability coverage shall
include all the coverages typically provided by the Broad Form Comprehensive
General Liability Endorsement, including broad form property damage coverage
(which shall include coverage for completed operations). Tenant's liability
coverage shall further include premises-operations coverage, owners and
contractors protective (OCP) coverage (when reasonably required by Landlord),
and the broadest available form of contractual liability coverage. It is the
parties' intent that Tenant's contractual liability coverage provide coverage to
the maximum extent possible of Tenant's indemnification obligations under this
Lease.
13.5.3. Primary Insured. Tenant shall be the first or primary
named insured.
13.5.4. Additional Insureds. Landlord and any lender of Landlord
shall be named by endorsement as additional insureds under Tenant's general
liability coverage. The additional insured endorsement must be on ISO Form CG 20
11 11 85 or an equivalent reasonably acceptable to Landlord.
13.5.5. Cross-Liability; Severability of Interests. Tenant's
general liability policies shall be endorsed as needed to provide
cross-liability coverage for Tenant, Landlord, and any lender of Landlord and to
provide severability of interests.
13.5.6. Primary Insurance Endorsements for Additional Insureds.
Tenant's general liability policies shall be endorsed as needed to provide that
the insurance afforded by those policies to the additional insureds is primary
and that all insurance carried by Landlord Parties is strictly excess and
secondary and shall not contribute with Tenant's liability insurance.
13.5.7. Scope of Coverage for Additional Insureds. The coverage
afforded to Landlord and any lender of Landlord must be at least as broad as
that afforded to Tenant and may not contain any terms, conditions, exclusions,
or limitations applicable to Landlord or any lender of Landlord that do not
apply to Tenant.
13.5.8. Delivery of Certificate, Policy, and Endorsements. Before
the Lease Commencement Date, Tenant shall deliver to Landlord the endorsements
referred to in this Section 13.5 as well as a certified copy of Tenant's
liability policy or policies and an original certificate of insurance, executed
by an agent of the insurer or insurers, evidencing compliance with the liability
insurance requirements. Tenant shall obtain a certificate that provides for no
less than thirty (30) days' advance written notice to Landlord from the insurer
or insurers of any cancellation, nonrenewal, or material change in coverage or
available limits of liability and that shall confirm compliance with the
liability insurance requirements in this Lease.
13.5.9. Concurrency of Primary, Excess, and Umbrella Policies.
Tenant's liability insurance coverage may be provided by a combination of
primary, excess, and umbrella policies, but those policies must be absolutely
concurrent in all respects regarding the coverage afforded by the policies. The
coverage of any excess or umbrella policy must be at least as broad as the
coverage of the primary policy.
13.5.10. Liability Limits. The minimum acceptable limits of
liability for Tenant's liability insurance are set forth in Summary Section 10.
13.5.11. "Per Location" Endorsement. Tenant shall, at Tenant's
sole expense, procure a "per location" endorsement or equivalent reasonably
acceptable to Landlord so that the general aggregate and other limits apply
separately and specifically to the Premises.
13.5.12. Survival of Insurance Requirements. Tenant shall, at
Tenant's sole expense, maintain in full force and effect the liability insurance
coverages required under this Lease and shall maintain Landlord Parties and any
lender specified by Landlord as additional insureds, as required by Section
13.5.4 of this lease, for a period of no less than two (2) years after
expiration or earlier termination of this Lease.
13.6 Tenant's Workers' Compensation and Employer Liability Coverage.
Tenant shall procure and maintain workers' compensation insurance as required by
law.
13.7 Tenant's First Party Insurance. Tenant shall, at Tenant's sole
expense, procure and maintain the first party insurance coverages described in
this Section 13.7.
13.7.1. Property Insurance. Tenant shall procure and maintain
property insurance coverage for all office furniture, trade fixtures, office
equipment, merchandise, and all other items of Tenant's property in, on, at, or
about the Premises and the Building, including property installed by, for, or at
the expense of Tenant but excluding:
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(a) "Tenant Improvements," as defined in the Leasehold
Improvement Agreement; and
(b) Other improvements, betterments, alterations, and
additions to the Premises that are insured by Landlord under this Lease.
Tenant's property insurance shall fulfill the following
requirements:
(a) It must be written on the broadest available
"all-risk" (special-causes-of-loss) policy form or an equivalent form acceptable
to Landlord;
(b) It must include an agreed-amount endorsement for no
less than one hundred (100) percent of the full replacement cost (new without
deduction for depreciation) of the covered items and property; and
(c) The amounts of coverage must meet any coinsurance
requirements of the policy or policies.
It is the parties' intent that Tenant shall structure its
property insurance program so that no coinsurance penalty shall be imposed and
there shall be no valuation shortfalls or disputes with any insurer or with
Landlord. Tenant's property insurance coverage shall include vandalism and
malicious mischief coverage, sprinkler leakage coverage, and earthquake
sprinkler leakage coverage.
Landlord shall maintain full replacement cost property insurance
coverage for the "Tenant Improvements," as defined in the Leasehold Improvement
Agreement, and for all other improvements, betterments, alterations, and
additions to the Premises approved in writing by Landlord.
13.7.2. Business Income and Extra Expense Coverage. Tenant shall
further procure and maintain business income (business interruption) insurance
and extra expense coverage with coverage amounts that shall reimburse Tenant for
all direct or indirect loss of income and charges and costs incurred arising out
of all perils insured against by Tenant's property insurance coverage, including
prevention of, or denial of use of or access to, all or part of the Premises or
the Building, as a result of those perils.
The business income and extra expense coverage shall provide
coverage for no less than twelve (12) months of the loss of income, charges, and
costs contemplated under the Lease and shall be carried in amounts necessary to
avoid any coinsurance penalty that could apply. The business income and extra
expense coverage shall be issued by the insurer that issues Tenant's other first
party coverage.
13.8 Other Insurance Coverage. Once every three (3) years during the
Lease Term and on the commencement of any renewal term, Landlord shall have the
right to engage insurance consultants to review the insurance coverages
maintained by Tenant. If, in the opinion of those consultants, any aspect of
Tenant's general liability, property, or other insurance program is inadequate
to protect the interests of Landlord, as contemplated by this Article 13, Tenant
shall, at its sole expense, comply promptly with the consultant's
recommendations. Tenant, however, shall not be required to procure or maintain
other or further coverages that are:
(a) Beyond those typically maintained by similarly
situated parties leasing reasonably similar amounts and types of space for use
in comparable buildings in the same submarket; or
(b) Not available at commercially reasonable rates.
13.9 Form of Policies and Additional Requirements.
13.9.1. Insurance Independent of Exculpation and
Indemnification. Tenant's insurance obligations set forth in Sections 13.4-
13.10 are independent of Tenant's exculpation, indemnification, and other
obligations under this Lease and shall not be construed or interpreted in any
way to restrict, limit, or modify Tenant's exculpation, indemnification, or
other obligations or to limit Tenant's liability under this Lease.
13.9.2. Form of Policies. In addition to the requirements set
forth in Section 13.5.8, the insurance required of Tenant under this Article 13
must:
(a) Name Landlord and any other party Landlord specifies
by endorsement as an additional insured;
(b) Be issued by an insurance company with a rating of
no less than A-X in the current Best's Insurance Guide, or that is otherwise
acceptable to Landlord, and admitted to engage in the business of insurance in
the State of California;
(c) Be primary insurance for all claims under it and
provide that any insurance carried by Landlord Parties and Landlord lenders is
strictly excess, secondary, and noncontributing with any insurance carried by
Tenant; and
(d) Provide that insurance may not be canceled,
nonrenewed, or the subject of material change in coverage or available limits of
coverage, except on thirty (30) days' prior written notice to Landlord and
Landlord's lenders.
13.9.3. Tenant's Delivery of Policy, Endorsements, and
Certificates. Tenant shall deliver the policy or policies, along with any
endorsements to them and certificates required by this Article 13, to Landlord:
(a) On or before the Lease Commencement Date;
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(b) At least thirty (30) days before the expiration date
of any policy; and
(c) On renewal of any policy.
13.9.4. Blanket Insurance. Tenant shall be permitted to provide
the insurance required under this Lease by obtaining a blanket policy or
policies to be maintained by Tenant. The coverages afforded to Landlord and
Landlord's lenders under this Lease shall in no way be limited, diminished, or
reduced under such blanket policy or policies.
13.10 Waiver of Subrogation. Landlord and Tenant agree to cause the
insurance companies issuing their respective property (first party) insurance to
waive any subrogation rights that those companies may have against Tenant or
Landlord, respectively, as long as the insurance is not invalidated by the
waiver. If the waivers of subrogation are contained in their respective
insurance policies, Landlord and Tenant waive any right that either may have
against the other on account of any loss or damage to their respective property
to the extent that the loss or damage is insured under their respective
insurance policies.
13.11 Disclosures Regarding Real Property. The Real Property and the
Premises are located in a special studies zone as designated under the
Alquist-Priolo Special Studies Zone Act (California Public Resources Code
Sections 2621-2630) and is located within a special Flood Hazard Area as
set forth on a Federal Emergency Management Agency "Flood Insurance Rate Map" or
"Flood Hazard Boundary Map" (12 CFR Section 339.6).
Article 14
DAMAGE AND DESTRUCTION
14.1 Repair of Damage by Landlord. Tenant agrees to notify Landlord
in writing promptly of any damage to the Premises resulting from fire,
earthquake, or any other identifiable event of a sudden, unexpected, or unusual
nature ("Casualty"). If the Premises are damaged by a Casualty, any Common Areas
of the Real Property providing access to the Premises are damaged to the extent
that Tenant does not have reasonable access to the Premises, and if neither
Landlord nor Tenant has elected to terminate this Lease under this Article 14,
Landlord shall promptly and diligently restore such Common Areas, and the Tenant
Improvements originally constructed by Landlord, to substantially the same
condition as existed before the Casualty, except for modifications required by
building codes and other laws.
14.2 Repair Period Notice. Landlord shall, within thirty (30) days
after the date of the Casualty, provide written notice to Tenant indicating the
anticipated period for repairing the Casualty ("Repair Period Notice"). The
Repair Period Notice shall be accompanied by a certified statement executed by
the contractor retained by Landlord to complete the repairs or, if Landlord has
not retained a contractor, a licensed contractor not affiliated with landlord,
certifying the contractor's opinion about the anticipated period for repairing
the Casualty. The Repair Period Notice shall also state, if applicable,
Landlord's election either to repair or to terminate the Lease under Section
14.3.
14.3 Landlord's Option To Terminate or Repair. Landlord may elect
either to terminate this Lease or to effectuate repairs if:
(a) The Repair Period Notice estimates that the period for
repairing the Casualty exceeds one-hundred and eighty (180) days from the date
of the Casualty;
(b) The estimated repair cost of the Premises or the Building,
even though covered by insurance, exceeds fifty percent (50%) of the full
replacement cost; or
(c) Insurance proceeds actually received by Landlord are
insufficient to pay for at least 95% of the total cost of restoration.
Landlord's election shall be stated in the Repair Period Notice.
Despite any other provision of this Article 14, Landlord may not elect to
terminate this Lease under this Article unless Landlord elects also to terminate
the Leases of all similarly situated Tenants, provided that Landlord has the
right under each applicable lease to terminate based on the extent of the
Casualty.
14.4 Tenant's Option To Terminate. If the Repair Period Notice
provided by Landlord indicates that the anticipated period for repairing the
Casualty exceeds two-hundred and seventy (270) days, Tenant may elect to
terminate this Lease by providing written notice ("Tenant's Termination Notice")
to Landlord within thirty (30) days after receiving the Repair Period Notice. If
Tenant does not elect to terminate within this thirty-day (30-day) period,
Tenant shall be considered to have waived the option to terminate.
14.5 Rent Abatement Due to Casualty. Landlord and Tenant agree that
Tenant's Rent shall be fully abated during the period beginning on the later of
(a) the date of the Casualty or (b) the date on which Tenant ceases to occupy
the Premises and ending on the date of substantial completion of Landlord's
restoration obligations as provided in this Article 14 ("Abatement Period"). If,
however, Tenant is able to occupy or does occupy a portion of the Premises, Rent
shall be abated during the Abatement Period only for the portion of the Premises
not able to be occupied by Tenant. Subject to Section 14.4, the Rent abatement
provided in this Section 14.5 is Tenant's sole remedy due to the occurrence of
the Casualty. Landlord shall not be liable to Tenant or any other person or
entity for any direct, indirect, or consequential damage (including lost profits
of Tenant or loss of or interference with Tenant's business), whether or not
caused by the negligence of Landlord or Landlord's employees, contractors,
licensees, or invitees, due to, arising out of, or as a result of the Casualty
(including but not limited to the termination of the Lease in connection with
the Casualty). Tenant agrees to maintain business interruption insurance in
amounts and with coverage no less than that required by Section 13.7.2 to
provide coverage regarding such matters.
14.6 Damage Near End of Term. Despite any other provision of this
Article 14, if the Premises is destroyed or damaged by a Casualty during the
last twelve (12) months of the Lease Term, Landlord and Tenant shall each have
the option to terminate
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this Lease by giving written notice to the other of the exercise of that option
within thirty (30) days after that damage or destruction. If Tenant is not then
in Default under this Lease, however, Tenant may negate Landlord's election to
terminate under this Section 14.6 by electing, within ten (10) days after
receipt of Landlord's termination notice, to exercise any unexercised option to
extend this Lease. If Tenant negates Landlord's election, this Lease shall
continue in effect unless Landlord has the right to, and elects to, terminate
this Lease under Section 14.3.
14.7 Effective Date of Termination; Rent Apportionment. If Landlord
or Tenant elects to terminate this Lease under this Article 14 in connection
with a Casualty, this termination shall be effective thirty (30) days after
delivery of notice of such election. Tenant shall pay Rent, properly apportioned
up to the date of the Casualty. After the effective date of the termination,
Landlord and Tenant shall be discharged of all future obligations under this
Lease, except for those provisions that, by their terms, survive the expiration
or earlier termination of the Lease.
14.8 Waiver of Statutory Provisions. The provisions of this Lease,
including those in this Article 14, constitute an express agreement between
Landlord and Tenant that applies in the event of any Casualty to the Premises,
Building, or Real Property. Tenant, therefore, fully waives the provisions of
any statute or regulation, including California Civil Code Sections 1932(2) and
1933(4), for any rights or obligations concerning a Casualty.
Article 15
CONDEMNATION
15.1 Definition of "Condemnation." As used in this Lease, the term
"Condemnation" means a permanent taking through (a) the exercise of any
government power (by legal proceedings or otherwise) by any public or
quasi-public authority or by any other party having the right of eminent domain
("Condemnor") or (b) a voluntary sale or transfer by Landlord to any Condemnor,
either under threat of exercise of eminent domain by a Condemnor or while legal
proceedings for condemnation are pending.
15.2 Effect on Rights and Obligations. If, during the Lease Term or
the period between the date of execution of this Lease and the date on which the
Lease Term begins, there is any Condemnation of all or part of the Premises,
Building, or Real Property on which the Premises and Building are constructed,
the rights and obligations of the parties shall be determined under this Article
15, and Rent shall not be affected or abated except as expressly provided in
this Article. Landlord shall notify Tenant in writing of any Condemnation within
thirty (30) days after the later of (a) the filing of a complaint by Condemnor
or (b) the final agreement and determination by Landlord and Condemnor of the
extent of the taking ("Condemnation Notice").
15.3 Termination of Lease.
15.3.1. Definition of "Termination Date." The "Termination Date"
shall be the earliest of:
(a) The date on which Condemnor takes possession of the
property that is subject to the Condemnation; (b) the date on which title to the
property subject to the Condemnation is vested in Condemnor; (c) if Landlord has
elected to terminate, the date on which Landlord requires possession of the
property in connection with the Condemnation, as specified in written notice
delivered to Tenant no less than thirty (30) days before that date; or (d) if
Tenant has elected to terminate, thirty (30) days after Landlord's receipt of
written notice of termination from Tenant.
If both Landlord and Tenant have elected to terminate under this
Article 15, the Termination Date shall be the earliest of the dates described in
Sections (a)-(c).
15.3.2. Automatic Termination. If the Premises are totally taken
by Condemnation, this Lease shall terminate as of the Termination Date, and the
Award shall be allocated between Landlord and Tenant in accordance with Section
15.5.
15.3.3. Landlord's Right To Terminate. Landlord shall have the
option to terminate this Lease if:
(a) Ten percent (10%) or more of the Rentable Square
Feet of the Building; (b) any portion of the Building or Real Property
reasonably necessary for Landlord to operate the Building is taken through
Condemnation, and Landlord also terminates the leases of all other similarly
situated tenants (as reasonably determined by Landlord) in the Building; or (c)
any other areas providing access to the Real Property are taken through
Condemnation, and Landlord also terminates the leases of all other similarly
situated tenants (as reasonably determined by Landlord) in the Building.
15.3.4. Tenant's Right To Terminate. Tenant shall have the
option to terminate this Lease by providing thirty (30) days' written notice to
Landlord if one or more of the following are taken through Condemnation:
(a) Thirty percent (30%) or more of the Rentable square
feet of the Premises; or (b) any portion of the common area that provides Tenant
with its primary access to the Premises and that, if taken, would materially
impair Tenant's access to and business activities on the Premises during normal
Business Hours.
Tenant's notice must be given within thirty (30) days after
Tenant's receipt of the Condemnation Notice required by Section 15.2.
15.3.5. Tenant's Waiver. Tenant agrees that its rights to
terminate this Lease due to partial Condemnation are governed by this Article
15. Tenant waives all rights it may have under California Code of Civil
Procedure Section 1265.130, or otherwise, to terminate this Lease based on a
partial Condemnation.
15.3.6. Proration of Rent. If this Lease is terminated under
this Article 15, the termination shall be effective on the Termination Date, and
Landlord shall prorate Rent to that date. Tenant shall be obligated to pay Rent
for the period up
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to, but not including, the Termination Date as prorated by Landlord. Landlord
shall return to Tenant prepaid Rent allocable to any period on or after the
Termination Date.
15.4 Effect of Condemnation if Lease Is Not Terminated. If any part
of the Premises is taken by Condemnation and this Lease is not terminated:
(a) Rent shall be proportionately reduced based on the rentable
square footage of the Premises taken; (b) Landlord shall, at Landlord's sole
expense, accomplish all necessary restoration to the Premises and the Building
resulting from the Condemnation; and (c) Rent shall be abated for the portion of
the remaining Premises not usable by Tenant until Landlord completes the
restoration.
15.5 Allocation of Award.
15.5.1. Landlord's Right to Award. Except as provided in Section
15.5.2 in connection with a Condemnation:
(a) Landlord shall be entitled to receive all
compensation and anything of value awarded, paid, or received in settlement or
otherwise ("Award"); and (b) Tenant irrevocably assigns and transfers to
Landlord all rights to and interests in the Award and fully releases and
relinquishes any claim to, right to make a claim on, or interest in the Award.
15.5.2. Tenant's Right to Compensation. Despite Section 15.5.1,
Tenant shall have the right to make a separate claim in the Condemnation
proceeding for: (1) the taking of the unamortized or undepreciated value of any
Alteration owned and paid for by Tenant that Tenant has the right to remove at
the end of the Lease Term and that Tenant elects not to remove; (2) reasonable
removal and relocation costs for any leasehold improvements that Tenant has the
right to remove and elects to remove (if Condemnor approves of the removal); (3)
relocation costs under Government Code Section 7262, the claim for which Tenant
may pursue by separate action independent of this Lease; and (4) the loss of
good will.
15.6 Temporary Taking. If a temporary taking of part of the
Premises occurs through (a) the exercise of any government power (by legal
proceedings or otherwise) by Condemnor or (b) a voluntary sale or transfer by
Landlord to any Condemnor, either under threat of exercise of eminent domain by
a Condemnor or while legal proceedings for condemnation are pending, Rent shall
abate during the time of such taking in proportion to the portion of the
Premises taken. The entire Award relating to the temporary taking shall be and
remain the property of Landlord. Tenant irrevocably assigns and transfers to
Landlord all rights to and interest in the Award and fully releases and
relinquishes any claim to, right to make a claim on, and any other interest in
the Award.
Article 16
ASSIGNMENT AND SUBLEASING
16.1 Restricted Transfers.
16.1.1. Consent Required; Definition of "Transfer." Except as
otherwise provided in this Article 16, Tenant shall obtain Landlord's written
consent before entering into or permitting any Transfer. A "Transfer" consists
of any of the following, whether voluntary or involuntary, and whether effected
by death, operation of law, or otherwise:
(a) Any assignment, mortgage, pledge, encumbrance, or
other transfer of any interest in this Lease; (b) any sublease or occupancy of
any portion of the Premises by any persons other than Tenant and its employees,
invitees, guests, and agents; and (c) any of the changes (e.g., a change of
ownership or reorganization) included in the definition of Transfer in Section
16.6.
Any person to whom any Transfer is made or sought to be made is a "Transferee."
16.1.2. Landlord's Remedies. If a Transfer fails to comply with
this Article 16, Landlord may, at its option, do either or both of the
following: (a) void the Transfer or (b) declare Tenant in Default under Section
21.1. If Landlord declares Tenant in Default under Section 21.1, Tenant has
thirty (30) days in which to cure the Default after receiving written notice of
the Default from Landlord notwithstanding any contrary cure period specified in
Section 21.1.
16.2 Transfer Procedure.
16.2.1. Transfer Notice. Before entering into or permitting any
Transfer, Tenant shall provide in writing to Landlord a "Transfer Notice" at
least thirty (30) days before the proposed effective date of the Transfer. The
Transfer Notice shall include all of the following:
(a) Information regarding the proposed Transferee,
including the name, address, and ownership of Transferee; the nature of
Transferee's business; and, if the Transferee will be an assignee of this Lease
or a subtenant current financial statements of Transferee (certified by an
officer, a partner, or an owner of Transferee); and
(b) All the material terms of the proposed Transfer,
including the consideration payable by Transferee, the portion of the Premises
to be transferred ("Subject Space"), a general description of any planned
alterations or improvements to the Subject Space that Tenant knows of, the
proposed use of the Subject Space, the effective date of the Transfer, and a
copy of all documentation concerning the proposed Transfer to the extent then
available (with updates as soon as they are available).
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Within ten (10) Business Days of receipt of the Transfer Notice,
Landlord shall notify Tenant in writing if the Transfer Notice is complete. If
it is not, Landlord shall inform Tenant what additional information is required
to make the Transfer Notice complete. Within three (3) Business Days of receipt
of any additional information Landlord requests from time to time, Landlord
shall notify Tenant in writing if the Transfer Notice is complete. If Landlord
fails to respond within the required time, the Transfer Notice shall be
considered complete. Although Landlord may condition its consent to a Transfer
on Landlord's reasonable approval of the final Transfer documentation, Landlord
may not require such final documentation for completion of the Transfer Notice.
16.2.2. Transfer Fee. Within thirty (30) days after Landlord's
written request, Tenant shall pay as Additional Rent any reasonable legal fees
that Landlord incurs in reviewing and processing the Transfer Notice ("Transfer
Fee") as long as Tenant shall not be required to pay more than $1,500 as a
Transfer Fee in connection with any one Transfer;
16.2.3. Limits of Consent. If Landlord consents to any Transfer,
the following limits apply:
(a) Landlord does not agree to waive or modify the
terms and conditions of this Lease.
(b) Landlord does not consent to any further Transfer
by either Tenant or Transferee.
(c) Tenant remains liable under this Lease, and any
guarantor of the Lease remains liable under the
guaranty.
(d) Tenant may enter into that Transfer in accordance
with this Article 16 if:
(1) The Transfer occurs within six (6) months
after Landlord's consent; (2) the Transfer is on
substantially the same terms as specified in the
Transfer Notice; and (3) Tenant delivers to
Landlord, promptly after execution, an original,
executed copy of all documentation pertaining to
the Transfer in a form reasonably acceptable to
Landlord (including Transferee's agreement to be
subject and subordinate to the Lease and to assume
Tenant's obligations under the Lease that arise
after the date of the Transfer to the extent that
they apply to the Subject Space). Landlord shall
respond promptly after Tenant requests that
Landlord approve the form of the Transfer
documentation.
(e) If the Transfer occurs after six (6) months or the
terms of the Transfer have materially changed from those in the Transfer Notice,
Tenant shall submit a new Transfer Notice under Section 16.2.1, requesting
Landlord's consent. A material change is one the terms of which would have
entitled Landlord to refuse to consent to the Transfer initially. A change to
the economic terms of the Transfer that makes it more favorable to Transferee
shall not, however, be considered a material change.
16.3 Landlord's Consent. Landlord may not unreasonably withhold its
consent to any proposed Transfer that complies with this Article 16.
16.3.1. Reasonable Grounds For Denying Consent. Reasonable
grounds for denying consent include but are not limited to the following: (a)
Transferee's character, reputation, business, or use is not consistent with the
character or quality of the Building or the uses of other tenants in the
Building; or (b) Transferee's financial condition is inadequate to support the
Lease obligations of Transferee under the Transfer documents, after taking into
account Tenant's continued financial liability under the Lease.
16.3.2. Unreasonable Grounds For Denying Consent.
Notwithstanding anything to the contrary in Section 16.3.1, Transferree's
financial condition shall not be a reasonable ground for denying consent if the
requested Transfer is as a result of a sale of Tenant or its parent company,
National Insurance Group, and the proposed Transferee is the purchasing entity;
and either (a) if the proposed transfer will take place during the period
covered by the Guaranty in Section 30.22, the Transferee has a net worth equal
to that of Tenant at the time of execution of this Lease and an entity with a
net worth equal to or greater than that of National Insurance Group at the time
of execution of this Lease guarantees the Transferee's obligations and
performance under the Lease in a form substantially similar to Exhibit F; or (b)
if the proposed Transfer will take place after the period covered by the
Guaranty in Section 30.22, the Transferee has a net worth of equal or greater
value to that of Tenant at the time of execution of this Lease. For purposes of
this Section 16.3.2, "net worth" shall be calculated according to Generally
Accepted Accounting Principles.
16.3.3. Landlord's Written Response. Within ten (10) days after
receiving the completed Transfer Notice, Landlord shall approve or disapprove
the proposed Transfer in writing.
16.4 Transfer Premium.
16.4.1. Transfer Premium Payment. As a reasonable condition to
Landlord's consent to any Transfer, Tenant shall pay to Landlord fifty percent
(50%) of any Transfer Premium, as defined in Section 16.4.2.
16.4.2. Definition of "Transfer Premium." "Transfer Premium"
means all Rent and other consideration actually received by Tenant from
Transferee (including key money and bonus money and any payment in excess of
fair market value for services rendered by Tenant to Transferee or assets,
fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee
in connection with the Transfer ("Transferee Rent")), after deducting:
(a) The Rent payable by Tenant under this Lease
(excluding the Transfer Premium) for the Subject Space ("Tenant Rent"); (b)
reasonable leasing commissions paid by Tenant; (c) other reasonable
out-of-pocket costs paid by Tenant (including attorney fees, advertising costs,
and expenses of readying the Subject Space for occupancy by Transferee); (d) any
consideration paid by Tenant to Transferee or any third party to induce
Transferee to consummate the Transfer; and (e) any losses Tenant has sustained
due to the Subject Space being vacate for a period of time before the transfer.
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16.4.3. Monthly Payment of Transfer Premium; Calculation. Tenant
shall pay the Transfer Premium on a monthly basis, together with its payment of
Additional Rent under Article 4. In calculating the Transfer Premium, Tenant
shall first deduct all the Transfer Costs from any Transferee Rent received,
provided that Transfer Costs referenced in clauses (b), (c) and (d) above shall
be amortized over the term of the Transfer.
16.4.4. Audit of Transfer Premium. Tenant shall allow Landlord
to review and audit Tenant's books and records for the purpose of verifying
Tenant's calculation of the Transfer Premium.
16.5 Effect of Transfer.
16.5.1. Right To Collect Rent. If this Lease is assigned,
Landlord may collect Rent directly from Transferee. If all or part of the
Premises is subleased and Tenant defaults, Landlord may collect Rent directly
from Transferee. Landlord may then apply the amount collected from Transferee to
Tenant's monetary obligations under this Lease. Collecting Rent from a
Transferee or applying that Rent to Tenant's monetary obligations does not waive
any provisions of this Article 16.
16.6 Transfers of Ownership Interests and Other Organizational
Changes.
16.6.1. Change of Ownership; Reorganization. For purposes of
this Article 16, "Transfer" also includes:
(a) If Tenant is a partnership or limited liability
company, the transfer, within a twelve-month (12-month) period, of fifty percent
(50%) or more of the partnership or membership interests; or the dissolution of
the partnership or limited liability company without its immediate
reconstitution.
(b) For so long as Tenant is a closely held corporation
(i.e., one whose stock is not publicly held and not traded through an exchange
or over the counter), the sale or other transfer, within a twelve-month
(12-month) period, of more than an aggregate of fifty percent (50%) of the
voting shares of Tenant (other than to immediate family members by reason of
gift or death) or the dissolution, merger, consolidation, or other
reorganization of Tenant. Notwithstanding anything to the contrary in this
Section 16.6.1, if Tenant is a closely held corporation, it shall not be a
Transfer if Tenant's stock becomes publicly held and traded.
16.6.2. Permitted Transfers. Despite any other provision of this
Lease, Landlord's consent is not required for any Transfer to an Affiliate, as
defined in Section 16.6.3, as long as the following conditions are met:
(a) Landlord receives written notice of the Transfer (as
well as any documents or information reasonably requested by Landlord regarding
the Transfer or Transferee); and (b) Transferee assumes in writing all of
Tenant's obligations under this Lease subject to the Transfer.
16.6.3. Definition of "Affiliate." An "Affiliate" means any
entity that: (a) controls, is controlled by, or is under common control with
Tenant; (b) is the transferee of all or substantially all of Tenant's assets or
stock; or (c)results from the merger or consolidation of Tenant with another
entity . "Control" means the direct or indirect ownership of more than fifty
percent (50%) of the voting securities of an entity or possession of the right
to vote more than fifty percent (50%) of the voting interest in the ordinary
direction of the entity's affairs.
Article 17
SURRENDER OF PREMISES
17.1 Surrender of Premises. No act of either party or its authorized
representatives shall constitute acceptance of a surrender of the Premises
unless that intent is specifically acknowledged in a writing signed by both
parties. At the option of Landlord, a surrender and termination of this Lease
shall operate as an assignment to Landlord of all subleases or subtenancies.
Landlord shall exercise this option by giving notice of that assignment to all
subtenants within ten (10) days after the effective date of the surrender and
termination.
17.2 Removal of Tenant Property by Tenant. Upon expiration or
termination of the Lease Term, Tenant shall quit the Premises and surrender
possession to Landlord in accordance with this Section 17.2. Tenant shall leave
the Premises in as good order and condition as when Tenant took possession of
the Premises and as thereafter improved by Landlord or Tenant, except for
reasonable wear and tear, obsolescence, and repairs that are specifically made
the responsibility of Landlord and except as provided in Article 15.
Tenant shall, without expense to Landlord, remove or cause to be
removed from the Premises:
(a) All debris and rubbish; (b) any items of furniture,
equipment, freestanding cabinet work, and other articles of personal property
owned by Tenant or installed or placed by Tenant at its expense in the Premises;
and (c) any similar articles of any other persons claiming under Tenant that
Landlord requires to be removed.
Tenant shall, at Tenant's sole option and expense, also remove from the Premises
all fixtures and trade fixtures installed on the Premises by Tenant at its
expense. Tenant shall, at Tenant's expense, repair all damage to the Premises
and the Building resulting from that removal.
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Article 18
HOLDING OVER
18.1 Holdover Rent. If Tenant remains in possession of the Premises
after expiration or earlier termination of this Lease without Landlord's
consent, Tenant's continued possession shall be on the basis of a tenancy at
sufferance and Tenant shall pay as rent during the first sixty (60) days of the
holdover period an amount equal to one-hundred and twenty-five percent (125%) of
the Base Rent and Additional Rent payable under this Lease for the last full
month before the date of expiration or termination. For any holdover period in
excess of sixty (60) days, Tenant shall pay an amount equal to one-hundred and
fifty percent (150%) of the Base Rent and Additional Rent payable under this
Lease for the last full month before the date of expiration or termination.
Article 19
ESTOPPEL CERTIFICATES
19.1 Obligation To Provide Estoppel Certificates. Within ten (10)
Business Days after receipt of a written request by Landlord, Tenant shall
execute and deliver to Landlord an estoppel certificate. The certificate shall
contain any information reasonably requested by and/or party or by any existing
or prospective lender, mortgagee, or purchaser.
19.2 Failure To Deliver. The failure of Tenant to execute or deliver
an estoppel certificate in the required time period shall constitute an
acknowledgment by Tenant that the statements requested in the estoppel
certificate are true and correct, without exception. The failure by Tenant to
execute or deliver an estoppel certificate or other document or instrument as
required in this Article 19, for ten (10) Business Days after notice of such
failure from the party requesting the certificate, document, or instrument,
shall constitute a material breach of this Lease.
Article 20
SUBORDINATION, NONDISTURBANCE, AND ATTORNMENT
20.1 Automatic Subordination; Nondisturbance Agreement To Include
Specified Terms. This Lease is subject and subordinate to: (a) the lien of any
mortgages, deeds of trust, or other encumbrances ("Encumbrances") of the Real
Property; (b) all present and future ground or underlying leases ("Underlying
Leases") of the Real Property now or hereafter in force against the Real
Property; (c) all renewals, extensions, modifications, consolidations, and
replacements of the items described in Sections (a)-(b); and (d) all advances
made or hereafter to be made on the security of the Encumbrances.
Despite any other provision of this Article 20, any Encumbrance holder or lessor
may elect that this Lease shall be senior to and have priority over that
Encumbrance or Underlying Lease whether this Lease is dated before or after the
date of the Encumbrance or Underlying Lease. No such subordination shall be
effective unless and until Landlord obtains from the holder of the Encumbrance
placed against the premises a commercially-reasonable nondisturbance agreement
in recordable form, providing that in the event of any foreclosure, sale under a
power of sale, ground or master lease termination, or transfer in lieu of any of
the foregoing, or the exercise of any other remedy under any such Encumbrance,
Tenant's use, possession, and enjoyment of the Premises shall not be disturbed
and this Lease shall continue in full force and effect as long as Tenant is not
in Default.
20.2 Subordination Agreement. If Tenant has received the
nondisturbance agreement referred to in Section 20.1, Tenant shall, within ten
(10) Business Days after Landlord's request, execute any further instruments or
assurances in recordable form that Landlord reasonably considers necessary to
evidence or confirm the subordination or superiority of this Lease to any such
Encumbrances or Underlying Leases. Tenant's failure to execute and deliver such
instrument(s) shall constitute a Default under this Lease only if Landlord has
first delivered the nondisturbance agreement to Tenant.
20.3 Attornment. Tenant covenants and agrees to attorn to the
transferee of Landlord's interest in the Real Property by foreclosure, deed in
lieu of foreclosure, exercise of any remedy provided in any Encumbrance or
Underlying Lease, or operation of law (without any deductions or setoffs) except
as expressly provided in this Lease or in any nondisturbance agreement, if
requested to do so by the transferee, and to recognize the transferee as the
lessor under this Lease. The transferee shall not be liable for:
(a) Any acts, omissions, or Defaults of Landlord that occurred
before the sale or conveyance; or
(b) The return of any security deposit except for deposits
actually paid to the transferee and except as expressly provided in this Lease
or in any nondisturbance agreement.
20.4 Notice of Default; Right To Cure. Tenant agrees to give written
notice of any default by Landlord to the holder of any prior Encumbrance or
Underlying Lease. Tenant agrees that, before it exercises any rights or remedies
under the Lease, the lienholder or lessor shall have the right, but not the
obligation, to cure the default (either by itself or by a receiver for the Real
Property) within the same time, if any, given to Landlord to cure the default,
plus an additional thirty (30) days, except that (i) only ten (10) days shall be
permitted in the case of a default in the payment of money from Landlord to
Tenant; and (ii) in the event of an emergency, the lienholder or lessor shall be
required to commence a cure as soon as is reasonably possible, and in the event
the lender or lienholder fails to do so, Tenant shall have the right to cure to
avoid the risk of in jury to persons, significant damage to property, or
material interference with Tenant's operation of its business. Tenant agrees
that this cure period shall be extended by the time necessary for the lienholder
to begin foreclosure proceedings and to obtain possession of the Building or
Real Property, as applicable, as long as the lienholder:
(a) Notifies Tenant, within twenty (20) days after receipt of
Tenant's notice, of the lienholder's intention to effect this remedy; and
(b) Institutes immediate steps to effect this remedy or
institutes immediate legal proceedings to appoint a receiver for the Real
Property or to foreclose on or recover possession of the Real Property within
the thirty-day (30-day) or
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ten-day (10-day) period and thereafter prosecutes the remedy or legal
proceedings to completion with due diligence and continuity.
Article 21
DEFAULTS AND REMEDIES
21.1 Tenant's Default. The occurrence of any of the following shall
constitute a Default by Tenant under this Lease ("Default"):
(a) Tenant's failure to pay when due any Rent required to be
paid under this Lease if the failure continues for five (5) Business Days after
written notice of the failure from Landlord to Tenant;
(b) Tenant's failure to provide any instrument or assurance as
required by Section 20.2 or estoppel certificate as required by Section 19.1 if
the failure continues for five (5) Business Days after written notice of the
failure from Landlord to Tenant; or
(c) Tenant's failure to perform any other obligation under this
Lease if the failure continues for thirty (30) days after written notice of the
failure from Landlord to Tenant. If the required cure of the noticed Default
cannot be completed within thirty (30) days, Tenant's failure to perform shall
constitute a Default under the Lease unless Tenant undertakes to cure the
failure within thirty (30) days and diligently and continuously attempts to
complete the cure as soon as reasonably possible.
21.2 Replacement of Statutory Notice Requirements. When this Lease
requires service of a notice, that notice shall replace rather than supplement
any equivalent or similar statutory notice, including any notices required by
Code of Civil Procedure Section 1161 or any similar or successor statute. When a
statute requires service of a notice in a particular manner, service of that
notice (or a similar notice required by this Lease) in the manner required by
Section 30.10 shall replace and satisfy the statutory service-of-notice
procedures, including those required by Code of Civil Procedure Section 1162 or
any similar or successor statute.
21.3 Landlord's Remedies on Tenant's Default. On the occurrence of a
Default by Tenant, Landlord shall have the right to pursue any one or more of
the following remedies in addition to any other remedies now or later available
to Landlord at law or in equity. These remedies are not exclusive but
cumulative.
21.3.1. Termination of Lease. Landlord may terminate this Lease
and recover possession of the Premises. Once Landlord has terminated this Lease,
Tenant shall immediately surrender the Premises to Landlord. On termination of
this Lease, Landlord may recover from Tenant all of the following:
(a) The worth at the time of the award of any unpaid
Rent that had been earned at the time of the termination, to be computed by
allowing interest at the rate set forth in Article 23 but in no case greater
than the maximum amount of interest permitted by law;
(b) The worth at the time of the award of the amount by
which the unpaid Rent that would have been earned between the time of the
termination and the time of the award exceeds the amount of unpaid Rent that
Tenant proves could reasonably have been avoided, to be computed by allowing
interest at the rate set forth in Section 23.2 but in no case greater than the
maximum amount of interest permitted by law;
(c) The worth at the time of the award of the amount by
which the unpaid Rent for the balance of the Lease Term after the time of the
award exceeds the amount of unpaid Rent that Tenant proves could reasonably have
been avoided, to be computed by discounting that amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of the award plus one
percent (1%);
(d) Any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform
obligations under this Lease, including brokerage commissions and advertising
expenses, expenses of remodeling the Premises for a new tenant (whether for the
same or a different use), and any special concessions made to obtain a new
tenant; and
(e) Any other amounts, in addition to or in lieu of
those listed above, that may be permitted by applicable law.
21.3.2. Continuation of Lease in Effect. Landlord shall have the
remedy described in Civil Code Section 1951.4, which provides that, when a
tenant has the right to sublet or assign (subject only to reasonable
limitations), the landlord may continue the lease in effect after the tenant's
breach and abandonment and recover Rent as it becomes due. Accordingly, if
Landlord does not elect to terminate this Lease on account of any Default by
Tenant, Landlord may enforce all of Landlord's rights and remedies under this
Lease, including the right to recover all Rent as it becomes due.
21.3.3. Tenant's Subleases. If Landlord elects to terminate this
Lease on account of any Default by Tenant, Landlord may:
(a) Terminate any sublease, license, concession, or
other consensual arrangement for possession entered into by Tenant and affecting
the Premises.
(b) Choose to succeed to Tenant's interest in such an
arrangement. If Landlord elects to succeed to Tenant's interest in such an
arrangement, Tenant shall, as of the date of notice by Landlord of that
election, have no further right to, or interest in, the Rent or other
consideration receivable under that arrangement.
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21.4 Form of Payment After Default. If, on three (3) occasions within
a twelve-month (12-month) period, Tenant fails to pay any amount due under this
Lease within five (5) Business Days after the due date or if Tenant draws a
check on an account with insufficient funds, Landlord shall have the right to
require that any subsequent amounts paid by Tenant to Landlord under this Lease
(to cure a Default or otherwise) be paid in the form of cash, money order,
cashier's or certified check drawn on an institution acceptable to Landlord, or
other form approved by Landlord despite any prior practice of accepting payments
in a different form.
21.5 Efforts To Relet. For purposes of this Article 21, Tenant's
right to possession shall not be considered to have been terminated by
Landlord's efforts to relet the Premises, by Landlord's acts of maintenance or
preservation with respect to the Premises, or by appointment of a receiver to
protect Landlord's interests under this Lease. This list is merely illustrative
of acts that may be performed by Landlord without terminating Tenant's right to
possession.
21.6 Acceptance of Rent Without Waiving Rights. Under Article 24,
Landlord may accept Tenant's payments without waiving any rights under this
Lease, including rights under a previously served notice of Default. If Landlord
accepts partial payments after serving a notice of Default, Landlord may
nevertheless commence and pursue an action to enforce rights and remedies under
the previously served notice of Default, unless the default is entirely cured,
without giving Tenant any further notice or demand.
21.7 Tenant's Remedies on Landlord's Default.
21.7.1. Landlord's Default. Except as provided in Section 10.2,
Landlord's failure to perform any of its obligations under this Lease shall
constitute a default by Landlord under the Lease if the failure continues for
thirty (30) days after written notice of the failure from Tenant to Landlord. If
the required performance cannot be completed within thirty (30) days, Landlord's
failure to perform shall constitute not a default under the Lease unless
Landlord fails to undertake to cure the failure within thirty (30) days and
diligently and continuously attempts to complete this cure as soon as reasonably
possible, except as provided in Section 10.2.
21.7.2. Rent Abatement. If Tenant is unable to use, and does not
use, all or part of the Premises ("Affected Area") as a result of an Abatement
Event, as defined in Section 21.7.2.1, and if this Abatement Event continues for
either (i) three (3) consecutive Business Days, where the cure for the Abatement
Event is reasonably within the control of Landlord, or (ii) ten (10) Business
Days, where the cure for the Abatement Event is not reasonably within the
control of Landlord, after Landlord's receipt of notice from Tenant of the
Abatement Event ("Eligibility Period"), the Rent payable under this Lease shall
be abated or reduced after the expiration of the Eligibility Period for such
time that Tenant continues to be prevented from using, and does not use, the
Affected Area in the proportion that the Rentable Area of the Affected Area
bears to the total Rentable Area of the Premises. Notwithstanding anything to
the contrary in this Section 21.7.2, if an Abatement Event occurs more than once
in a one (1) year period, then the Eligibility Period after which Rent is abated
shall be reduced to one (1) Business Day, where the cure for the Abatement Event
is reasonably within the control of Landlord.
21.7.2.1 Abatement Event. An "Abatement Event" is:
(a) Landlord's performance of or failure to
perform any repair, maintenance, or alteration that substantially interferes
with Tenant's use of the Premises or which concerns an emergency involving risk
of life or injury to persons or significant damage to property;
(b) Any failure of or interruption in utilities
or services required to be supplied by Landlord to the Premises; or
(c) Any failure of Landlord to provide Tenant
with access to the Premises.
Article 22
LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS
22.1 Landlord's Right To Perform Tenant's Obligations. All
obligations to be performed by Tenant under this Lease shall be performed by
Tenant at Tenant's expense and without any reduction of Rent. If Tenant is in
Default on any obligation, Landlord may, after notice to Tenant as required by
Section 21.2, perform the obligation on Tenant's behalf, without waiving
Landlord's rights for Tenant's failure to perform any obligations under this
Lease and without releasing Tenant from such obligations.
22.2 Reimbursement by Tenant. Within fifteen (15) days after
receiving a statement from Landlord, Tenant shall pay to Landlord the amount of
expense reasonably incurred by Landlord, under Section 22.1, in performing
Tenant's obligation as Additional Rent.
Article 23
LATE PAYMENTS
23.1 Late Charges. If any Rent payment is not received by Landlord or
Landlord's designee within ten (10) days after that Rent is due, Tenant shall
pay to Landlord a late charge of three percent (3%) of such overdue amount
liquidated damages, in lieu of actual damages (other than interest under Section
23.2 and attorney fees and costs under Section 26.1). The parties agree that
this late charge represents a reasonable estimate of the expenses that Landlord
will incur because of any late payment of Rent (other than interest and attorney
fees and costs). Tenant shall pay the late charge as Additional Rent with the
next installment of Rent.
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23.2 Interest. If any Rent payment is not received by Landlord or
Landlord's designee within ten (10) days after that Rent is due, Tenant shall
pay to Landlord annual interest on the past-due amount, from the date due until
paid, at the Prime Rate published by the Wall Street Journal (or if such rate is
no longer published such substitute rate reasonable selected by Landlord plus
two percent (2%) rate per year ("Lease Rate").
Article 24
NONWAIVER
24.1 Nonwaiver. No waiver of any provision of this Lease shall be
implied by any failure of either party to enforce any remedy for the violation
of that provision, even if that violation continues or is repeated. Any waiver
by a party of any provision of this Lease must be in writing. Such written
waiver shall affect only the provision specified and only for the time and in
the manner stated in the writing.
24.2 Acceptance and Application of Payment; Not Accord and
Satisfaction. No receipt by either party of a lesser payment than the Rent
required under this Lease shall be considered to be other than on account of the
earliest amount due, and no endorsement or statement on any check or letter
accompanying a payment or check shall be considered an accord and satisfaction.
Each party may accept checks or payments without prejudice to its right to
recover all amounts due and pursue all other remedies provided for in this
Lease. Either party's receipt of monies from the other party after giving notice
to the other party terminating this Lease in no way reinstates, continues, or
extends the Lease Term or affects that Termination Notice. After the service of
notice terminating this Lease, the beginning of an action, or the entry of final
judgment in any action, either party may receive monies from the other party.
The payment and receipt of the payment shall not waive or affect such prior
notice, action, or judgment.
Article 25
DISPUTE RESOLUTION
25.1 Waiver of Right to Jury Trial. Landlord and Tenant waive their
respective rights to trial by jury of any contract or tort claim, counterclaim,
cross-complaint, or cause of action in any action, proceeding, or hearing
brought by either party against the other on any matter arising out of or in any
way connected with this Lease, the relationship of Landlord and Tenant, or
Tenant's use or occupancy of the Premises, including any claim of injury or
damage or the enforcement of any remedy under any current or future law,
statute, regulation, code, or ordinance.
Landlord's initials /s/ JAW Tenant's initials /s/ DSG
25.2 Resolving Disagreement Over Fair Market Rental Value. If Tenant
timely and effectively objects to Landlord's determination of Fair Market Rental
Value under Section 2.5.2, the disagreement shall be resolved under this Section
25.2.
25.2.1. Negotiated Agreement. Landlord and Tenant shall
diligently attempt in good faith to agree on the Fair Market Rental Value on or
before the tenth (10th) day after Tenant's objection to the Fair Market Rental
Value ("Outside Agreement Date").
25.2.2. Parties' Separate Determinations. If Landlord and Tenant
fail to reach agreement on or before the Outside Agreement Date, Landlord and
Tenant shall each make a separate determination of the Fair Market Rental Value
and notify the other party of this determination within five (5) days after the
Outside Agreement Date.
25.2.2.1 Two Determinations. If each party makes a
timely determination of the Fair Market Rental Value, those determinations shall
be submitted to arbitration in accordance with Section 25.2.3.
25.2.2.2 One Determination. If Landlord or Tenant fails
to make a determination of the Fair Market Rental Value within the five-day
(5-day) period, that failure shall be conclusively considered to be that party's
approval of the Fair Market Rental Value submitted within the five-day (5-day)
period by the other party.
25.2.3. Arbitration. If both parties make timely individual
determinations of the Fair Market Rental Value under Section 25.2.2, the Fair
Market Rental Value shall be determined by arbitration under this Section.
25.2.3.1 Scope of Arbitration. The determination of the
arbitrator(s) shall be limited to the sole issue of whether Landlord's or
Tenant's submitted Fair Market Rental Value is the closest to the actual Fair
Market Rental Value as determined by the arbitrator(s), taking into account the
requirements of Section 2.5.2.
25.2.3.2 Qualifications of Arbitrator(s). The
arbitrator(s) shall each be a licensed real estate broker who has been active in
the leasing or appraising of commercial office properties in the Concord/Walnut
Creek area over the ten-year (10-year) period ending on the date of their
appointment as arbitrator(s).
25.2.3.3 Parties' Appointment of Arbitrators. Within
fifteen (15) days after the Outside Agreement Date, Landlord and Tenant shall
each appoint one arbitrator and notify the other party of the arbitrator's name
and business address.
25.2.3.4 Appointment of Third Arbitrator. If each party
timely appoints an arbitrator, the two (2) arbitrators shall, within ten (10)
days after the appointment of the second arbitrator, agree on and appoint a
third arbitrator (who shall be qualified under the same criteria set forth above
for qualification of the initial two (2) arbitrators) and provide notice to
Landlord and Tenant of the arbitrator's name and business address.
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25.2.3.5 Arbitrators' Decision. Fair Market Rental Value
shall be determined within thirty (30) days of the appointment of the third
arbitrator and the third arbitrator shall notify Landlord and Tenant hereof
immediately. The arbitrators shall have the right to consult experts and
competent authorities for factual information or evidence pertaining to a
determination of Fair Market Rental Value, but any such consultation shall be
made in the presence of both parties, with full right on their parts to
cross-examine. Each party-appointed arbitrator shall state in writing his or her
determination of Fair Market Rental Value, supported by the reasons therefor,
and shall make counterpart copies for each of the other arbitrators. The
arbitrators shall arrange for simultaneous exchange of such proposed resolutions
and the three appraisals shall be added together and their total divided by
three; the resulting quotient shall be the Fair Market Rental Value. If,
however, the low appraisal and/or the high appraisal is/are more than ten
percent (10%) lower and/or higher than the middle appraisal, the appraisal(s)
exceeding such ten percent (10%) limit shall be disregarded. If only one
appraisal is disregarded, the remaining two appraisals shall be added together
and their total divided by two; the resulting quotient shall be the Fair Market
Rental Value. If both the low appraisal and the high appraisal are disregarded
as stated in this Section, the middle appraisal shall be the Fair Market Rental
Value.
25.2.3.6 If Only One Arbitrator Is Appointed. If either
Landlord or Tenant fails to appoint an arbitrator within fifteen (15) days after
the Outside Agreement Date, the arbitrator timely appointed by one of them shall
reach a decision and notify Landlord and Tenant of that decision within thirty
(30) days after the arbitrator's appointment. The arbitrator's decision shall be
binding on Landlord and Tenant.
25.2.3.7 If Only Two Arbitrators Are Appointed. If each
party appoints an arbitrator in a timely manner, but the two (2) arbitrators
fail to agree on and appoint a third arbitrator within the required period, the
arbitrators shall be dismissed without delay and the issue of Fair Market Rental
Value shall be submitted to binding arbitration under the Commercial Real Estate
Arbitration rules of the American Arbitration Association ("AAA"), subject to
the provisions of this Section 25.3.
25.2.3.8 If No Arbitrator Is Appointed. If Landlord and
Tenant each fail to appoint an arbitrator in a timely manner, the matter to be
decided shall be submitted without delay to binding arbitration under Commercial
Real Estate Arbitration rules of AAA, subject to the provisions of this Section
25.3.
25.2.3.9 Cost of Arbitration. The cost of the
arbitration shall be paid by the losing party.
Article 26
ATTORNEY FEES AND COSTS
26.1 Attorney Fees and Costs. If either party undertakes litigation
against the other party arising out of or in connection with this Lease, the
prevailing party shall be entitled to recover from the other party reasonable
attorney fees and court costs incurred. The prevailing party shall be determined
under Civil Code Section 1717(b)(1) or any successor statute.
Article 27
LANDLORD'S ACCESS TO PREMISES
27.1 Landlord's Access to Premises. Landlord and its agents may, at
reasonable times and on reasonable oral or written notice to Tenant, enter the
Premises to:
(a) Inspect the Premises; (b) show the Premises to prospective
purchasers or mortgagees or to ground lessors or underlying lessors; (c) show
the Premises, during the final year of the Lease Term, to prospective tenants;
(d) serve, post, and keep posted notices; (e) repair, alter, or improve the
Premises or Building that Landlord deems necessary or desirable; (f) make
necessary repairs to the Building structure or systems; (g) perform services
required or permitted of Landlord by law or by this Lease; (h) perform any
covenants of Tenant that Tenant fails to perform, in accordance with Article 22;
or (i) such other matters as Landlord reasonably deems necessary or desirable.
27.2 Restrictions on Entry; Tenant's Waiver. To the extent reasonably
practicable, Landlord shall exercise its rights under this Article 27 at such
times and in such a manner as to reasonably minimize the impact on Tenant's
business in and occupancy of the Premises. Except in an emergency or when
accompanied by an authorized representative of Tenant, Landlord shall not enter
Tenant's vaults or the special security areas designated in writing by Tenant.
Landlord may enter the Premises under this Article 27 without the
abatement of Rent, subject to Section 21.7, and may take reasonable steps to
accomplish the stated purposes. Tenant waives any claims for damages caused by
Landlord's entry, in accordance with this Article 27, including damage claims
for (a) injuries; (b) inconvenience to or interference with Tenant's business;
(c) lost profits; and (d) loss of occupancy or quiet enjoyment of the Premises,
except to the extent any of the foregoing are caused by the negligence or
willful misconduct of Landlord or any of Landlord's agents.
27.3 Method of Entry. Landlord shall at all times have a key or, if
applicable, a card key with which to unlock all the doors in the Premises,
excluding Tenant's vaults, safes, and special security areas designated in
writing by notice to Landlord. In an emergency situation, Landlord shall have
the right to use any means that Landlord considers proper to open the doors in
and to the Premises. Any such entry into the Premises by Landlord shall not be
considered a forcible or unlawful entry into, or a detainer of, the Premises or
an actual or constructive eviction of Tenant from any portion of the Premises.
27.4 Emergency Entry. Despite any other provision of this Article 27,
Landlord and Landlord's agents may enter the Premises without any advance notice
when necessary to address emergency situations. For purposes of this Article, an
emergency situation is one that poses a threat of imminent bodily harm or
property damage. If Landlord makes an emergency entry onto the Premises when no
authorized representative of Tenant is present, Landlord shall provide telephone
notice to Tenant as soon as
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reasonably possible within twenty-four (24) hours after that entry and shall
take reasonable steps to secure the Premises until a representative of Tenant
arrives at the Premises.
Article 28
SIGNS
28.1 Building Name; Landlord's Signage Rights. Subject to Tenant's
signage rights under this Article 28, Landlord may at any time change the name
of the Building and install, affix, and maintain all signs on the Real Property
as Landlord may, in Landlord's sole discretion, desire. Tenant shall not have or
acquire any property right or interest in the name of the Building. Tenant may
use the name of the Real Property.
28.2 Tenant's Signage Rights.
28.2.1. Tenant's Monument Sign. Tenant shall have the
non-exclusive right to construct a monument sign located on the Real Property
and fronting on Systron Drive to display Tenant's trade name and direct
visitor's to Tenant's driveway ("Monument Sign"). Tenant's right to maintain its
name on the Monument Sign shall be subject to the following requirements:
(a) All expenses in connection with the construction,
installation, and maintenance of Tenant's sign shall be paid by Tenant.
(b) The design, size, location, materials, colors, and
lighting of the Monument Sign shall be approved by Landlord in Landlord's
reasonable discretion.
(c) Tenant must obtain all applicable permits and
authorizations by government authorities before beginning to install Tenant's
name on the Monument Sign.
(d) Tenant shall maintain repair and insure the Monument
Sign at Tenant's sole cost and expense.
28.2.2. Nontransferability. Tenant's signage rights under this
Section 28.2.2. may not be assigned to any assignee of this Lease or to any
subtenant of Tenant.
28.2.3. Removal, Repair, and Restoration. On termination or
expiration of the Lease Term or on expiration of Tenant's sign rights under this
Section 28, Landlord shall have the right to permanently remove the Monument
Sign or permanently remove Tenant's name (including its logo) from the Monument
Sign, repair any damage to the Monument Sign resulting from the removal of
Tenant's name, and restore the land on which the Monument Sign was located to
the condition that existed before the installation of the Monument Sign. Tenant
shall pay to Landlord, within thirty (30) days after demand, all expenses
incurred in connection with that removal, repair, and restoration.
28.2.4. Prohibited Signs and Other Items. Tenant may not display
any signs on the exterior or roof of the Building or in the Common Areas of the
Building or the Real Property. Tenant may not install or display any signs,
window coverings, blinds (even if located behind the Landlord-approved window
coverings for the Building), or other items visible from the exterior of the
Premises without Landlord's prior written approval, which Landlord may, in
Landlord's sole discretion, grant or withhold. Any signs, notices, logos,
pictures, names, or advertisements that are installed by or for Tenant without
Landlord's approval may be removed without notice by Landlord at Tenant's
expense.
28.2.5. Directory. Landlord shall, at Landlord's sole expense,
provide and maintain throughout the Lease Term a directory on the Real Property
exclusively for the display of the names and suite numbers of tenants on the
Real Property. Tenant is entitled to display its name and Premises address in
the directory without additional expense to Tenant.
Article 29
TENANT PARKING
29.1 Number of Parking Spaces. Tenant shall be entitled to use
throughout the Lease Term the number of unreserved parking spaces for use in
common with other tenants of the Real Property in the Common Area up to the
maximum number set forth in Summary Section 12.
29.2 Changes in Location, Layout, and Service. Landlord specifically
reserves the right to grant reserved spaces, change the location, size,
configuration, design, layout, and all other aspects of the parking facility.
Landlord may close off or restrict access to the parking facility from time to
time to facilitate construction, alteration, or improvements, without incurring
any liability to Tenant and without any abatement of Rent under this Lease.
Landlord shall have no obligation to police or patrol the parking area.
Article 30
MISCELLANEOUS
30.1 Captions. The captions of articles and Sections and the table of
contents of this Lease are for convenience only and have no effect on the
interpretation of the provisions of this Lease.
30.2 Word Usage. Unless the context clearly requires otherwise:
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(a) The plural and singular numbers shall each be
considered to include the other; (b) the masculine, feminine, and neuter genders
shall each be considered to include the others; (c) "shall," "will," "must,"
"agrees," and "covenants" are each mandatory; (d) "may" is permissive; (e) "or"
is not exclusive; and (f) "includes" and "including" are not limiting.
30.3 Counting Days. Days shall be counted by excluding the first day
and including the last day. For purposes of this Agreement, "Business Day" means
any day other than Saturday, Sunday or a holiday observed by national or
federally chartered banks. If the last day is a Saturday, Sunday, or legal
holiday as described in Government Code Sections 6700- 6701, it shall be
excluded. Any act required by this Lease to be performed by a certain day shall
be timely performed if completed before 5 p.m. local time on that date. If the
day for performance of any obligation under this Lease is a Saturday, Sunday, or
legal holiday, the time for performance of that obligation shall be extended to
5 p.m. local time on the first following date that is not a Saturday, Sunday, or
legal holiday.
30.4 Entire Agreement; Amendments. This Lease and all exhibits
referred to in this Lease constitute the final, complete, and exclusive
statement of the terms of the agreement between Landlord and Tenant pertaining
to Tenant's lease of space in the Real Property and supersedes all prior and
contemporaneous understandings or agreements of the parties. Neither party has
been induced to enter into this Lease by, and neither party is relying on, any
representation or warranty outside those expressly set forth in this Lease. This
Lease may be amended only by an agreement in writing signed by Landlord and
Tenant.
30.5 Exhibits. The Exhibits if applicable, attached to this Lease are
a part of this Lease and incorporated into this Lease by reference.
30.6 Partial Invalidity. If a court or arbitrator of competent
jurisdiction holds any Lease clause to be invalid or unenforceable in whole or
in part for any reason, the validity and enforceability of the remaining
clauses, or portions of them, shall not be affected.
30.7 Binding Effect. Subject to Article 16, this Lease shall bind and
benefit the parties to this Lease and their legal representatives and successors
in interest.
30.8 Independent Covenants. This Lease shall be construed as though
its covenants between Landlord and Tenant are independent and not dependent.
30.9 Governing Law. This Lease shall be construed and enforced in
accordance with the laws of the State of California.
30.10 Notices. All notices (including requests, demands, approvals,
or other communications) under this Lease shall be in writing.
30.10.1. Method of Delivery. Notice shall be sufficiently given
for all purposes as follows:
(a) When personally delivered to the recipient, notice
is effective on delivery.
(b) When mailed first class to the last address of the
recipient known to the party giving notice, notice is effective on delivery.
(c) When mailed by certified mail with return receipt
requested, notice is effective on receipt if delivery is confirmed by a return
receipt.
(d) When delivered by overnight delivery Federal
Express/Airborne/United Parcel Service/DHL WorldWide Express with charges
prepaid or charged to the sender's account, notice is effective on delivery if
delivery is confirmed by the delivery service.
(e) When sent by telex or fax to the last telex or fax
number of the recipient known to the party giving notice, notice is effective on
receipt as long as (1) a duplicate copy of the notice is promptly given by
first-class or certified mail or by overnight delivery or (2) the receiving
party delivers a written confirmation of receipt. Any notice given by telex or
fax shall be considered to have been received on the next Business Day if it is
received after 5 p.m. (recipient's time) or on a nonbusiness day.
30.10.2. Refused, Unclaimed, or Undeliverable Notices. Any
correctly addressed notice that is refused, unclaimed, or undeliverable because
of an act or omission of the party to be notified shall be considered to be
effective as of the first date that the notice was refused, unclaimed, or
considered undeliverable by the postal authorities, messenger, or overnight
delivery service.
30.10.3. Addresses. Addresses for purposes of giving notice are
set forth in Summary Section 13. Either party may change its address or telex or
fax number by giving the other party notice of the change in any manner
permitted by this Section 30.11.
30.10.4. Lenders and Ground Lessor. If Tenant is notified of the
identity and address of Landlord's lender or ground or underlying lessor, Tenant
shall give to that lender or ground or underlying lessor written notice of any
default by Landlord under the terms of this Lease.
30.11 Force Majeure--Specific Exceptions. The time for performance of
an obligation other than the payment of money under this Lease shall be extended
for the period during which a party is prevented from performing by acts of God,
government, or other force or event beyond the reasonable control of that party.
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30.12 Time of the Essence. Time is of the essence of this Lease and
each of its provisions and Exhibits.
30.13 Modifications Required by Landlord's Lender. If any
institutional lender of Landlord (e.g., bank, savings and loan association,
pension fund, insurance company, real estate investment trust) reasonably
requires a modification of this Lease, Tenant shall agree to that modification
as long as:
(a) Base Rent, Additional Rent, and any other amounts required
to be paid under this Lease, and the time and manner of payment, will not be
changed.
(b) The Term (including any Option Terms and the times governing
Tenant's exercise of any options) will not be changed.
(c) Tenant's possession of the Premises and rights to possession
and use of other parts of the Building and Real Property will not be changed.
(d) Landlord's obligations to Tenant under this Lease will not
be reduced, and Tenant's obligations to Landlord under this Lease will not be
increased.
Tenant shall execute an amendment to this Lease evidencing
modifications required and permitted under this Section 30.13 within a
reasonable time after receipt of a written request.
30.14 Recording. Neither this Lease nor any short form of this Lease
shall be recorded.
30.15 Liability of Landlord. The liability of Landlord (including all
persons and entities that comprise Landlord, and any successor landlord) and any
recourse by Tenant against Landlord under all provision of this Lease shall be
limited to the interest of Landlord and Landlord's successors in interest in and
to the Real Property. On behalf of itself and all persons claiming by, through,
or under Tenant, Tenant expressly waives and releases Landlord from any personal
liability for breach of this Lease.
30.16 Transfer of Landlord's Interest. On a transfer of all of
Landlord's interest in the Building and Real Property and in this Lease,
Landlord shall be released from all liability and obligations under this Lease
that accrue after the effective date of transfer, and the following
restrictions:
(a) Landlord shall not be released from its obligations under
this Lease unless the transferee agrees in writing, for the benefit of Tenant,
to assume Landlord's obligations under this Lease from and after the date of
transfer; and
(b) If Landlord assigns its interest in this Lease to a lender
as additional security, this assignment shall not release Landlord from its
obligations under this Lease;
30.17 Submission of Lease. Submission of this document for
examination or signature by the parties does not constitute an option or offer
to lease the Premises on the terms in this document or a reservation of the
Premises in favor of Tenant. This document is not effective as a lease or
otherwise until executed and delivered by both Landlord and Tenant.
30.18 Legal Authority.
30.18.1. Corporate Authority. If either party is a corporation:
(a) Each individual signing this Lease on behalf of that
corporation represents and warrants that each of them is duly authorized to
execute and deliver this Lease on behalf of the corporation;
(b) That the corporation is duly organized and validly
existing under the laws of a state of the United States; and
(c) That corporation and the individuals signing this
Lease on its behalf covenant that, within thirty (30) days after the date of
this Lease, the corporation shall deliver to the other party a duly certified
copy of a resolution of the corporation's board of directors authorizing
execution of this Lease.
30.18.2. Partnership Authority. If either party is a partnership
or a limited liability partnership, each individual executing this Lease on
behalf of the partnership represents and warrants that:
(a) Each of them is duly authorized to execute and
deliver this Lease on behalf of the partnership in accordance with the
partnership agreement, or an amendment to the partnership agreement, now in
effect; and
(b) That the partnership and the individual signing this
Lease on its behalf covenant that, within fifteen (15) days after the date of
this Lease, the partnership shall deliver to Landlord a duly certified copy of a
resolution, a certificate or other evidence reasonably satisfactory to Landlord
that the partnership has authorized execution of this Lease.
30.18.3. Limited Liability Company Authority. If either party is
a limited liability company, each individual executing this Lease on behalf of
that company represents and warrants that:
(a) The individual(s) executing this Lease on behalf of
the company have full power and authority under the company's governing
documents to execute and deliver this Lease in the name of and on behalf of the
company;
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(b) The company is a limited liability company duly
organized and validly existing under the laws of a state of the United States;
and
(c) The company and the individuals signing this Lease
on his behalf covenant that, within fifteen (15) days after the date of this
Lease, the company shall deliver to the Landlord a duly certified copy of a
resolution or other document reasonably satisfactory to Landlord confirming
authorization of the execution of this Lease.
30.19 Right To Lease. Landlord reserves the absolute right to
contract with any other person or entity to be a tenant in the Building as
Landlord, in Landlord's sole business judgment, determines best to promote the
interests of the Building. Tenant does not rely on the expectation, and Landlord
does not represent, that any specific tenant or type or number of tenants will,
during the Lease Term, occupy any space in the Building.
30.20 No Air Rights. No rights to any view from the Premises or to
exterior light or air to the Premises are created under this Lease.
30.21 Brokers. Landlord and Tenant each represents to the other that
it has had no dealings with any real estate broker or agent in connection with
the negotiation of this Lease, except for the real estate brokers or agents
specified in Summary Section 14 (Brokers) and that they know of no other real
estate broker or agent who is entitled to a commission or finder's fee in
connection with this Lease. Tenant acknowledges that Sean Cooley, Vice President
of Cornish & Carey Commercial, is the acting broker for Landlord in this
transaction as well as a principal of Landlord. Tenant consents to Mr. Cooley's
role as a principal of Landlord and waives any potential conflict of interest
arising therefrom. Each party shall indemnify, protect, defend, and hold
harmless the other party against all claims, demands, losses, liabilities,
lawsuits, judgments, and costs and expenses (including reasonable attorney fees)
for any leasing commission, finder's fee, or equivalent compensation alleged to
be owing on account of the indemnifying party's dealings with any real estate
broker or agent other than the Brokers. Landlord agrees to pay a commission to
the Brokers regarding this transaction pursuant to a separate agreement with
such Brokers. The terms of this Section 30.21 shall survive the expiration or
earlier termination of the Lease Term.
30.22 Guaranty. National Insurance Group, Tenant's parent company,
shall guaranty Tenant's performance and obligations under this Lease during the
first three (3) Lease Years in the form attached as Exhibit F (the "Guaranty").
If after the first three (3) Lease Years, Tenant's net worth falls below its
level as of the date of execution of this Lease, the Guaranty shall be
immediately reinstated for an additional three (3) Lease Years. Tenant agrees to
provide Landlord with confidential financial statements establishing its net
worth on an annual basis, or more frequently as requested by Landlord, but in no
event more often than quarterly. Landlord agrees to keep such financial
statements confidential and shall not disclose them to any persons other than
its attorneys or other professional advisors whose review may be reasonably
necessary to assist Landlord in evaluating Tenant's financial status. For
purposes of this Section 30.22, "net worth" shall be calculated according to
Generally Accepted Accounting Principles.
Executed as of the date stated in Summary Section 1.
Landlord: Tenant:
Systron Business Center, LLC Pinnacle Data Corporation
a California limited liability company a California corporation
By: /s/ Sean M. Cooley By: /s/ Donald S. Grant
----------------------------------- ----------------------------------
Sean M. Cooley Name: Donald S. Grant
Title: Vice President/Facilities
By: /s/ Jeff Wilcox
----------------------------------
Jeff Wilcox
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Exhibit 10.30
[IMPERIAL BANK LETTERHEAD]
March 20, 1998
Mr. Gregory S. Saunders
Executive Vice President
National Insurance Group
395 Oyster Point Blvd., Suite 500
South San Francisco, CA 94080
Re: Loan #716065529/#250 - $1,000,000 revolving line of credit
Dear Greg:
Imperial Bank has approved an extension of your credit facility shown above as
evidenced by that Note dated September 11, 1997 from its current maturity date
of May 31, 1998 to March 31, 1999.
Except as modified and extended hereby, the existing documentation as amended
concerning your obligation remains in full force and effect. Please acknowledge
your acceptance in the space provided below and return this letter to the
undersigned no later than March 30,1998.
Best personal regards,
/s/ Joseph J. McCarthy
- ---------------------------
Joseph J. McCarthy
Vice President
Acknowledged and Agreed to:
National Insurance Group
By: /s/ Greg Saunders
--------------------------
Gregory S. Saunders
Date: March 20, 1998
<PAGE> 1
EXHIBIT 10.34
FRANKLIN TEMPLETON VALUSELECT
DEFINED CONTRIBUTION PLAN
Copyright 1996 Franklin Templeton Investor Services, Inc.
[LOGO]
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
ARTICLE II
TOP HEAVY PROVISIONS AND ADMINISTRATION
<TABLE>
<S> <C>
2.1 TOP HEAVY PLAN REQUIREMENTS ........................................13
2.2 DETERMINATION OF TOP HEAVY STATUS ..................................13
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER ........................16
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY ............................16
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES ......................16
2.6 POWERS AND DUTIES OF THE ADMINISTRATOR .............................17
2.7 RECORDS AND REPORTS ................................................18
2.8 APPOINTMENT OF ADVISERS ............................................18
2.9 INFORMATION FROM EMPLOYER ..........................................18
2.10 PAYMENT OF EXPENSES ................................................18
2.11 MAJORITY ACTIONS ...................................................18
2.12 CLAIMS PROCEDURE ...................................................18
2.13 CLAIMS REVIEW PROCEDURE ............................................18
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY ..........................................19
3.2 EFFECTIVE DATE OF PARTICIPATION ....................................19
3.3 DETERMINATION OF ELIGIBILITY .......................................19
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
3.4 TERMINATION OF ELIGIBILITY .........................................20
3.5 OMISSION OF ELIGIBLE EMPLOYEE ......................................20
3.6 INCLUSION OF INELIGIBLE EMPLOYEE ...................................20
3.7 ELECTION NOT TO PARTICIPATE ........................................20
3.8 CONTROL OF ENTITIES BY OWNER-EMPLOYEE ..............................20
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION ....................21
4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION .........................22
4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS ...............22
4.4 MAXIMUM ANNUAL ADDITIONS ...........................................26
4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS ..........................32
4.6 TRANSFERS FROM QUALIFIED PLANS .....................................32
4.7 VOLUNTARY CONTRIBUTIONS ............................................33
4.8 DIRECTED INVESTMENT ACCOUNT ........................................34
4.9 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS .........................34
4.10 ACTUAL CONTRIBUTION PERCENTAGE TESTS ...............................35
4.11 INTEGRATION IN MORE THAN ONE PLAN ..................................35
ARTICLE V
VALUATIONS
5.1 VALUATION OF THE TRUST FUND ........................................35
5.2 METHOD OF VALUATION ................................................35
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE VI
DETERMINATION AND DISTRIBUTION OF BENEFITS
6.1 DETERMINATION OF BENEFITS UPON RETIREMENT ..........................36
6.2 DETERMINATION OF BENEFITS UPON DEATH ...............................36
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY ...................37
6.4 DETERMINATION OF BENEFITS UPON TERMINATION .........................37
6.5 DISTRIBUTION OF BENEFITS ...........................................40
6.6 DISTRIBUTION OF BENEFITS UPON DEATH ................................43
6.7 TIME OF SEGREGATION OR DISTRIBUTION ................................47
6.8 DISTRIBUTION FOR MINOR BENEFICIARY .................................47
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN .....................47
6.10 PRE-RETIREMENT DISTRIBUTION ........................................47
6.11 ADVANCE DISTRIBUTION FOR HARDSHIP ..................................47
6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS ..........................48
6.13 SPECIAL RULE FOR NON-ANNUITY PLANS .................................48
ARTICLE VII
TRUSTEE
7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE ..............................49
7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE ........................49
7.3 OTHER POWERS OF THE TRUSTEE ........................................51
7.4 LOANS TO PARTICIPANTS ..............................................54
7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS ...........................55
7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES ......................55
7.7 ANNUAL REPORT OF THE TRUSTEE .......................................56
7.8 AUDIT ..............................................................56
</TABLE>
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<TABLE>
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7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE .....................57
7.10 TRANSFER OF INTEREST ...............................................57
7.11 TRUSTEE INDEMNIFICATION ............................................58
7.12 EMPLOYER SECURITIES AND REAL PROPERTY ..............................58
ARTICLE VIII
AMENDMENT, TERMINATION, AND MERGERS
8.1 AMENDMENT ..........................................................58
8.2 TERMINATION ........................................................59
8.3 MERGER OR CONSOLIDATION ............................................59
ARTICLE IX
MISCELLANEOUS
9.1 EMPLOYER ADOPTIONS .................................................60
9.2 PARTICIPANT'S RIGHTS ...............................................60
9.3 ALIENATION .........................................................60
9.4 CONSTRUCTION OF PLAN ...............................................61
9.5 GENDER AND NUMBER ..................................................61
9.6 LEGAL ACTION .......................................................61
9.7 PROHIBITION AGAINST DIVERSION OF FUNDS .............................61
9.8 BONDING ............................................................61
9.9 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE .........................62
9.10 INSURER'S PROTECTIVE CLAUSE ........................................62
9.11 RECEIPT AND RELEASE FOR PAYMENTS ...................................62
9.12 ACTION BY THE EMPLOYER .............................................62
9.13 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY .................62
</TABLE>
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<TABLE>
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9.14 HEADINGS ...........................................................63
9.15 APPROVAL BY INTERNAL REVENUE SERVICE ...............................63
9.16 UNIFORMITY .........................................................63
9.17 PAYMENT OF BENEFITS ................................................63
ARTICLE X
PARTICIPATING EMPLOYERS
10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER ........................63
10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS ............................63
10.3 DESIGNATION OF AGENT ...............................................64
10.4 EMPLOYEE TRANSFERS .................................................64
10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES ..............64
10.6 AMENDMENT ..........................................................64
10.7 DISCONTINUANCE OF PARTICIPATION ....................................65
10.8 ADMINISTRATOR'S AUTHORITY ..........................................65
10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE ..................65
ARTICLE XI
CASH OR DEFERRED PROVISIONS
11.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION ....................65
11.2 PARTICIPANT'S SALARY REDUCTION ELECTION ............................66
11.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS ...............69
11.4 ACTUAL DEFERRAL PERCENTAGE TESTS ...................................71
11.5 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS .....................73
11.6 ACTUAL CONTRIBUTION PERCENTAGE TESTS ...............................76
</TABLE>
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<TABLE>
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11.7 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS .................78
11.8 ADVANCE DISTRIBUTION FOR HARDSHIP ..................................81
</TABLE>
<PAGE> 8
ARTICLE I
DEFINITIONS
As used in this Plan, the following words and phrases shall
have the meanings set forth herein unless a different meaning is clearly
required by the context:
1.1 "ACT" means the Employee Retirement Income Security Act of 1974,
as it may be amended from time to time.
1.2 "ADMINISTRATOR" means the person(s) or entity designated by the
Employer pursuant to Section 2.4 to administer the Plan on behalf of the
Employer.
1.3 "ADOPTION AGREEMENT" means the separate Agreement which is executed
by the Employer and accepted by the Trustee which sets forth the elective
provisions of this Plan and Trust as specified by the Employer.
1.4 "AFFILIATED EMPLOYER" means the Employer and any corporation which
is a member of a controlled group of corporations (as defined in Code Section
414(b)) which includes the Employer; any trade or business (whether or not
incorporated) which is under common control (as defined in Code Section 414(c))
with the Employer; any organization (whether or not incorporated) which is a
member of an affiliated service group (as defined in Code Section 414(m)) which
includes the Employer; and any other entity required to be aggregated with the
Employer pursuant to Regulations under Code Section 414(o).
1.5 "AGGREGATE ACCOUNT" means with respect to each Participant, the
value of all accounts maintained on behalf of a Participant, whether
attributable to Employer or Employee contributions, subject to the provisions of
Section 2.2.
1.6 "ANNIVERSARY DATE" means the anniversary date specified in C3 of
the Adoption Agreement.
1.7 "BENEFICIARY" means the person to whom a share of a deceased
Participant's interest in the Plan is payable, subject to the restrictions of
Sections 6.2 and 6.6.
1.8 "CODE" means the Internal Revenue Code of 1986, as amended or
replaced from time to time.
1.9 "COMPENSATION" with respect to any Participant means one of the
following as elected in the Adoption Agreement. However, Compensation for any
Self-Employed Individual shall be equal to his Earned Income.
(a) Information required to be reported under Sections
6041, 6051 and 6052 (wages, tips and Other Compensation Box on
Form W-2). Compensation is defined as wages, as defined in Code
Section 3401(a) and all other payments of Compensation to an
Employee by the Employer (in the course of the Employer's trade or
business) for which the Employer is required to furnish the
Employee a written statement under Code Sections 6041 (d) and
6051(a)(3). Compensation must be determined without regard to any
rules under Code Section 3401(a) that limit the remuneration
included in wages based on the nature or location of the
employment or the services performed (such as the exception for
agricultural labor in Section 3401(a)(2)).
(b) Section 3401 (a) wages. Compensation is defined as
wages within the meaning of Code Section 3401 (a) for the purposes
of income tax withholding at the source but determined without
regard to any rules that limit the remuneration included in wages
based on the nature or location
1
<PAGE> 9
of the employment or the services performed (such as the exception
for agricultural labor in Code Section 3401 (a)(2)).
(c) 415 safe-harbor compensation. Compensation is defined
as wages, salaries, and fees for professional services and other
amounts received (without regard to whether or not an amount is
paid in cash) for personal services actually rendered in the
course of employment with the Employer maintaining the Plan to the
extent that the amounts are includible in gross income (including,
but not limited to, commissions paid salesmen, compensation for
services on the basis of a percentage of profits, commissions on
insurance premiums, tips, bonuses, fringe benefits, and
reimbursements, or other expense allowances under a nonaccountable
plan (as described in Regulation Section 1.62-2(c)), and excluding
the following:
(1) Employer contributions to a plan of deferred
compensation which are not includible in the Employee's
gross income for the taxable year in which contributed, or
Employer contributions under a simplified employee pension
plan to the extent such contributions are deductible by
the Employee, or any distributions from a plan of deferred
compensation;
(2) Amounts realized from the exercise of a nonqualified
stock option, or when restricted stock (or property) held
by the Employee either becomes freely transferable or is
no longer subject to a substantial risk of forfeiture;
(3) Amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock
option; and
(4) Other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under a
salary reduction agreement) towards the purchase of an
annuity contract described in section 403(b) of the
Internal Revenue Code (whether or not the contributions
are actually excludable from the gross income of the
Employee).
If, in connection with the adoption of any amendment, the
definition of Compensation has been modified, then, for Plan Years prior to the
Plan Year which includes the adoption date of such amendment, Compensation means
compensation determined pursuant to the Plan then in effect.
In addition, if specified in the Adoption Agreement,
Compensation for all Plan purposes shall also include compensation which is not
currently includible in the Participant's gross income by reason of the
application of Code Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b).
Compensation in execs of $200.00 shall be disregarded. Such
amount shall be adjusted at the same time and in such manner as permitted under
Code Section 415(d). In applying this limitation, the family group of a Highly
Compensated Participant who is subject to the Family Member aggregation rules of
Code Section 414(q)(6) because such Participant is either a "five percent owner"
of the Employer or one of the ten (10) Highly Compensated Employees paid the
greatest "415 Compensation" during the year, shall be treated as a single
Participant, except that for this purpose Family Members shall include only the
affected Participant's spouse and any lineal descendants who have not attained
age nineteen (19) before the close of the year. If, as a result of the
application of such rules, the adjusted $200,000 limitation is exceeded, then
(except for purposes of determining the portion of compensation up to the
integration level if this plan is integrated), the limitation shall be prorated
among the affected individuals in proportion to each such individual's
Compensation as determined under this Section prior to the application of this
limitation.
For Plan Years beginning prior to January 1, 1989, the
$200,000 limit (without regard to Family Member aggregation) shall apply only
for Top Heavy Plan Years and shall not be adjusted.
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<PAGE> 10
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 for
each Employee taken into account under the Plan shall not exceed the OBRA '93
annual Compensation limit. The OBRA '93 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 that prior determination period is subject to the OBRA '93
Compensation limit in effect for that prior determination period. For this
purpose, for determination periods beginning before the first day of the Plan
Year beginning on or after January 1, 1994, the OBRA '93 annual Compensation
limit is $150,000.
1.10 "CONTRACT" or "POLICY" means any life insurance policy, retirement
income policy, or annuity contract (group or individual) issued by the Insurer.
In the event of any conflict between the terms of this Plan and the terms of any
insurance contract purchased hereunder, the Plan provisions shall control.
1.11 "DEFERRED COMPENSATION" means, with respect to any Participant,
that portion of the Participant's total Compensation which has been contributed
to the Plan in accordance with the Participant's deferral election pursuant to
Section 11.2.
1.12 "EARLY RETIREMENT DATE" means the date specified in the Adoption
Agreement on which a Participant or Former Participant has satisfied the age and
service requirements specified in the Adoption Agreement (Early Retirement Age).
A Participant shall become fully Vested upon satisfying this requirement if
still employed at his Early Retirement Age.
A Former Participant who terminates employment after
satisfying the service requirement for Early Retirement and who thereafter
reaches the age requirement contained herein shall be entitled to receive his
benefits under this Plan.
1.13 "EARNED INCOME" means with respect to a Self-Employed Individual,
the net earnings from self-employment in the trade or business with respect to
which the Plan is established, for which the personal services of the individual
are a material income-producing factor. Net earnings will be determined without
regard for items not included in gross income and the deductions allocable to
such items. Net earnings are reduced by contributions by the Employer to a
qualified Plan For the extent deductible under Code Section 404. In addition,
for Plan Years beginning after December 31, 1989, net earnings shall be
determined with regard to the deduction allowed For the Employer by Code Section
164(f).
1.14 "ELECTIVE CONTRIBUTION" means the Employer's contributions to the
Plan that are made pursuant to the Participant's deferral election pursuant to
Section 11.2, excluding any such amounts distributed as "excess annual
additions" pursuant to Section 4.4. In addition, if selected in E3 of the
Adoption Agreement, the Employer's matching contribution made pursuant to
Section 11.1 (b) shall or shall not be considered an Elective Contribution for
purposes of the Plan, as provided in Section 11.1(b). Elective Contributions
shall be subject to the requirements of Sections 11.2(b) and 11.2(c) and shall
further be required For satisfy the
3
<PAGE> 11
discrimination requirements of Regulation 1.401(k)-1(b)(3), the provisions of
which are specifically incorporated herein by reference.
1.15 "ELIGIBLE EMPLOYEE" means any Employee specified in DI of the
Adoption Agreement.
1.16 "EMPLOYEE" means any person who is employed by the Employer, but
excludes any person who is employed as an independent contractor. The term
Employee shall also include Leased Employees as provided in Code Section 414(n)
or (o).
Except as provided in the Non-Standardized Adoption Agreement,
all Employees of all entities which are an Affiliated Employer will be treated
as employed by a single employer
1.17 "EMPLOYER" means the entity specified in the Adoption Agreement,
any Participating Employer (as defined in Section 10.1) which shall adopt this
Plan, any successor which shall maintain this Plan and any predecessor which has
maintained this Plan.
1.18 "EXCESS COMPENSATION" means, with respect to a Plan that is
integrated with Social Security, a Participant's Compensation which is in excess
of the amount set forth in the Adoption Agreement.
1.19 "EXCESS CONTRIBUTIONS" means, with respect to a Plan Year, the
excess of Elective Contributions and Qualified Non-Elective Contributions made
on behalf of Highly Compensated Participants for the Plan Year over the maximum
amount of such contributions permitted under Section 11.4(a).
1.20 "EXCESS DEFERRED COMPENSATION" means, with respect to any taxable
year of a Participant, the excess of the aggregate amount of such Participant's
Deferred Compensation and the elective deferrals pursuant to Section 11.2(f)
actually made on behalf of such Participant for such taxable year, over the
dollar limitation provided for in Code Section 402(g), which is incorporated
herein by reference. Excess Deferred Compensation shall be treated as an "annual
addition" pursuant to Section 4.4 when contributed to the Plan unless
distributed to the affected Participant not later than the first April l5th
following the close of the Participant's taxable year.
1.21 "FAMILY MEMBER" means, with respect to an affected Participant,
such Participant's spouse, and such Participant's lineal descendants and
ascendants and their spouses, all as described in Code Section 414(q)(6)(B).
1.22 "FIDUCIARY" means any person who (a)exercises any discretionary
authority or discretionary control respecting management of the Plan or
exercises any authority or control respecting management or disposition of its
assets, (b) renders investment advice for a fee or other compensation, direct or
indirect, with respect to any monies or other property of the Plan or has any
authority or responsibility to do so, or (c) has any discretionary authority or
discretionary responsibility in the administration of the Plan, including, but
not limited to, the Trustee, the Employer and its representative body, and the
Administrator.
1.23 "FISCAL YEAR" means the Employer's accounting year as specified in
the Adoption Agreement.
1.24 "FORFEITURE" means that portion of a Participant's Account that
is not Vested, and occurs on the earlier of:
(a) the distribution of the entire Vested portion of a
Participant's Account, or
(b) the last day of the Plan Year in which the Participant
incurs five (5) consecutive 1-Year Breaks in Service.
4
<PAGE> 12
Furthermore, for purposes of paragraph (a) above, in the case
of a Terminated Participant whose Vested benefit is zero, such Terminated
Participant shall be deemed to have received a distribution of his Vested
benefit upon his termination of employment. In addition, the term Forfeiture
shall also include amounts deemed to be Forfeitures pursuant to any other
provision of this Plan.
1.25 "FORMER PARTICIPANT" means a person who has been a Participant,
but who has ceased to be a Participant for any reason.
1.26 "414(S) COMPENSATION" with respect to any Employee means his
Compensation as defined in Section 1.9. However, for purposes of this Section,
Compensation shall be Compensation paid and, if selected in the Adoption
Agreement, shall only be recognized as of an Employee's effective date of
participation. If, in connection with the adoption of any amendment, the
definition of "414(s) Compensation" has been modified, then for Plan Years prior
to the Plan Year which includes the adoption date of such amendment, "414(s)
Compensation" means compensation determined pursuant to the Plan Year in effect.
In addition, if specified in the Adoption Agreement, "414(s)
Compensation" shall also include compensation which is not currently includible
in the Participant's gross income by reason of the application of Code Sections
125, 402(a)(8), 402(h)(1)(B), or 403(b), plus Elective Contributions
attributable to Deferred Compensation recharacterized as voluntary Employee
contributions pursuant to 11.5(a).
1.27 "415 COMPENSATION" means compensation as defined in Section
4.4(f)(2).
If, in connection with the adoption of any amendment, the
definition of "415 Compensation" has been modified, then, for Plan Years prior
to the Plan Year which includes the adoption date of such amendment, "415
Compensation" means compensation determined pursuant to the Plan then in effect.
1.28 "HIGHLY COMPENSATED EMPLOYEE" means an Employee described in Code
Section 414(q) and the Regulations thereunder and generally means an Employee
who performed services for the Employer during the "determination year" and is
in one or more of the following groups:
(a) Employees who at any time during the "determination
year" or "look-back year" were "Five percent owners" as defined in
Section 1.35(c).
(b) Employees who received "415 Compensation" during the
"look-back year" from the Employer in excess of $75,000.
(c) Employees who received "415 Compensation" during the
"look-back year" from the Employer in excess of $50,000 and were
in the Top Paid Group of Employees for the Plan Year.
(d) Employees who during the "look-back year" were
officers of the Employer (as that term is defined within the
meaning of the Regulations under Code Section 416) and received
"415 Compensation" during the "look-back year" from the Employer
greater than 50 percent of the limit in effect under Code Section
415(b)(1)(A) for any such Plan Year. The number of officers shall
be limited For the lesser of (i) 50 employees, or (ii) the greater
of 3 employees or 10 percent of all employees. If the Employer
does not have at least one officer whose annual "415 Compensation"
is in excess of 50 percent of the Code Section 415(b)(1)(A) limit,
then the highest paid officer of the Employer will be treated as a
Highly Compensated Employee.
(e) Employees who are in the group consisting of the 100
Employees paid the greatest "415 Compensation" during the
"determination year" and are also described in (b), (c) or (d)
above when these paragraphs are modified to substitute
"determination year" for "look-back year."
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<PAGE> 13
The "determination year" shall be the Plan Year for which
testing is being performed, and the "look-back year" shall be the immediately
preceding twelve-month period. However, if the Plan Year is a calendar year, or
if another Plan of the Employer so provides, then the "look-back year" shall be
the calendar year ending with or within the Plan Year for which testing is being
performed, and the "determination year" (if applicable) shall be the period of
time, if any, which extends beyond the "look-back year" and ends on the last day
of the Plan Year for which testing is being performed (the "lag period"). With
respect to this election, it shall be applied on a uniform and consistent basis
to all plans, entities, and arrangements of the Employer.
For purposes of this Section, the determination of "415
Compensation" shall be made by including amounts that would otherwise be
excluded from a Participant's gross income by reason of the application of Code
Sections 125, 402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions
made pursuant to a salary reduction agreement, Code Section 403(b).
Additionally, the dollar threshold amounts specified in (b) and (c) above shall
be adjusted at such time and in such manner as is provided in Regulations. In
the case of such an adjustment, the dollar limits which shall be applied are
those for the calendar year in which the "determination year" or "look back
year" begins.
In determining who is a Highly Compensated Employee, Employees
who are nonresident aliens and who received no earned income (within the meaning
of Code Section 911 (d)) from the Employer constituting United States source
income within the meaning of Code Section 861(a)(3) shall not be treated as
Employees. Additionally, all Affiliated Employers shall be taken into account as
a single employer and Leased Employees within the meaning of Code Sections
414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased
Employees are covered by a plan described in Code Section 414(n)(5) and are not
covered in any qualified plan maintained by the Employer. The exclusion of
Leased Employees for this purpose shall be applied on a uniform and consistent
basis for all of the Employer's retirement plans. In addition, Highly
Compensated Former Employees shall be treated as Highly Compensated Employees
without regard to whether they performed services during the "determination
year,"
1.29 "HIGHLY COMPENSATED FORMER EMPLOYEE" means a former Employee who
had a separation year prior to the "determination year" and was a Highly
Compensated Employee in the year of separation from service or in any
"determination year" after attaining age 55. Notwithstanding the foregoing, an
Employee who separated from service prior to 1987 will be treated as a Highly
Compensated Former Employee only if during the separation year (or year
preceding the separation year) or any year after the Employee attains age 55 (or
the last year ending before the Employee's 55th birthday), the Employee either
received `415 Compensation" in excess of $50,000 or was a "Five percent owner."
For purposes of this Section, "determination year," "415 Compensation" and "five
percent owner" shall be determined in accordance with Section 1.28. Highly
Compensated Former Employees shall be treated as Highly Compensated Employees.
The method set forth in this Section for determining who is a "Highly
Compensated Former Employee" shall be applied on a uniform and consistent basis
for all purposes for which the Code Section 414(q) definition is applicable.
1.30 "HIGHLY COMPENSATED PARTICIPANT" means any Highly Compensated
Employee who is eligible to participate in the Plan.
1.31 "HOUR OF SERVICE" means (1) each hour for which an Employee is
directly or indirectly compensated or entitled to compensation by the Employer
for the performance of duties during the applicable computation period; (2) each
hour for which an Employee is directly or indirectly compensated or entitled to
compensation by the Employer (irrespective of whether the employment
relationship has terminated) for reasons other than performance of duties (such
as vacation, holidays, sickness, jury duty, disability, lay-off, military duty
or leave of absence) during the applicable computation period; (3) each hour for
which back pay is awarded or agreed to by the Employer without regard For
mitigation of damages. The same Hours of Service shall not he credited both
under (1) or (2), as the case may be, and under (3).
6
<PAGE> 14
Notwithstanding the above, (i) no more than 501 Hours of
Service are required to be credited 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 computation period); (ii) an hour for which an
Employee is directly or indirectly paid, or entitled to payment, on account of a
period during which no duties are performed is not required to be credited to
the Employee if such payment is made or due under a plan maintained solely for
the purpose of complying with applicable worker's compensation, or unemployment
compensation or disability insurance laws; and (iii) Hours of Service are not
required to be credited for a payment which solely reimburses an Employee for
medical or medically related expenses incurred by the Employee.
For purposes of this Section, a payment shall be deemed to be
made by or due from the Employer regardless of whether such payment is made by
or due from the Employer directly, or indirectly through, among others, a trust
fund, or insurer, to which the Employer contributes or pays premiums and
regardless of whether contributions made or due to the trust fund, insurer, or
other entity are for the benefit of particular Employees or are on behalf of a
group of Employees in the aggregate.
An Hour of Service must be counted for the purpose of
determining a Year of Service, a year of participation for purposes of accrued
benefits, a 1-Year Break in Service, and employment commencement date (or
reemployment commencement date). The provisions of Department of Labor
regulations 2530.200b-2(b) and (c) are incorporated herein by reference.
Hours of Service will be credited for employment with all
Affiliated Employers and for any individual considered to be a Leased Employee
pursuant to Code Sections 414(n) or 414(o) and the Regulations thereunder.
Hours of Service will be determined on the basis of the method
selected in the Adoption Agreement.
1.32 "INSURER" means any legal reserve insurance company which shall
issue one or more policies under the Plan.
1.33 "INVESTMENT MANAGER" means an entity that (a) has the power to
manage, acquire, or dispose of Plan assets and (b) acknowledges fiduciary
responsibility to the Plan in writing. Such entity must be a person, firm, or
corporation registered as an investment adviser under the Investment Advisers
Act of 1940, a bank, or an insurance company.
1.34 "JOINT AND SURVIVOR ANNUITY" means an annuity for the life of a
Participant with a survivor annuity for the life of the Participant's spouse
which is not less than 1/2, nor greater than the amount of the annuity payable
during the joint lives of the Participant and the Participant's spouse. The
Joint and Survivor Annuity will be the amount of benefit which can be purchased
with the Participant's Vested interest in the Plan.
1.35 "KEY EMPLOYEE" means an Employee as defined in Code Section 416(i)
and the Regulations thereunder. Generally, any Employee or former Employee (as
well as each of his Beneficiaries) is considered a Key Employee if he, at any
time during the Plan Year that contains the "Determination Date" or any of the
preceding four (4) Plan Years, has been included in one of the following
categories:
(a) an officer of the Employer (as that term is defined
within the meaning of the Regulations under Code Section 416)
having annual "415 Compensation" greater than 50 percent of the
amount in effect under Code Section 415(b)(1)(A) for any such Plan
Year.
(b) one of the ten employees having annual "415
Compensation" from the Employer for a Plan Year greater than the
dollar limitation in effect under Code Section 415(c)(1)(A) for
the calendar year in which such Plan Year ends and owning (or
considered as owning within the
7
<PAGE> 15
meaning of Code Section 318) both more than one-half percent
interest and the largest interests in the Employer.
(c) a "five percent owner" of the Employer. "Five percent
owner" means any person who owns (or is considered as owning
within the meaning of Code Section 318) more than five percent
(5%) of the outstanding stock of the Employer or stock possessing
more than Eve percent (5%) of the tool combined voting power of
all stock of the Employer or, in the case of an unincorporated
business, any person who owns more than five percent (5%) of the
capital or profits interest in the Employer. In determining
percentage ownership hereunder, employers that would otherwise be
aggregated under 'Code Sections 414(b) (c) !(m) and (o) shall be
treated as separate employers.
(d) a "one percent owner" of the Employer having an annual
"415 Compensation" from the Employer of more than $150,000. "One
percent owner" means any person who owns (or is considered as
owning within the meaning of Code Section 318) more than one
percent (1%) of the outstanding stock of the Employer or stock
possessing more than one percent (1%) of the total combined voting
power of all stock of the Employer or, in the case of an
unincorporated business, any person who owns more than one percent
(1%) of the capital or profits interest in the Employer. In
determining percentage ownership hereunder, employers that would
otherwise be aggregated under Code Sections 414(b), (c), (m) and
(o) shall be treated as separate employers. However, in
determining whether an individual has "415 Compensation" of more
than $150,000, "415 Compensation" from each employer required to
be aggregated under Code Sections 414(b), (c), (m) and (o) shall
be taken into account.
For purposes of this Section, the determination of "415
Compensation" shall be made by including amounts that would otherwise be
excluded from a Participant's gross income by reason of the application of Code
Sections 125, 402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions
made pursuant to a salary reduction agreement, Code Section 403(b).
1.36 "LATE RETIREMENT DATE" means the date of, or the first day of the
month or the Anniversary Date coinciding with or next following, whichever
corresponds to the election made for the Normal Retirement Date, a Participant's
actual retirement after having reached his Normal Retirement Date.
1.37 "LEASED EMPLOYEE" means any person (other than an Employee of the
recipient) who pursuant to an agreement between the recipient and any other
person ("leasing organization") has performed services for the recipient (or for
the recipient and related persons determined in accordance with Code Section
414(n)(6)) on a substantially full time basis for a period of at least one year,
and such services are of a type historically performed by employees in the
business field of the recipient employer. Contributions or benefits provided a
leased employee by the leasing organization which are attributable to services
performed for the recipient employer shall be treated as provided by the
recipient employer.
A leased employee shall not be considered an Employee of the
recipient if: (i) such employee is covered by a money purchase pension plan
providing: (1) a nonintegrated employer contribution rate of at least 10 percent
of compensation, as defined in Code Section 415(c)(3), but including amounts
contributed pursuant to a salary reduction agreement which are excludable from
the employee's gross income under Code Sections 125, 402(a)(8), 402(h), or
403(b), (2) immediate participation, and (3) full and immediate vesting; and
(ii) leased employees do not constitute more than 20 percent of the recipient's
nonhighly compensated workforce.
1.38 "NET PROFIT" means with respect to any Fiscal Year the Employer's
net income or profit for such Fiscal Year determined upon the basis of the
Employer's books of account in accordance with generally accepted accounting
principles, without any reduction for taxes based upon income, or for
contributions made by the Employer to this Plan and any other qualified plan.
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1.39 "NON-ELECTIVE CONTRIBUTION" means the Employer's contributions to
the Plan other than those made pursuant to the Participant's deferral election
made pursuant to Section 11.2 and any Qualified Non-Elective Contribution. In
addition, if selected in E3 of the Adoption Agreement, the Employer's Matching
Contribution made pursuant to Section 4.3(b) shall be considered a Non-Elective
Contribution for purposes of the Plan.
1.40 "NON-HIGHLY COMPENSATED PARTICIPANT" means any Participant who is
neither a Highly Compensated Employee nor a Family Member.
1.41 "NON-KEY EMPLOYEE" means any Employee or former Employee (and his
Beneficiaries) who is not a Key Employee.
1.42 "NORMAL RETIREMENT AGE" means the age specified in the Adoption
Agreement at which time a Participant shall become fully Vested in his
Participant's Account.
1.43 "NORMAL RETIREMENT DATE" means the date specified in the Adoption
Agreement on which a Participant shall become eligible to have his benefits
distributed to him.
1.44 "1-YEAR BREAK IN SERVICE" means the applicable computation period
during which an Employee has not completed more than 500 Hours of Service with
the Employer, Further, solely for the purpose of determining whether a
Participant has incurred a 1-Year Break in Service, Hours of Service shall be
recognized for "authorized leaves of absence" and "maternity and paternity
leaves of absence."
"Authorized leave of absence" means an unpaid, temporary cessation
from active employment with the Employer pursuant to an established
nondiscriminatory policy, whether occasioned by illness, military service, or
any other reason.
A "maternity or paternity leave of absence" means, for Plan Years
beginning after December 31, 1984, an absence from work for any period by reason
of the Employee's pregnancy, birth of the Employee's child, placement of a child
with the Employee in connection with the adoption of such child, or any absence
for the purpose of caring for such child for a period immediately following such
birth or placement. For this purpose, Hours of Service shall be credited for the
computation period in which the absence from work begins, only if credit
therefore is necessary to prevent the Employee from incurring a 1-Year Break in
Service, or, in any other case, in the immediately following computation period.
The Hours of Service credited for a maternity or paternity leave of absence"
shall be those which would normally have been credited but for such absence, or,
in any case in which the Administrator is unable to determine such hours
normally credited, eight (8) Hours of Service per day. The total Hours of
Service required to be credited for a "maternity or paternity leave of absence"
shall not exceed 501.
1.45 "OWNER-EMPLOYEE" means a sole proprietor who owns the entire
interest in the Employer or a partner who owns more than 10% of either the
capital interest or the profit-its interest in the Employer and who receives
income for personal services from the Employer.
1.46 "PARTICIPANT" means any Eligible Employee who participates in the
Plan as provided in Section 3.2 and has not for any reason become ineligible to
participate further in the Plan.
1.47 "PARTICIPANT'S ACCOUNT" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest under the Plan resulting from (a) the Employer's contributions in the
case of a Profit Sharing Plan or Money Purchase Plan, and (b) the Employer's
Non-Elective Contributions in the case of a 401(k) Profit Sharing Plan.
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1.48 "PARTICIPANT'S COMBINED ACCOUNT" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest under the Plan resulting from the Employer's contributions.
1.49 "PARTICIPANT'S ELECTIVE ACCOUNT" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan and Trust resulting from the Employer's Elective
Contributions and Qualified Non-Elective Contributions. A separate accounting
shall be maintained with respect to that portion of the Participant's Elective
Account attributable to Elective Contributions made pursuant to Section 11.2,
Employer matching contributions if they are deemed to be Elective Contributions,
and any Qualified Non-Elective Contributions.
1.50 "PARTICIPANT'S Rollover Account" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan resulting from amounts transferred from another qualified
plan or "conduit" Individual Retirement Account in accordance with Section 4.6.
1.51 "Plan means this instrument (hereinafter referred to as Franklin
Templeton ValueSelect Defined Contribution Plan Basic Plan Document #01)
including all amendments thereto, and the Adoption Agreement as adopted by the
Employer.
1.52 "PLAN YEAR" means the Plan's accounting year as specified in C2 of
the Adoption Agreement.
1.53 "PRE-RETIREMENT SURVIVOR ANNUITY" means an immediate annuity for
the life of the Participant's spouse, the payments under which must be equal to
the actuarial equivalent of 50% of the Participant's Vested interest in the Plan
as of the date of death.
1.54 "QUALIFIED NON-ELECTIVE ACCOUNT" means the account established
hereunder to which Qualified Non-Elective Contributions are allocated.
1.55 "QUALIFIED NON-ELECTIVE CONTRIBUTION" means the Employer's
contributions to the Plan that are made pursuant to E5 of the Adoption Agreement
and Section 11.1(d) which are used to satisfy the "Actual Deferral Percentage"
tests. Qualified Non-Elective Contributions are nonforfeitable when made and are
distributable only as specified in Sections 11.2(c) and 11.8. In addition, the
Employer's contributions to the Plan that are made pursuant to Section 11.7(h)
and which are used to satisfy the "Actual Contribution Percentage" tests shall
be considered Qualified Non-Elective Contributions.
1.56 "QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTION ACCOUNT" means the
account established and maintained by the Administrator for each Participant
with respect to his total interest under the Plan resulting from the
Participant's tax deductible qualified voluntary employee contributions made
pursuant to Section 4.9.
1.57 "REGULATION" means the Income Tax Regulations as promulgated by
the Secretary of the Treasury or his delegate, and as amended from time to time.
1.58 "RETIRED PARTICIPANT" means a person who has been a Participant,
but who has become entitled to retirement benefits under the Plan.
1.59 "RETIREMENT DATE" means the date as of which a Participant retires
for reasons other than Total and Permanent Disability, whether such retirement
occurs on a Participant's Normal Retirement Date, Early or Late Retirement Date
(see Section 6.1).
1.60 "SELF-EMPLOYED INDIVIDUAL" means an individual who has earned
income for the taxable year from the trade or business for which the Plan is
established, and, also, an individual who would have had earned
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income but for the fact that the trade or business had no net profits for the
taxable year. A Self-Employed Individual shall be treated as an Employee.
1.61 "SHAREHOLDER-EMPLOYEE" means a Participant who owns more than five
percent (5%) of the Employer's outstanding capital stock during any year in
which the Employer elected to be taxed as a Small Business Corporation under the
applicable Code Section.
1.62 "SHORT PLAN YEAR" means, if specified in the Adoption Agreement,
that the Plan Year shall be less than a 12 month period. If chosen, the
following rules shall apply in the administration of this Plan. In determining
whether an Employee has completed a Year of Service for benefit accrual purposes
in the Short Plan Year, the number of the Hours of Service required shall be
proportionately reduced based on the number of days in the Short Plan Year. The
determination of whether an Employee has completed a Year of Service for vesting
and eligibility purposes shall be made in accordance with Department of Labor
Regulation 2530.2030(c). In addition, if this Man is integrated with Social
Security, the integration level shall also be proportionately reduced based on
the number of days in the Short Plan Year.
1.63 "SUPER TOP HEAVY PLAN" means a plan described in Section 2.2(b).
1.64 "TAXABLE WAGE BASE" means, with respect to any year, the maximum
amount of earnings which may be considered wages for such year under Code
Section 3121(a)(1).
1.65 "TERMINATED PARTICIPANT" means a person who has been a
Participant, but whose employment has been terminated other than by death, Total
and Permanent Disability or retirement.
1.66 "TOP HEAVY PLAN" means a plan described in Section 2.2(a).
1.67 "TOP HEAVY PLAN YEAR" means a Plan Year commencing after December
31, 1983 during which the Plan is a Top Heavy Plan.
1.68 "TOP PAID GROUP" shall be determined pursuant to Code Section
414(q) and the Regulations thereunder and generally means the top 20 percent of
Employees who performed services for the Employer during the applicable year,
ranked according to the amount of "415 Compensation" (as determined pursuant to
Section 1.28) received from the Employer during such year. All Affiliated
Employers shall be taken into account as a single employer, and Leased Employees
shall be treated as Employees pursuant to Code Section 414(n) or (o). Employees
who are non-resident aliens who received no earned income (within the meaning of
Code Section 911(d)(2)) from the Employer constituting United States source
income within the meaning of Code Section 864a(3) shall not be treated as
Employees. Additionally, for the purpose of determining the number of active
Employees in any year, the following additional Employees shall also he
excluded, however, such Employees shall still be considered for the purpose of
identifying the particular Employees in the Top Paid Group:
(a) Employees with less than six (6) months of service;
(b) Employees who normally work less than 17 1/2 hours per
week;
(c) Employees who normally work less than six (6) months
during a year; and
(d) Employees who have not yet attained age 21.
In addition, if 90 percent or more of the Employees of the
Employer are covered under agreements the Secretary of Labor finds to be
collective bargaining agreements between Employee representatives and the
Employer, and the Plan covers only Employees who are not covered under such
agreements, then Employees
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covered by such agreements shall be excluded from both the total number of
active Employees as well as from the identification of particular Employees in
the Top Paid Group.
The foregoing exclusions set forth in this Section shall be
applied on a uniform and consistent basis for all purposes for which the Code
Section 414(q) definition is applicable.
1.69 "TOTAL AND PERMANENT DISABILITY" means the inability to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or which
has lasted or can be expected to last for a continuous period of not less than
12 months. The disability of a Participant shall be determined by a licensed
physician chosen by the Administrator. However, if the condition constitutes
total disability under the federal Social Security Acts, the Administrator may
rely upon such determination that the Participant is Totally and Permanently
Disabled for the purposes of this Plan. The determination shall be applied
uniformly to all Participants.
1.70 "TRUSTEE" means the person or entity named in B6 of the Adoption
Agreement or named in any trust forming a part of this Plan, and any successors.
1.71 "TRUST FUND" means the assets of the Plan and Trust as the same
shall exist from time to time.
1.72 "VESTED" means the nonforfeitable portion of any account
maintained on behalf of a Participant.
1.73 "VOLUNTARY CONTRIBUTION ACCOUNT" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan resulting from the Participant's nondeductible voluntary
contributions made pursuant to Section 4.7.
1.74 "YEAR OF SERVICE" means the computation period of twelve (12)
consecutive months, herein set forth, and during which an Employee has completed
at least 1000 Hours of Service.
For purposes of eligibility for participation, the initial
computation period shall begin with the date on which the Employee first
performs an Hour of Service (employment commencement date). The computation
period beginning after a 1-Year Break in Service shall be measured from the date
on which an Employee again performs an Hour of Service. The succeeding
computation periods shall begin with the first anniversary of the Employee's
employment commencement date. However, if one (1) Year of Service or less is
required as a condition of eligibility, then after the initial eligibility
computation period, the eligibility computation period shall shift to the
current Plan Year which includes the anniversary of the date on which the
Employee first performed an Hour of Service. An Employee who is credited with
1,000 Hours of Service in both the initial eligibility computation period and
the first Plan Year which commences prior to the first anniversary of the
Employee's initial eligibility computation period will be credited with two
Years of Service for purposes of eligibility to participate.
For vesting purposes, and all other purposes not specifically
addressed in this Section, the computation period shall be the Plan Year,
including periods prior to the Effective Date of the Plan unless specifically
excluded pursuant to the Adoption Agreement.
Years of Service and breaks in service will be measured on the
same computation period.
Years of Service with any predecessor Employer which
maintained this Plan shall be recognized. Years of Service with any other
predecessor Employer shall be recognized as specified in the Adoption Agreement.
Years of Service with any Affiliated Employer shall be
recognized.
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ARTICLE II
TOP HEAVY PROVISIONS AND ADMINISTRATION
2.1 TOP HEAVY PLAN REQUIREMENTS
For any Top Heavy Plan Year, the Plan shall provide the
special vesting requirements of Code Section 416(b) pursuant to Section 6.4 of
the Plan and the special minimum allocation requirements of Code Section 416(c)
pursuant to Section 4.3(i) of the Plan.
2.2 DETERMINATION OF TOP HEAVY STATUS
(a) This Plan shall be a Top Heavy Plan for any Plan Year
beginning after December 31, 1983, in which, as of the Determination Date,
(1) the Present Value of Accrued Benefits of Key Employees and (2) the sum
of the Aggregate Accounts of Key Employees under this Plan and all plans of
an Aggregation Group, exceeds sixty percent (60%) of the Present Value of
Accrued Benefits and the Aggregate Accounts of all Key and Non-Key
Employees under this Plan and all plans of an Aggregation Group.
If any Participant is a Non-Key Employee for any Plan Year,
but such Participant was a Key Employee for any prior Plan Year, such
Participant's Present Value of Accrued Benefit and/or Aggregate Account
balance shall not be taken into account for purposes of determining whether
this Plan is a Top Heavy or Super Top Heavy Plan (or whether any
Aggregation Group which includes this Plan is a Top Heavy Group). In
addition, if a Participant or Former Participant has not performed any
services for any Employer maintaining the Plan at any time during the five
year period ending on the Determination Date, any accrued benefit-it for
such Participant or Former Participant shall not be taken into account for
the purposes of determining whether this Plan is a Top Heavy or Super Top
Heavy Plan.
(b) This Plan shall be a Super Top Heavy Plan for any Plan Year
beginning after December 31, 1983, in which, as of the Determination Date,
(1) the Present Value of Accrued Benefits of Key Employees and (2) the sum
of the Aggregate Accounts of Key Employees under this Plan and all plans of
an Aggregation Group, exceeds ninety percent (90%) of the Present Value of
Accrued Benefits and the Aggregate Accounts of all Key and Non-Key
Employees under this Plan and all plans of an Aggregation Group.
(c) Aggregate Account: A Participant's Aggregate Account as of the
Determination Date is the sum of:
(1) his Participant's Combined Account balance as of the most
recent valuation occurring within a twelve (12) month period
ending on the Determination Date;
(2) for a Profit Sharing Plan, an adjustment for any contributions
due as of the Determination Date. Such adjustment shall be the
amount of any contributions actually made after the valuation date
but before the Determination Date, except for the first Plan Year
when such adjustment shall also reflect the amount of any
contributions made after the Determination Date that are allocated
as of a date in that first Plan Year;
(3) for a Money Purchase Plan, contributions that would be
allocated as of a date not later than the Determination Date, even
though those amounts are not yet made or required to be made.
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(4) any Plan distributions made within the Plan Year that includes
the Determination Date or within the four (4) preceding Plan
Years. However, in the case of distributions made after the
valuation date and prior to the Determination Date, such
distributions are not included as distributions for top heavy
purposes to the extent that such distributions are already
included in the Participant's Aggregate Account balance as of the
valuation date. In the case of a distribution of an annuity
Contract, the amount of such distribution is deemed to be the
current actuarial value of the Contract, determined on the date of
the distribution. Notwithstanding anything herein to the contrary,
all distributions, including distributions made prior to January
1, 1984, and distributions under a terminated plan which if it had
not been terminated would have been required to be included in an
Aggregation Group, will be counted. Further, distributions from
the Plan (including the cash value of life insurance policies) of
a Participant's account balance because of death shall be treated
as a distribution for the purpose of this paragraph.
(5) any Employee contributions, whether voluntary or mandatory.
However, amounts attributable to tax deductible qualified
voluntary employee contributions shall not be considered to be a
part of the Participant's Aggregate Account balance.
(6) with respect to unrelated rollovers and plan-to-plan transfers
(ones which are both initiated by the Employee and made from a
plan maintained by one employer to a plan maintained by another
employer), if this Plan provides the rollovers or plan-to-plan
transfers, it shall always consider such rollovers or plan-to-plan
transfers as a distribution for the purposes of this Section. If
this Plan is the plan accepting such rollovers or plan-to-plan
transfers, it shall not consider such rollovers or plan-to-plan
transfers accepted after December 31, 1983 as part of the
Participant's Aggregate Account balance. However, rollovers or
plan-to-plan transfers accepted prior to January 1, 1984 shall be
considered as part of the Participant's Aggregate Account balance.
(7) with respect to related rollovers and plan-to-plan transfers
(ones either not initiated by the Employee or made to a plan
maintained by the same employer), if this Plan provides the
rollover or plan-to-plan transfer, it shall not be counted as a
distribution for purposes of this Section. If this Plan is the
plan accepting such rollover or plan-to-plan transfer, it shall
consider such rollover or plan-to-plan transfer as part of the
Participant's Aggregate Account balance, irrespective of the date
on which such rollover or plan-to-plan transfer is accepted.
(8) For the purposes of determining whether two employers are to
be treated as the same employer in 2.2(c)(6) and 2.2(c)(7) above,
all employers aggregated under Code Section 414(b), (c), (m) and
(o) are treated as the same employer.
(d) "Aggregation Group" means either a Required Aggregation Group
or a Permissive Aggregation Group as hereinafter determined.
(1) Required Aggregation Group: In determining a Required
Aggregation Group hereunder, each qualified plan of the Employer,
including any Simplified Employee Pension Plan, in which a Key
Employee is a participant in the Plan Year containing the
Determination Date or any of the four preceding Plan Years, and
each other qualified plan of the Employer which enables any
qualified plan in which a Key Employee participates to meet the
requirements of Code Sections 401 (a)(4) or 410, will be required
to be aggregated. Such group shall be known as a Required
Aggregation Group.
In the case of a Required Aggregation Group, each plan in the
group will be considered a Top Heavy Plan if the Required
Aggregation Group is a Top Heavy Group. No plan in the
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Required Aggregation Group will be considered a Top Heavy Plan if
the Required Aggregation Group is not a Top Heavy Group.
(2) Permissive Aggregation Group: The Employer may also include
any other plan of the Employer, including any Simplified Employee
Pension Plan, not required to be included in the Required
Aggregation Group, provided the resulting group, taken as a whole,
would continue to satisfy the provisions of Code Sections
401(a)(4) and 410. Such group shall be known as a Permissive
Aggregation Group.
In the case of a Permissive Aggregation Group, only a plan that is
part of the Required Aggregation Group will be considered a Top
Heavy Plan if the Permissive Aggregation Group is a Top Heavy
Group. No plan in the Permissive Aggregation Group will be
considered a Top Heavy Plan if the Permissive Aggregation Group is
not a Top Heavy Group.
(3) Only those plans of the Employer in which the Determination
Dates fall within the same calendar year shall be aggregated in
order to determine whether such plans are Top Heavy Plans.
(4) An Aggregation Group shall include any terminated plan of the
Employer if it was maintained within the last five (5) years
ending on the Determination Date.
(e) "Determination Date" means (a) the last day of the preceding
Plan Year, or (b) in the case of the first Plan Year, the last day of such
Plan Year.
(f) Present Value of Accrued Benefit: In the case of a defined
benefit plan, the Present Value of Accrued Benefit for a Participant other
than a Key Employee shall be as determined using the single accrual method
used for all plans of the Employer and Affiliated Employers, or if no such
single method exists, using a method which results in benefits accruing not
more rapidly than the slowest accrual rate permitted under Code Section
41l(b)(1)(C). The determination of the Present Value of Accrued Benefit
shall be determined as of the most recent valuation date that falls within
or ends with the 12-month period ending on the Determination Date, except
as provided in Code Section 416 and the Regulations thereunder for the
first and second plan years of a defined benefit Plan.
However, any such determination must include present value of
accrued benefit attributable to any Plan distributions referred to in
Section 2.2(c)(4) above, any Employee contributions referred to in Section
2.2(c)(5) above or any related or unrelated rollovers referred to in
Sections 2.2(c)(6) and 2.2(c)(7) above.
(g) "Top Heavy Group" means an Aggregation Group in which, as of
the Determination Date, the sum of:
(1) the Present Value of Accrued Benefits of Key Employees under
all defined benefit plans included in the group, and
(2) the Aggregate Accounts of Key Employees under all defined
contribution plans included in the group, exceeds sixty percent
(60%) of a similar sum determined for all Participants.
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(h) The Administrator shall determine whether this Plan is
a Top Heavy Plan on the Anniversary Date specified in the Adoption
Agreement. Such determination of the top heavy ratio shall be in
accordance with Code Section 416 and the Regulations thereunder.
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER
(a) The Employer shall be empowered to appoint and remove
the Trustee and the Administrator from time For time as it deems
necessary for the proper administration of the Plan to assure that
the Plan is being operated for the exclusive benefit of the
Participants and their Beneficiaries in accordance with the terms
of the Plan, the Code, and the Act.
(b) The Employer shall establish a "funding policy and
method," i.e., it shall determine whether the Plan has a short run
need for liquidity (e.g., to pay benefits) or whether liquidity is
a long run goal and investment growth (and stability of same) is a
more current need, or shall appoint a qualified person to do so.
The Employer or its delegate shall communicate such needs and
goals to the Trustee, who shall coordinate such Plan needs with
its investment policy. The communication of such a "funding policy
and method" shall not, however, constitute a directive to the
Trustee as to investment of the Trust Funds. Such "funding policy
and method" shall be consistent with the objectives of this Plan
and with the requirements of Title 1 of the Act.
(c) If a separate trust is not being used pursuant to the
election in the Adoption Agreement, the Employer may, in its
discretion, appoint an Investment Manager to manage all or a
designated portion of the assets of the Plan. In such event, the
Trustee shall follow the directive of the Investment Manager in
investing the assets of the Plan managed by the Investment
Manager.
(d) The Employer shall periodically review the performance
of any Fiduciary or other person to whom duties have been
delegated or allocated by it under the provisions of this Plan or
pursuant to procedures established hereunder. This requirement may
be satisfied by formal periodic review by the Employer or by a
qualified person specifically designated by the Employer, through
day-to-day conduct and evaluation, or through other appropriate
ways.
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY
The Employer shall appoint one or more Administrators. Any person,
including, but not limited to, the Employees of the Employer, shall be eligible
to serve as an Administrator. Any person so appointed shall signify his
acceptance by filing written acceptance with the Employer. An Administrator may
resign by delivering his written resignation to the Employer or be removed by
the Employer by delivery of written notice of removal, to take effect at a date
specified therein, or upon delivery to the Administrator if no date is
specified.
The Employer, upon the resignation or removal of an Administrator,
shall promptly designate in writing a successor to this position. If the
Employer does not appoint an Administrator, the Employer will function as the
Administrator.
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES
If more than one person is appointed as Administrator, the
responsibilities of each Administrator may be specified by the Employer and
accepted in writing by each Administrator. In the event that no such delegation
is made by the Employer, the Administrators may allocate the responsibilities
among themselves, in which event the Administrators shall notify the Employer
and the Trustee in writing of such action and specify the responsibilities of
each Administrator. The Trustee thereafter shall accept and rely upon any
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<PAGE> 24
documents executed by the appropriate Administrator until such time as the
Employer or the Administrators file with the Trustee a written revocation of
such designation.
2.6 POWERS AND DUTIES OF THE ADMINISTRATOR
The primary responsibility of the Administrator is to administer
the Plan for the exclusive benefit of the Participants and their Beneficiaries,
subject to the specific terms of the Plan. The Administrator shall administer
the Plan in accordance with its terms and shall have the power and discretion to
construe the terms of the Plan and determine all questions arising in connection
with the administration, interpretation, and application of the Plan. Any such
determination by the Administrator shall be conclusive and binding upon all
persons. The Administrator may establish procedures, correct any defect, supply
any information, or reconcile any inconsistency in such manner and to such
extent as shall be deemed necessary or advisable to carry out the purpose of the
Plan; provided, however, that any procedure, discretionary act, interpretation
or construction shall be done in a nondiscriminatory manner based upon uniform
principles consistently applied and shall be consistent with the intent that the
Plan shall continue to be deemed a qualified plan under the terms of Code
Section 401(a), and shall comply with the terms of the Act and all regulations
issued pursuant thereto. The Administrator shall have all powers necessary or
appropriate to accomplish his duties under this Plan.
The Administrator shall be charged with the duties of the general
administration of the Plan, including, but not limited to, the following:
(a) the discretion to determine all questions relating to
the eligibility of Employees to participate or remain a
Participant hereunder and to receive benefits under the Plan;
(b) to compute, certify, and direct the Trustee with
respect to the amount and the kind of benefit to which any
Participant shall be entitled hereunder;
(c) to authorize and direct the Trustee with respect to
all nondiscretionary or otherwise directed disbursements from the
Trust Fund;
(d) to maintain all necessary records for the
administration of the Plan;
(e) to interpret the provisions of the Plan and to make
and publish such rules for regulation of the Plan as are
consistent with the terms hereof;
(f) For determine the size and type of any Contract to be
purchased from any Insurer, and to designate the Insurer from
which such Contract shall be purchased;
(g) For compute and certify to the Employer and to the
Trustee from time to time the sums of money necessary or desirable
to be contributed For the Trust Fund;
(h) to consult with the Employer and the Trustee regarding
the short and long-term liquidity needs of the Plan in order that
the Trustee can exercise any investment discretion in a manner
designed to accomplish specific objectives;
(i) For prepare and distribute to Employees a procedure
for notifying Participants and Beneficiaries of their rights to
elect Joint and Survivor Annuities and Pre-Retirement Survivor
Annuities if required by the Code and Regulations thereunder;
(j) to assist any Participant regarding his rights,
benefits, or elections available under the Plan.
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<PAGE> 25
2.7 RECORDS AND REPORTS
The Administrator shall keep a record of all actions taken and
shall keep all other books of account, records, and other data that may be
necessary for proper administration of the Plan and shall be responsible for
supplying all information and reports to the Internal Revenue Service,
Department of Labor, Participants, Beneficiaries and others as required by law.
2.8 APPOINTMENT OF ADVISERS
The Administrator, or the Trustee with the consent of the
Administrator, may appoint counsel, specialists, advisers, and other persons as
the Administrator or the Trustee deems necessary or desirable in connection with
the administration of this Plan.
2.9 INFORMATION FROM EMPLOYER
To enable the Administrator to perform his functions, the Employer
shall supply full and timely information to the Administrator on all matters
relating to the Compensation of all Participants, their Hours of Service, their
Years of Service, their retirement, death, disability, or termination of
employment, and such other pertinent facts as the Administrator may require; and
the Administrator shall advise the Trustee of such of the foregoing facts as may
be pertinent to the Trustee's duties under the Plan. The Administrator may rely
upon such information as is supplied by the Employer and shall have no duty or
responsibility to verify such information.
2.10 PAYMENT OF EXPENSES
All expenses of administration may be paid out of the Trust Fund
unless paid by the Employer. Such expenses shall include any expenses incident
to the functioning of the Administrator, including, but not limited to, fees of
accountants, counsel, and other specialists and their agents, and other costs of
administering the Plan. Until paid, the expenses shall constitute a liability of
the Trust Fund. However, the Employer may reimburse the Trust Fund for any
administration expense incurred. Any administration expense paid to the Trust
Fund as a reimbursement shall not be considered an Employer contribution.
2.11 MAJORITY ACTIONS
Except where there has been an allocation and delegation of
administrative authority pursuant to Section 2.5, if there shall be more than
one Administrator, they shall act by a majority of their number, but may
authorize one or more of them to sign all papers on their behalf.
2.12 CLAIMS PROCEDURE
Claims for benefits under the Plan may be filed in writing with
the Administrator. Written notice of the disposition of a claim shall be
furnished to the claimant within 90 days after the application is filed. In the
event the claim is denied, the reasons for the denial shall be specifically set
forth in the notice in language calculated to be understood by the claimant,
pertinent provisions of the Plan shall be cited, and, where appropriate, an
explanation as to how the claimant can perfect the claim will be provided. In
addition, the claimant shall be furnished with an explanation of the Plan's
claims review procedure.
2.13 CLAIMS REVIEW PROCEDURE
Any Employee, former Employee, or Beneficiary of either, who has
been denied a benefit by a decision of the Administrator pursuant For Section
2.12 shall be entitled to request the Administrator to give further
consideration to his claim by filing with the Administrator a written request
for a hearing. Such request,
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<PAGE> 26
together with a written statement of the reasons why the claimant believes his
claim should be allowed, shall be filed with the Administrator no later than 60
days after receipt of the written notification provided for in Section 2.12. The
Administrator shall then conduct a hearing within the next 60 days, at which the
claimant may be represented by an attorney or any other representative of his
choosing and expense and at which the claimant shall have an opportunity to
submit written and oral evidence and arguments in support of his claim. At the
hearing (or prior thereto upon 5 business days written notice to the
Administrator) the claimant or his representative shall have an opportunity to
review all documents in the possession of the Administrator which are pertinent
to the claim at issue and its disallowance. Either the claimant or the
Administrator may cause a court reporter to attend the hearing and record the
proceedings. In such event, a complete written transcript of the proceedings
shall be furnished to both parties by the court reporter. The full expense of
any such court reporter and such transcripts shall be done by the party causing
the court reporter to attend the hearing. A final decision as to the allowance
of the claim shall be made by the Administrator within 60 days of receipt of the
appeal (unless there has been an extension of 60 days due to special
circumstances, provided the delay and the special circumstances occasioning it
are communicated to the claimant within the 60 day period). Such communication
shall be written in a manner calculated to be understood by the claimant and
shall include specific reasons for the decision and specific references to the
pertinent Plan provisions on which the decision is based.
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY
Any Eligible Employee shall be eligible to participate hereunder
on the date he has satisfied the requirements specified in the Adoption
Agreement.
3.2 EFFECTIVE DATE OF PARTICIPATION
An Eligible Employee who has become eligible to be a Participant
shall become a Participant effective as of the day specified in the Adoption
Agreement.
In the event an Employee who has satisfied the Plan's eligibility
requirements and would otherwise have become a Participant shall go from a
classification of a noneligible Employee to an Eligible Employee, such Employee
shall become a Participant as of the date he becomes an Eligible Employee.
In the event an Employee who has satisfied the Plan's eligibility
requirements and would otherwise become a Participant shall go from a
classification of an Eligible Employee to a noneligible Employee and becomes
ineligible to participate and has not incurred a 1-Year Break in Service, such
Employee shall participate in the Plan as of the date he returns to an eligible
class of Employees. If such Employee does incur a 1-Year Break in Service,
eligibility will be determined under the Break in Service rules of the Plan.
3.3 DETERMINATION OF ELIGIBILITY
The Administrator shall determine the eligibility of each Employee
for participation in the Plan based upon information furnished by the Employer.
Such determination shall be conclusive and binding upon all persons, as long as
the same is made pursuant to the Plan and the Act. Such determination shall be
subject to review per Section 2.13
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3.4 TERMINATION OF ELIGIBILITY
In the event a Participant shall go from a classification of an
Eligible Employee to an ineligible Employee, such Former Participant shall
continue to vest in his interest in the Plan for each Year of Service completed
while a noneligible Employee, until such time as his Participant's Account shall
be forfeited or distributed pursuant to the terms of the Plan. Additionally, his
interest in the Plan shall continue to share in the earnings of the Trust Fund.
3.5 OMISSION OF ELIGIBLE EMPLOYEE
If, in any Plan Year, any Employee who should be included as a
Participant in the Plan is erroneously omitted and discovery of such omission is
not made until after a contribution by his Employer for the year has been made,
the Employer shall make a subsequent contribution, if necessary after the
application of Section 4.3(c), so that the omitted Employee receives a total
amount which the said Employee would have received had he not been omitted. Such
contribution shall be made regardless of whether or not it is deductible in
whole or in part in any taxable year under applicable provisions of the Code.
3.6 INCLUSION OF INELIGIBLE EMPLOYEE
If, in any Plan Year, any person who should not have been included
as a Participant in the Plan is erroneously included and discovery of such
incorrect inclusion is not made until after a contribution for the year has been
made, the Employer shall not be entitled to recover the contribution made with
respect to the ineligible person regardless of whether or not a deduction is
allowable with respect to such contribution. In such event, the amount
contributed with respect to the ineligible person shall constitute a Forfeiture
for the Plan Year in which the discovery is made.
3.7 ELECTION NOT TO PARTICIPATE
An Employee may, subject to the approval of the Employer, elect
voluntarily not to participate in the Plan. The election not to participate must
be communicated to the Employer, in writing, at least thirty (30) days before
the beginning of a Plan Year. For Standardized Plans, a Participant or an
Eligible Employee may not elect not to participate. Furthermore, the foregoing
election not to participate shall not be available with respect to partners in a
partnership.
3.8 CONTROL OF ENTITIES BY OWNER-EMPLOYEE
(a) 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 entities,
this Plan and the plan established for other trades or businesses
must, when looked at as a single Plan, satisfy Code Sections
401(a) and (d) for the Employees of this and all other entities.
(b) If the Plan provides contributions or benefit 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 Sections 401(a) and (d)
and which provides contributions and benefits not less favorable
than provided for Owner-Employees under this Plan.
(c) If an individual is covered as an Owner-Employee under
the plans of two or more trades or businesses which are not
controlled and the individual controls a trade or business, then
the benefits or contributions of the employees under the plan of
the trades or businesses which are controlled must be as favorable
as those provided for him under the most favorable plan of the
trade or business which is not controlled.
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<PAGE> 28
(d) For purposes of the preceding paragraphs, an
Owner-Employee, or two or more Owner-Employees, will be considered
to control an entity if the Owner-Employee, or two or more
Owner-Employees together:
(1) own the entire interest in an unincorporated entity,
or
(2) in the case of a partnership, own more than 50 percent
of either the capital interest or the profits interest in
the partnership.
(c) For purposes of the preceding sentence, an
Owner-Employee, or two or more Owner-Employees shall be treated as
owning any interest in a partnership which is owned, directly or
indirectly, by a partnership which such Owner-Employee, or such
two or more Owner-Employees, are considered to control within the
meaning of the preceding sentence.
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION
(a) For a Money Purchase Plan -
(1) The Employer shall make contributions over such period
of years as the Employer may determine on the following
basis. On behalf of each Participant eligible to share in
allocations, for each year of his participation in this
Plan, the Employer shall contribute the amount specified
in the Adoption Agreement. All contributions by the
Employer shall be made in cash or in such property as is
acceptable to the Trustee. The Employer shall be required
to obtain a waiver from the Internal Revenue Service for
any Plan Year in which it is unable to make the full
required contribution to the Plan. In the event a waiver
is obtained, this Plan shall be deemed to be an
individually designed plan.
(2) For any Plan Year beginning prior to January 1, 1990,
and if elected in the non-standardized Adoption Agreement
for any Plan Year beginning on or after January 1, 1990,
the Employer shall not contribute on behalf of a
Participant who performs less than a Year of Service
during any Plan Year, unless there is a Short Plan Year or
a contribution is required pursuant to 4.3(h).
(3) Notwithstanding the foregoing, the Employer's
contribution for any Fiscal Year shall not exceed the
maximum amount allowable as a deduction to the Employer
under the provisions of Code Section 404. However, to the
extent necessary to provide the top heavy minimum
allocations, the Employer shall make a contribution even
if it exceeds the amount which is deductible under Code
Section 404.
(b) For a Profit Sharing Plan -
(1) For each Plan Year, the Employer shall contribute to
the Plan such amount as specified by the Employer in the
Adoption Agreement. Notwithstanding the foregoing,
however, the Employer's contribution for any Fiscal Year
shall not exceed the maximum amount allowable as a
deduction to the Employer under the provisions of Code
Section 404. All contributions by the Employer shall be
made in cash or in such property as is acceptable to the
Trustee.
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<PAGE> 29
(2) Except, however, to the extent necessary to provide
the top heavy minimum allocations, the Employer shall make
a contribution even if it exceeds current or accumulated
Net Profit or the amount which is deductible under Code
Section 404.
4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION
The Employer shall generally pay to the Trustee its
contribution to the Plan for each Plan Year within the time prescribed by law,
including extensions of time, for the filing of the Employer's federal income
tax return for the Fiscal Year.
4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS
(a) The Administrator shall establish and maintain an
account in the name of each Participant to which the Administrator
shall credit as of each Anniversary Date, or other valuation date,
all amounts allocated to each such Participant as set forth
herein.
(b) The Employer shall provide the Administrator with all
information required by the Administrator to make a proper
allocation of the Employer's contributions for each Plan Year.
Within a reasonable period of time after the date of receipt by
the Administrator of such information, the Administrator shall
allocate such contribution as follows:
(1) For a Money Purchase Plan:
(i) The Employer's Contribution shall be allocated to
each Participant's Combined Account in the manner set
forth in Section 4.1 herein and as specified in
Section E2 of the Adoption Agreement.
(2) For an Integrated Profit Sharing Plan:
(i) The Employer's contribution shall be allocated to
each Participant's Account, except as provided in
Section 4.3(f), in a dollar amount equal to 5.7% of
the sum of each Participant's total Compensation plus
Excess Compensation. If the Employer does not
contribute such amount for all Participants, each
Participant will be allocated a share of the
contribution in the same proportion that his total
Compensation plus his total Excess Compensation for
the Plan Year bears to the total Compensation plus
the total Excess Compensation of all Participants for
that year.
Regardless of the preceding, 4.3% shall be substituted for
5.7% above if Excess Compensation is based on more than
20% and less than or equal to 80% of the Taxable Wage
Base. If Excess Compensation is based on less than 100%
and more than 80% of the Taxable Wage Base, then 5.4%
shall be substituted for 5.7% above.
(ii) The balance Of the Employer's contribution over
the amount allocated above, if any, shall be
allocated to each Participant's Combined Account in
the same proportion that his total Compensation for
the Year bears to the total Compensation of all
Participants for such year.
(iii) Except, however, for any Plan Year beginning
prior to January 1, 1990, and if elected in the
non-standardized Adoption Agreement for any Plan Year
beginning on or after January 1, 1990, a Participant
who performs less than a Year of Service during any
Plan Year shall not share in the Employer's
contribution for that year, unless there is a Short
Plan Year or a contribution is required pursuant to
Section 4.3(h).
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<PAGE> 30
(3) For a Non-Integrated Profit Sharing Plan:
(i) The Employer's contribution shall be allocated to
each Participant's Account in the same proportion
that each such Participant's Compensation for the
year bears to the total Compensation of all
Participants for such year.
(ii) Except, however, for any Plan Year beginning
prior to January 1, 1990, and if elected in the
non-standardized Adoption Agreement for any Plan Year
beginning on or after January 1, 1990, a Participant
who performs less than a Year of Service during any
Plan Year shall not share in the Employer's
contribution for that year, unless there is a Short
Plan Year or a contribution is required pursuant to
Section 4.3(h).
(c) As of each Anniversary Date or other valuation date,
before allocation of Employer contributions and Forfeitures, any
earnings or losses (net appreciation or net depreciation) of the
Trust Fund shall be allocated in the same proportion that each
Participant's and Former Participant's nonsegregated accounts bear
to the total of all Participants' and Former Participants'
nonsegregated accounts as of such date. If any nonsegregated
account of a Participant has been distributed prior to the
Anniversary Date or other valuation date subsequent to a
Participant's termination of employment, no earnings or losses
shall be credited to such account.
Notwithstanding the above, with respect to
contributions made to a 401(k) Plan after the previous Anniversary
Date or allocation date, the method specified in the Adoption
Agreement shall be used.
(d) Participants' Accounts shall be debited for any
insurance or annuity premiums paid, if any, and credited with any
dividends or interest received on insurance contracts.
(e) As of each Anniversary Date any amounts which became
Forfeitures since the last Anniversary Date shall first be made
available to reinstate previously forfeited account balances of
Former Participants, if any, in accordance with Section 6.4(g)(2)
or be used to satisfy any contribution that may be required
pursuant to Section 3.5 and/or 6.9. The remaining Forfeitures, if
any, shall be treated in accordance with the Adoption Agreement.
Provided, however, that in the event the allocation of Forfeitures
provided herein shall cause the "annual addition" (as defined in
Section 4.4) to any Participant's Account to exceed the amount
allowable by the Code, the excess shall be reallocated in
accordance with Section 4.5. Except, however, for any Plan Year
beginning prior to January 1, 1990, and if elected in the
non-standardized Adoption Agreement for any Plan Year beginning on
or after January 1, 1990, a Participant who performs less than a
Year of Service during any Plan Year shall not share in the Plan
Forfeitures for that year, unless there is a Short Plan Year or a
contribution required pursuant to Section 4.3(h).
(f) Minimum Allocations Required for Top Heavy Plan Years:
Notwithstanding the foregoing, for any Top Heavy Plan Year, the
sum of the Employer's contributions and Forfeitures allocated to
the Participant's Combined Account of each Non-Key Employee shall
be equal to at least three percent (3%) of such Non-Key Employee's
"415 Compensation" (reduced by contributions and forfeitures, if
any, allocated to each Non-Key Employee in any defined
contribution plan included with this plan in a Required
Aggregation Group). However, if (i) the sum of the Employer's
contributions and Forfeitures allocated to the Participant's
Combined Account of each Key Employee for such Top Heavy Plan Year
is less than three percent (3%) of each Key Employee's "415
Compensation" and (ii) this Plan is not required to be included in
an Aggregation Group to enable a defined benefit plan For meet the
requirements of Code Section 401(a)(4) or 410, the sum of the
Employer's contributions and Forfeitures allocated to the
Participant's Combined Account of each
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<PAGE> 31
Non-Key Employee shall be equal to the largest percentage
allocated to the Participant's Combined Account of any Key
Employee.
However, for each Non-Key Employee who is a
Participant in a paired Profit Sharing Plan or 401(k) Profit
Sharing Plan and a paired Money Purchase Plan, the minimum 3%
allocation specified above shall be provided in the Money Purchase
Plan.
If this is an integrated Plan, then for any Top Heavy
Plan Year the Employer's contribution shall be allocated as
follows:
(1) An amount equal to 3% multiplied by each Participant's
Compensation for the Plan Year shall be allocated to each
Participant's Account. If the Employer does not contribute
such amount for all Participants, the amount shall be
allocated to each Participant's Account in the same
proportion that his total Compensation for the Plan Year
bears to the total Compensation of all Participants for
such year.
(2) The balance of the Employer's contribution over the
amount allocated under subparagraph (1) hereof shall be
allocated to each Participant's Account in a dollar amount
equal to 3% multiplied by a Participant's Excess
Compensation. If the Employer does not contribute such
amount for all Participants, each Participant will be
allocated a share of the contribution in the same
proportion that his Excess Compensation bears to the total
Excess Compensation of all Participants for that year.
(3) The balance of the Employer's contribution over the
amount allocated under subparagraph (2) hereof shall be
allocated to each Participant's Account in a dollar amount
equal to 2.7% multiplied by the sum of each Participant's
total Compensation plus Excess Compensation. If the
Employer does not contribute such amount for all
Participants, each Participant will be allocated a share
of the contribution in the same proportion that his total
Compensation plus his total Excess Compensation for the
Plan Year bears to the total Compensation plus the total
Excess Compensation of all Participants for that year.
Regardless of the preceding, 1.3% shall be substituted for
2.7% above if Excess Compensation is based on more than
20% and less than or equal to 80% of the Taxable Wage
Base. If Excess Compensation is based on less than 100%
and more than 80% of the Taxable Wage Base, then 2.4%
shall be substituted for 2.7% above.
(4) The balance of the Employer's contributions over the
amount allocated above, if any, shall be allocated to each
Participant's Account in the same proportion that his
total Compensation for the Plan Year bears to the total
Compensation of all Participants for such year.
For each Non-Key Employee who is a Participant in this
Plan and another non-paired defined contribution plan maintained
by the Employer, the minimum 3% allocation specified above shall
be provided as specified in F3 of the Adoption Agreement.
(g) For purposes of the minimum allocations set forth
above, the percentage allocated to the Participant's Combined
Account of any Key Employee shall be equal to the ratio of the sum
of the Employer's contributions and Forfeitures allocated on
behalf of such Key Employee divided by the "415 Compensation" for
such Key Employee.
(h) For any Top Heavy Plan Year, the minimum allocations
Set forth in this Section shall be allocated to the Participant's
Combined Account of all Non-Key Employees who are Participants and
24
<PAGE> 32
who are employed by the Employer on the last day of the Plan Year,
including Non-Key Employees who have (1) failed the complete a
Year of Service; or (2) declined to make mandatory contributions
(if required) or, in the case of a cash or deferred arrangement,
elective contributions to the Plan.
(i) Notwithstanding anything herein to the contrary, in
any Plan Year in which the Employer maintains both this Plan and a
defined benefit pension plan included in a Required Aggregation
Group which is top heavy, the Employer shall not be required to
provide a Non-Key Employee with both the full separate minimum
defined benefit plan benefit and the full separate defined
contribution plan allocations. Therefore, if the Employer
maintains both a Defined Benefit and a Defined Contribution Plan
that are a Top Heavy Group, the top heavy minimum benefits shall
be provided as follows:
(1) Applies if F1b of the Adoption Agreement is
Selected:
(i) The requirements of Section 2.1 shall apply
except that each Non-Key Employee who is a
Participant in the Profit Sharing Plan or Money
Purchase Plan and who is also a Participant in the
Defined Benefit Plan shall receive a minimum
allocation of five percent (5%) of such Participant's
"415 Compensation" from the applicable Defined
Contribution Plan(s).
(ii) For each Non-Key Employee who is a Participant
only in the Defined Benefit Plan the Employer will
provide a minimum non-integrated benefit equal to 2%
of his highest five consecutive year average "415
Compensation" for each Year of Service while a
Participant in the Plan, in which the Plan is top
heavy, not to exceed ten.
(iii) For each Non-Key Employee who is a Participant
only in this Defined Contribution Plan, the Employer
shall provide a contribution equal to 3% of his "415
Compensation."
(2) Applies if F1c of the Adoption Agreement is
Selected:
(i) The minimum allocation specified in Section
4.3(i)(1)(i) shall be 7 1/2% if the Employer elects
in the Adoption Agreement for years in which the Plan
is Top Heavy, but not Super Top Heavy.
(ii) The minimum benefit specified in Section
4.3(i)(1)(ii) shall be 3% if the Employer elects in
the Adoption Agreement for years in which the Plan is
Top Heavy, but not Super Top Heavy.
(iii) The minimum allocation specified in Section
4.3(i)(1)(iii) shall be 4% if the Employer elects in
the Adoption Agreement for years in which the Plan is
Top Heavy, but not Super Top Heavy.
(j) For the purposes of this Section, "415
Compensation" shall be limited to $200,000 (unless adjusted in
such manner as permitted under Code Section 415(d)). However, for
Plan Years beginning prior to January 1, 1989, the $200,000 limit
shall apply only for Top Heavy Plan Years and shall not be
adjusted.
(k) Notwithstanding anything herein to the contrary,
any Participant who terminated employment during the Plan Year for
reasons other than death, Total and Permanent Disability, or
retirement shall or shall not share in the allocations of the
Employer's Contributions and Forfeitures as provided in the
Adoption Agreement. Notwithstanding the foregoing, for Plan Years
beginning
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<PAGE> 33
after 1989, if this is a standardized Plan, any such terminated
Participant shall share in the allocations as provided in this
Section provided such Participant completed more than 500 Hours of
Service.
(l) Notwithstanding anything herein to the contrary,
Participants terminating for reasons of death, Total and Permanent
Disability, or retirement shall share in the allocations as
provided in this Section regardless of whether they completed a
Year of Service during the Plan Year.
(m) If a Former Participant is reemployed after five (5)
consecutive 1-Year Breaks in Service, then separate accounts shall
be maintained as follows:
(1) one account for nonforfeitable benefits attributable
to pre-break service; and
(2) one account representing his employer derived account
balance in the Plan attributable to post-break service.
(n) Notwithstanding any election in the Adoption Agreement
to the contrary, if this is a non-standardized Plan that would
otherwise fail to meet the requirements of Code Sections
401(a)(26), 410(b)(1), or 410(b)(2)(A)(i) and the Regulations
thereunder because Employer Contributions have not been allocated
to a sufficient number or percentage of Participants for a Plan
Year, then the following rules shall apply:
(1) The group of Participants eligible to share in the
Employer's contribution and Forfeitures for the Plan Year
shall be expanded to include the minimum number of
Participants who would not otherwise be eligible as are
necessary to satisfy the applicable test specified above.
The specific participants who shall become eligible under
the terms of this paragraph shall be those who are
actively employed on the last day of the Plan Year and,
when compared to similarly situated Participants, have
completed the greatest number of Hours of Service in the
Plan Year.
(2) If after application of paragraph (1) above, the
applicable test is still not satisfied, then the group of
Participants eligible to share in the Employer's
contribution and Forfeitures for the Plan Year shall be
further expanded to include the minimum number of
Participants who are not actively employed on the last day
of the Plan Year as are necessary to satisfy the
applicable test. The specific Participants who shall
become eligible to share shall be those Participants, when
compared to similarly situated Participants, who have
completed the greatest number of Hours of Service in the
Plan Year before terminating employment.
Nothing in this Section shall permit the reduction of
a Participant's accrued benefit. Therefore any amounts that have
previously been allocated to Participants may not be reallocated
to satisfy these requirements. In such event, the Employer shall
make an additional contribution equal to the amount such affected
Participants would have received had they been included in the
allocations, even if it exceeds the amount which would be
deductible under Code Section 404. Any adjustment to the
allocations pursuant to this paragraph shall be considered a
retroactive amendment adopted by the last day of the Plan Year.
4.4 MAXIMUM ANNUAL ADDITIONS
(a)(1) If the Participant does not participate in, and has
never participated in another qualified plan maintained by the
Employer, or a welfare benefit fund (as defined in Code Section
419(c)), maintained by the Employer, or an individual medical
account (as defined in Code Section 415(i)(2)) maintained by the
Employer, which provides Annual Additions, the amount of Annual
Additions which may be credited to the Participant's accounts for
any Limitation Year shall not exceed the
26
<PAGE> 34
lesser of the Maximum Permissible Amount or any other limitation
contained in this Plan. If the Employer contribution that would
otherwise be contributed or allocated to the Participant's
accounts would cause the Annual Additions for the Limitation Year
to exceed the Maximum Permissible Amount, the amount contributed
or allocated will be reduced so that the Annual Additions for the
Limitation Year will equal the Maximum Permissible Amount.
(2) Prior to determining the Participant's actual
Compensation for the Limitation Year, the Employer may
determine the Maximum Permissible Amount for a Participant
on the basis of a reasonable estimation of the
Participant's Compensation for the Limitation Year,
uniformly determined for all Participants similarly
situated.
(3) As soon as is administratively feasible after the end
of the Limitation Year, the Maximum Permissible Amount for
such Limitation Year shall be determined on the basis of
the Participant's actual compensation for such Limitation
Year.
(4) If there is an excess amount pursuant to Section
4.4(a)(2) or Section 4.5, the excess will be disposed of
in one of the following manners, as uniformly determined
by the Plan Administrator for all Participants similarly
situated:
(i) Any Deferred Compensation or nondeductible
Voluntary Employee Contributions, to the extent they
would reduce the Excess Amount, will be distributed to
the Participant;
(ii) If, after the application of subparagraph (i), an
Excess Amount still exists, and the Participant is
covered by the Plan at the end of the Limitation Year,
the Excess Amount in the Participant's account will be
used to reduce Employer contributions (including any
allocation of Forfeitures) for such Participant in the
next Limitation Year, and each succeeding Limitation
Year if necessary;
(iii) If, after the application of subparagraph (i),
an Excess Amount still exists, and the Participant is
not covered by the Plan at the end of a Limitation
Year, the Excess Amount will be held unallocated in a
suspense account. The suspense account will be applied
to reduce future Employer contributions (including
allocation of any Forfeitures) for all remaining
Participants in the next Limitation Year, and each
succeeding Limitation Year if necessary;
(iv) If a suspense account is in existence at any time
during a Limitation Year pursuant to this Section, it
will not participate in the allocation of investment
gains and losses. If a suspense account is in
existence at any time during a particular limitation
year, all amounts in the suspense account must be
allocated and reallocated to participants' accounts
before any employer contributions or any employee
contributions may be made to the plan for that
limitation year. Excess amounts may not be distributed
to participants or former participants.
(b)(1) This subsection applies if, in addition to this
Plan, the Participant is covered under another qualified Prototype
defined contribution plan maintained by the Employer, or a welfare
benefit fund (as defined in Code Section 419(e)) maintained by the
Employer, or an individual medical account (as defined in Code
Section 415(l)(2)) maintained by the Employer, which provides
Annual Additions, during any Limitation Year. The Annual Additions
which may be credited to a Participant s accounts under this Plan
for any such Limitation Year shall not exceed the Maximum
Permissible Amount reduced by the Annual Additions credited to a
Participant's accounts under the other plans and welfare benefit
funds for the same Limitation Year. If the Annual Additions with
respect to the Participant under other defined contribution plans
and welfare benefit funds maintained
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<PAGE> 35
by the Employer are less than the Maximum Permissible Amount
and the Employer contribution that would otherwise be
contributed or allocated to the Participant's accounts under
this Plan would cause the Annual Additions for the Limitation
Year to exceed this limitation, the amount contributed or
allocated will be reduced so that the Annual Additions under
all such plans and welfare benefit funds for the Limitation
Year will equal the Maximum Permissible Amount. If the Annual
Additions with respect to the Participant under such other
defined contribution plans and welfare benefit funds in the
aggregate are equal to or greater than the Maximum Permissible
Amount, no amount will be contributed or allocated to the
Participant's account under this Plan for the Limitation Year.
(2) Prior to determining the Participant's actual
Compensation for the Limitation Year, the Employer may
determine the Maximum Permissible Amount for a Participant
in the manner described in Section 4.4(a)(2).
(3) As soon as is administratively feasible after the end
of the Limitation Year, the Maximum Permissible Amount for
the Limitation Year will be determined on the basis of the
Participant's actual Compensation for the Limitation Year.
(4) If, pursuant to Section 4.4(b)(2) or Section 4.5, a
Participant's Annual Additions under this Plan and such
other plans would result in an Excess Amount for a
Limitation Year, the Excess Amount will be deemed to
consist of the Annual Additions last allocated, except
that Annual Additions attributable to a welfare benefit
fund or individual medical account will be deemed to have
been allocated first regardless of the actual allocation
date.
(5) If an Excess Amount was allocated to a Participant on
an allocation date of this Plan which coincides with an
allocation date of another plan, the Excess Amount
attributed to this Plan will be the product of:
(i) the total Excess Amount allocated as of such date,
times
(ii) the ratio of (1) the Annual Additions allocated
to the Participant for the Limitation Year as of such
date under this Plan to (2) the total Annual Additions
allocated to the Participant for the Limitation Year
as of such date under this and all the other qualified
defined contribution plans.
(6) Any Excess Amount attributed to this Plan will be
disposed in the manner described in Section 4.4(a)(4).
(c) If the Participant is covered under another qualified
defined contribution plan maintained by the Employer which is not
a Prototype Plan, Annual Additions which may be credited to the
Participant's account under this Plan for any Limitation Year will
be limited in accordance with Section 4.4(b), unless the Employer
provides other limitations in the Adoption Agreement.
(d) If the Employer maintains, or at any time maintained,
a qualified defined benefit plan covering any Participant in this
Plan the sum of the Participant's Defined Benefit Plan Fraction
and Defined Contribution Plan Fraction will not exceed 1.0 in any
Limitation Year. The Annual Additions which may be credited to the
Participant's account under this Plan for any Limitation Year will
be limited in accordance with the Limitation on Allocations
Section of the Adoption Agreement.
Except, however, if the Plans are standardized paired
plans, the rate of accrual in the defined benefit plan will be
reduced to the extent necessary so that the sum of the Defined
Contribution Fraction and Defined Benefit Fraction will equal 1.0.
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<PAGE> 36
(e) For purposes of applying the limitations of Code
Section 415, the transfer of funds from one qualified plan to
another is not an "annual addition." In addition, the following
are not Employee contributions for the purposes of Section
4.4(f)(1)(2): (1) rollover contributions (as defined in Code
Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3)); (2)
repayments of loans made to a Participant from the Plan; (3)
repayments of distributions received by an Employee pursuant to
Code Section 41 I (a)(7)(B) (cash-outs); (4) repayments of
distributions received by an Employee pursuant to Code Section 41
1(a)(3)(D) (mandatory contributions); and (5) Employee
contributions to a simplified employee pension excludable from
gross income under Code Section 408(k)(6).
(f) For purposes of this Section, the following terms
shall be defined as follows:
(1) Annual Additions means the sum credited to a
Participant's accounts for any Limitation Year of (1)
Employer contributions, (2) effective with respect to
"limitation years" beginning after December 31, 1986,
Employee contributions, (3) forfeitures, (4) amounts
allocated, after Mareh 31, 1984, to an individual medical
account, as defined in Code Section 415(l)(2), which is
part of a pension or annuity plan maintained by the
Employer and (5) amounts derived from contributions paid
or accrued after December 31, 1985, in taxable years
ending after such date, which are attributable to
post-retirement medical benefits allocated to the separate
account of a key employee (as defined in Code Section
419A(d)(3)) under a welfare benefit fund (as defined in
Code Section 419(e)) maintained by the Employer. Except,
however, the "415 Compensation" percentage limitation
referred to in paragraph (a)(2) above shall not apply to:
(1) any contribution for medical benefits (within the
meaning of Code Section 419A(f)(2)) after separation from
service which is otherwise treated as an "annual
addition," or (2) any amount otherwise treated as an
"annual addition" under Code Section 415(l)(1).
Notwithstanding the foregoing, for "limitation years"
beginning prior to January 1, 1987, only that portion of
Employee contributions equal to the lesser of Employee
contributions in excess of six percent (6%) of "415
Compensation" or one-half of Employee contributions shall
be considered an "annual addition."
For this purpose, any Excess Amount applied under Sections
4.4(a)(4) and 4.4(b)(6) in the Limitation Year to reduce
Employer contributions shall be considered Annual
Additions for such Limitation Year.
(2) Compensation means a Participant's Compensation as
elected in the Adoption Agreement. However, regardless of
any selection made in the Adoption Agreement, "415
Compensation" shall exclude compensation which is not
currently includible in the Participant's gross income by
reason of the application of Code Sections 125, 402(a)(8),
402(h)(1)(B), or 403(b).
For limitation years beginning after December 31,
1991, for purposes of applying the limitations of this
article, compensation for a limitation year is the
compensation actually paid or made available during such
limitation year.
Notwithstanding the preceding sentence, compensation
for a participant in a defined contribution plan who is
permanently and totally disabled (as defined in section
22(e)(3) of the Internal Revenue Code) is the compensation
such participant would have received for the limitation
year if the participant had been paid at the rate of
compensation paid immediately before becoming permanently
and totally disabled; such imputed compensation for the
disabled participant may be taken into account only if the
participant is not a Highly Compensated Employee and
contributions made on behalf of such participant are
nonforfeitable when made.
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<PAGE> 37
(3) Defined Benefit Fraction means a fraction, the
numerator of which is the sum of the Participant's
Projected Annual Benefits under all the defined benefit
plans (whether or not terminated) maintained by the
Employer, and the denominator of which is the lesser of
125 percent of the dollar limitation determined for the
Limitation Year under Code Sections 415(b) and (d) or 140
percent of his Highest Average Compensation including any
adjustments under Code Section 415(b).
Notwithstanding the above, if the Participant was a
Participant as of the first day of the first Limitation
Year beginning after December 31, 1986, in one or more
defined benefit plans maintained by the Employer which
were in existence on May 6, 1986, the denominator of this
fraction will not be less than 125 percent of the sum of
the annual benefits under such plans which the Participant
had accrued as of the end of the close of the last
Limitation Year beginning before January 1, 1987,
disregarding any changes in the terms and conditions of
the plan after May 5, 1986. The preceding sentence applies
only if the defined benefit plans individually and in the
aggregate satisfied the requirements of Code Section 415
for all Limitation Years beginning before January 1, 1987.
Notwithstanding the foregoing, for any Top Heavy Plan
Year, 100 shall be substituted for 125 unless the extra
minimum allocation is being made pursuant to the
Employer's election in F1 of the Adoption Agreement.
However, for any Plan Year in which this Plan is a Super
Top Heavy Plan, 100 shall be substituted for 125 in any
event.
(4) Defined Contribution Dollar Limitation means $30,000,
or, if greater, one-fourth of the defined benefit dollar
limitation set forth in Code Section 415(b)(1) as in
effect for the Limitation Year.
(5) Defined Contribution Fraction means a fraction, the
numerator of which is the sum of the Annual Additions to
the Participant's account under all the defined
contribution plans (whether or not terminated) maintained
by the Employer for the current and all prior Limitation
Years, (including the Annual Additions attributable to the
Participant's nondeductible voluntary employee
contributions to any defined benefit plans, whether or not
terminated, maintained by the Employer and the annual
additions attributable to all welfare benefit funds, as
defined in Code Section 419(c), and individual medical
accounts, as defined in Code Section 415(l)(2), maintained
by the Employer), and the denominator of which is the sum
of the maximum aggregate amounts for the current and all
prior Limitation Years of Service with the Employer
(regardless of whether a defined contribution plan was
maintained by the Employer). The maximum aggregate amount
in any Limitation Year is the lesser of 125 percent of the
Defined Contribution Dollar Limitation or 35 percent of
the Participant's Compensation for such year. For
Limitation Years beginning prior to January 1, 1987, the
annual addition" shall not be recomputed to treat all
Employee contributions as an Annual Addition.
If the Employee was a Participant as of the end of the
first day of the first Limitation Year beginning after
December 31, 1986, in one or more defined contribution
plans maintained by the Employer which were in existence
on May 5, 1986, the numerator of this fraction will be
adjusted if the sum of this fraction and the Defined
Benefit Fraction would otherwise exceed 1.0 under the
terms of this Plan. Under the adjustment, an amount equal
to the product of (1) the excess of the sum of the
fractions over 1.0 times (2) the denominator of this
fraction, will be permanently subtracted from the
numerator of this fraction. The adjustment is calculated
using the fractions as they would be computed as of the
end of the last Limitation Year beginning before January
1, 1987, and disregarding any changes in the terms and
conditions
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<PAGE> 38
of the plan made after May 5, 1986, but using the Code
Section 415 limitation applicable to the first Limitation
Year beginning on or after January 1, 1987.
Notwithstanding the foregoing, for any Top Heavy Plan
Year, 100 shall be substituted for 125 unless the extra
minimum allocation is being made pursuant to the
Employer's election in F1 of the Adoption Agreement.
However, for any Plan Year in which this Plan is a Super
Top Heavy Plan, 100 shall be substituted for 125 in any
event.
(6) Employer means the Employer that adopts this Plan and
all Affiliated Employers, except that for purposes of this
Section, Affiliated Employers shall be determined pursuant
to the modification made by Code Section 415(h).
(7) Excess Amount means the excess of the Participant's
Annual Additions for the Limitation Year over the Maximum
Permissible Amount.
(8) Highest Average Compensation means the average
Compensation for the three consecutive Years of Service
with the Employer that produces the highest average. A
Year of Service with the Employer is the 12 consecutive
month period defined in Section El of the Adoption
Agreement which is used to determine Compensation under
the Plan.
(9) Limitation Year means the Compensation Year (a 12
consecutive month period) as elected by the Employer in
the Adoption Agreement. All qualified plans maintained by
the Employer must use the same Limitation Year. If the
Limitation Year is amended to a different 12 consecutive
month period, the new Limitation Year must begin on a date
within the Limitation Year in which the amendment is made.
(10) Master or Prototype Plan means a plan the form of
which is the subject of a favorable opinion letter from
the Internal Revenue Service.
(11) Maximum Permissible Amount means the maximum Annual
Addition that may be contributed or allocated to a
Participant's account under the plan for any Limitation
Year, which shall not exceed the lesser of:
(i) the Defined Contribution Dollar Limitation, or
(ii) 25 percent of the Participant's Compensation for
the Limitation Year.
The Compensation Limitation referred to in (ii) shall
not apply to any contribution for medical benefits
(within the meaning of Code Sections 401(h) or
419A(f)(2)) which is otherwise treated as an annual
addition under Code Sections 415(l)(1) or 419A(d)(2).
If a short Limitation Year is created because of an
amendment changing the Limitation Year to a different 12
consecutive month period, the Maximum Permissible Amount
will not exceed the Defined Contribution Dollar
Contribution multiplied by the following fraction:
number of months in the short Limitation Year
---------------------------------------------
12
(12) Projected Annual Benefit means the annual retirement
benefit (adjusted to an actuarially equivalent Straight
life annuity if such benefit is expressed in a form other
than a straight life annuity or qualified Joint and
Survivor Annuity) to which the Participant would be
entitled under the terms of the plan assuming:
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<PAGE> 39
(i) the Participant will continue employment
until Normal Retirement Age (or current
age, if later), and
(ii) the Participant's Compensation for the
current Limitation Year and all other
relevant factors used to determine benefits
under the Plan will remain constant for all
future Limitation Years.
(g) Notwithstanding anything contained in this Section to
the contrary, the limitations, adjustments and other requirements
prescribed in this Section shall at all times comply with the
provisions of Code Section 415 and the Regulations thereunder, the
terms of which are specifically incorporated herein by reference.
4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS
(a) If as a result of the allocation of Forfeitures, a
reasonable error in estimating a Participant's annual
Compensation, a reasonable error in determining the amount of
elective deferrals (within the meaning of Code Section 402(g)(3))
that may be made with respect to any Participant under the limits
of Section 4.4, or other facts and circumstances to which
Regulation 1.415-6(b)(6) shall be applicable, the "annual
additions" under this Plan would cause the maximum provided in
Section 4.4 to be exceeded, the Administrator shall treat the
excess in accordance with Section 4.4(a)(4).
4.6 TRANSFERS FROM QUALIFIED PLANS
(a) If specified in the Adoption Agreement and with the
consent of the Administrator, amounts may be transferred from
other qualified plans, provided that the trust from which such
funds are transferred permits the transfer to be made and the
transfer will not jeopardize the tax exempt status of the Plan or
create adverse tax consequences for the Employer. The amounts
transferred shall be set up in a separate account herein referred
to as a "Participant's Rollover Account." Such account shall be
fully Vested at all times and shall not be subject to forfeiture
for any reason.
(b) Amounts in a Participant's Rollover Account shall be
held by the Trustee pursuant to the provisions of this Plan and
may not be withdrawn by, or distributed to the Participant, in
whole or in part, except as provided in Paragraphs (c) and (d) of
this Section.
(c) Amounts attributable to elective contributions (as
defined in Regulation 1.40 l(k)-I(g)(4)), including amounts
treated as elective contributions, which are transferred from
another qualified plan in a plan-to-plan transfer shall be subject
to the distribution limitations provided for in Regulation 1.401
(k)-I(d).
(d) At Normal Retirement Date, or such other date when the
Participant or his Beneficiary shall be entitled to receive
benefits, the fair market value of the Participant's Rollover
Account shall be used to provide additional benefits to the
Participant or his Beneficiary. Any distributions of amounts held
in a Participant's Rollover Account shall be made in a manner
which is consistent with and satisfies the provisions of Section
6.5, including, but not limited to, all notice and consent
requirements of Code Sections 411(a)(11) and 417 and the
Regulations thereunder. Furthermore, such amounts shall be
considered as part of a Participant's benefit in determining
whether an involuntary cash-out of benefits without Participant
consent may be made.
(e) The Administrator may direct that employee transfers
made after a valuation date be segregated into a separate account
for each Participant until such time as the allocations pursuant
to
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<PAGE> 40
this Plan have been made, at which time they may remain segregated
or be invested as part of the general Trust Fund, to be determined
by the Administrator.
(f) For purposes of this Section, the term "qualified
plan" shall mean any tax qualified plan under Code Section 401(a).
The term "amounts transferred from other qualified plans" shall
mean: (i) amounts transferred to this Plan directly from another
qualified plan; (ii) lump-sum distributions received by an
Employee from another qualified plan which are eligible for tax
free rollover to a qualified plan and which are transferred by the
Employee to this Plan within sixty (60) days following his receipt
thereof; (iii) amounts transferred to this Plan from a conduit
individual retirement account provided that the conduit individual
retirement account has no assets other than assets which (A) were
previously distributed to the Employee by another qualified plan
as a lump-sum distribution B were eligible for tax-free rollover
to a qualified plan and (C) were deposited in such conduit
individual retirement account within sixty (60) days of receipt
thereof and other than earnings on said assets; and (iv) amounts
distributed to the Employee from a conduit individual retirement
account meeting the requirements of clause (iii) above, and
transferred by the Employee to this Plan within sixty (60) days of
his receipt thereof from such conduit individual retirement
account.
(g) Prior to accepting any transfers to which this Section
applies, the Administrator may require the Employee to establish
that the amounts to be transferred to this Plan meet the
requirements of this Section and may also require the Employee to
provide an opinion of counsel satisfactory to the Employer that
the amounts to be transferred meet the requirements of this
Section.
(h) Notwithstanding anything herein to the contrary, a
transfer directly to this Plan from another qualified plan (or a
transaction having the effect of such a transfer) shall only be
permitted if it will not result in the elimination or reduction of
any "Section 411(d)(6) protected benefit" as described in Section
8.1.
4.7 VOLUNTARY CONTRIBUTIONS
(a) If this is an amendment to a Plan that had previously
allowed voluntary Employee contributions, then, except as provided
in 4.7(b) below, this Plan will not accept voluntary Employee
contributions for Plan Years beginning after the Plan Year in
which this Plan is adopted by the Employer.
(b) For 401(k) Plans, if elected in the Adoption
Agreement, each Participant may, at the discretion of the
Administrator in a nondiscriminatory manner, elect to voluntarily
contribute a portion of his compensation earned while a
Participant under this Plan. Such contributions shall be paid to
the Trustee within a reasonable period of time but in no event
later than 90 days after the receipt of the contribution.
(c) The balance in each Participant's Voluntary
Contribution Account shall be fully Vested at all times and shall
not be subject to Forfeiture for any reason.
(d) A Participant may elect to withdraw his voluntary
contributions from his Voluntary Contribution Account and the
actual earnings thereon in a manner which is consistent with and
satisfies the provisions of Section 6.5, including, but not
limited to, all notice and consent requirements of Code Sections
411(a)(11) and 417 and the Regulations thereunder. If the
Administrator maintains sub-accounts with respect to voluntary
contributions (and earnings thereon) which were made on or before
a specified date, a Participant shall be permitted to designate
which sub-account shall be the source for his withdrawal. No
Forfeitures shall occur solely as a result of an Employee's
withdrawal of Employee contributions.
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<PAGE> 41
In the event such a withdrawal is made, or in the event a
Participant has received a hardship distribution pursuant to
Regulation 1.401 (k)-1 (d)(2)(iii)(B) from any plan maintained by
the Employer, then such Participant shall be barred from making
any voluntary contributions for a period of twelve (12) months
after receipt of the withdrawal or distribution.
(e) At Normal Retirement Date, or such other date when the
Participant or his Beneficiary shall be entitled to receive
benefits, the fair market value of the Voluntary Contribution
Account shall be used to provide additional benefits to the
Participant or his Beneficiary.
(f) The Administrator may direct that voluntary
contributions made after a valuation date be segregated into a
separate account until such time as the allocations pursuant to
this Plan have been made, at which time they may remain segregated
or be invested as part of the general Trust Fund, to be determined
by the Administrator.
4.8 DIRECTED INVESTMENT ACCOUNT
(a) If elected in the Adoption Agreement, all Participants
shall direct the Trustee as to the investment of all of their
individual account balances. Participants shall direct the Trustee
in writing to invest their account in specific assets as permitted
by the Administrator provided such investments are in accordance
with the Department of Labor regulations and are permitted by the
Plan. That portion of the account of any Participant so directing
will thereupon be considered a Directed Investment Account.
(b) A separate Directed Investment Account shall be
established for each Participant who has directed an investment.
Transfers between the Participant's regular account and their
Directed Investment Account shall be charged and credited as the
case may be to each account. The Directed Investment Account shall
not share in Trust Fund Earnings, but it shall be charged or
credited as appropriate with the net earnings, gains, losses and
expenses as well as any appreciation or depreciation in market
value during each Plan Year attributable to such account.
(c) The Administrator shall establish a procedure, to be
applied in a uniform and nondiscriminatory manner, setting forth
the permissible investment options under this Section, how often
changes between investments may be made, and any other limitations
that the Administrator shall impose on a Participant's right to
direct investments.
4.9 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS
(a) If this is an amendment to a Plan that previously
permitted deductible voluntary contributions, then each
Participant who made a "Qualified Voluntary Employee Contribution"
within the meaning of Code Section 219(e)(2) as it existed prior
to the enactment of the Tax Reform Act of 1986, shall have his
contribution held in a separate Qualified Voluntary Employee
Contribution Account which shall be fully Vested at all times.
Such contributions, however, shall not be permitted if they are
attributable to taxable years beginning after December 31, 1986.
(b) A Participant may, upon written request delivered to
the Administrator, make withdrawals from his Qualified Voluntary
Employee Contribution Account. Any distribution shall be made in a
manner which is consistent with and satisfies the provisions of
Section 6.5, including, but not limited to, all notice and consent
requirements of Code Sections 411(a)(11) and 417 and the
Regulations thereunder.
(c) At Normal Retirement Date, or such other date when the
Participant or his Beneficiary shall be entitled to receive
benefits, the fair market value of the Qualified Voluntary
Employee
34
<PAGE> 42
Contribution Account shall be used to provide additional benefits
to the Participant or his Beneficiary.
(d) Unless the Administrator directs Qualified Voluntary
Employee Contributions made pursuant to this Section be segregated
into a separate account for each Participant, they shall be
invested as part of the general Trust Fund and share in earnings
and losses.
4.10 ACTUAL CONTRIBUTION PERCENTAGE TESTS
In the event this Plan previously provided for voluntary or
mandatory Employee contributions, then, with respect to Plan Years beginning
after December 31, 1986, such contributions must satisfy the provisions of Code
Section 401(m) and the Regulations thereunder.
4.11 INTEGRATION IN MORE THAN ONE PLAN
If the Employer and/or an Affiliated Employer maintain qualified
retirement plans integrated with Social Security such that any Participant in
this Plan is covered under more than one of such plans, then such plans will be
considered to be one plan and will be considered to be integrated if the extent
of the integration of all such plans does not exceed 100%. For purposes of the
preceding sentence, the extent of integration of a plan is the ratio, expressed
as a percentage, which the actual benefits, benefit rate, offset rate, or
employer contribution rate, whatever is applicable under the Plan bears to the
limitation applicable to such Plan. If the Employer maintains two or more
standardized paired plans, only one plan may be integrated with Social Security.
ARTICLE V
VALUATIONS
5.1 VALUATION OF THE TRUST FUND
The Administrator shall direct the Trustee, as of each Anniversary
Date, and at such other date or dates deemed necessary by the Administrator,
herein called "valuation date," to determine the net worth of the assets
comprising the Trust Fund as it exists on the "valuation date." In determining
such net worth, the Trustee shall value the assets comprising the Trust Fund at
their fair market value as of the "valuation date" and shall deduct all expenses
from which the Trustee has not yet obtained reimbursement from the Employer or
the Trust Fund.
5.2 METHOD OF VALUATION
In determining the fair market value of securities held in the
Trust Fund which are listed on a registered stock exchange, the Administrator
shall direct the Trustee to value the same at the prices they were last traded
on such exchange preceding the close of business on the "valuation date." If
such securities were not traded on the "valuation date," or if the exchange on
which they are traded was not open for business on the "valuation date," then
the securities shall be valued at the prices at which they were last traded
prior to the valuation date. Any unlisted security held in the Trust Fund shall
be valued at its bid price next preceding the close of business on the
"valuation date," which bid price shall be obtained from a registered broker or
an investment banker. In determining the fair market value of assets other than
securities for which trading or bid prices can be obtained, the Trustee may
appraise such assets itself, or in its discretion, employ one or more appraisers
for that purpose and rely on the values established by such appraiser or
appraisers.
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<PAGE> 43
ARTICLE VI
DETERMINATION AND DISTRIBUTION OF BENEFITS
6.1 DETERMINATION OF BENEFITS UPON RETIREMENT
Every Participant may terminate his employment with the Employer
and retire for the purposes hereof on or after his Normal Retirement Date or
Early Retirement Date. Upon such Normal Retirement Date or Early Retirement
Date, all amounts credited to such Participant's Combined Account shall become
distributable. However, a Participant may postpone the termination of his
employment with the Employer to a later date, in which event the participation
of such Participant in the Plan, including the right to receive allocations
pursuant to Section 4.3, shall continue until his Late Retirement Date. Upon a
Participant's Retirement Date, or as soon thereafter as is practicable, the
Administrator shall direct the distribution of all amounts credited to such
Participant's Combined Account in accordance with Section 6.5.
6.2 DETERMINATION OF BENEFITS UPON DEATH
(a) Upon the death of a Participant before his
Retirement Date or other termination of his employment, all
amounts credited to such Participant's Combined Account shall
become fully Vested. The Administrator shall direct, in accordance
with the provisions of Sections 6.6 and 6.7, the distribution of
the deceased Participant's accounts to the Participant's
Beneficiary.
(b) Upon the death of a Former Participant, the
Administrator shall direct, in accordance with the provisions of
Sections 6.6 and 6.7, the distribution of any remaining amounts
credited to the accounts of such deceased Former Participant to
such Former Participant's Beneficiary.
(c) The Administrator may require such proper proof
of death and such evidence of the right of any person to receive
payment of the value of the account of a deceased Participant or
Former Participant as the Administrator may deem desirable. The
Administrator's determination of death and of the right of any
person to receive payment shall be conclusive.
(d) Unless otherwise elected in the manner prescribed
in Section 6.6, the Beneficiary of the Pre-Retirement Survivor
Annuity shall be the Participant's spouse. Except, however, the
Participant may designate a Beneficiary other than his spouse for
the Pre-Retirement Survivor Annuity if:
(1) the Participant and his spouse have validly
waived the Pre-Retirement Survivor Annuity in the
manner prescribed in Section 6.6, and the spouse has
waived his or her fight to be the Participant's
Beneficiary, or
(2) the Participant is legally separated or has been
abandoned (within the meaning of local law) and the
Participant has a court order to such effect (and
there is no "qualified domestic relations order" as
defined in Code Section 414(p) which provides
otherwise), or
(3) the Participant has no spouse, or
(4) the spouse cannot be located.
In such event, the designation of a Beneficiary
shall be made on a form satisfactory to the Administrator. A
Participant may at any time revoke his designation of a
Beneficiary or change his Beneficiary by filing written notice of
such revocation or change with the Administrator. However, the
Participant's spouse must again consent in writing to any change
in Beneficiary unless the original consent acknowledged that the
spouse had the right to limit consent only to a specific
Beneficiary and that the spouse voluntarily elected to relinquish
such right. The Participant may, at
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<PAGE> 44
any time, designate a Beneficiary for death benefits payable under
the Plan that are in excess of the Pre-Retirement Survivor
Annuity. In the event no valid designation of Beneficiary exists
at the time of the Participant's death, the death benefit shall be
payable to his estate.
(e) If the Plan provides an insured death benefit and
a Participant dies before any insurance coverage to which he is
entitled under the Plan is effected, his death benefit from such
insurance coverage shall be limited to the standard rated premium
which was or should have been used for such purpose.
(f) In the event of any conflict between the terms of
this Plan and the terms of any Contract issued hereunder, the Plan
provisions shall control.
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY
In the event of a Participant's Total and Permanent Disability
prior to his Retirement Date or other termination of his employment, all amounts
credited to such Participant's Combined Account shall become fully Vested. In
the event of a Participant's Total and Permanent Disability, the Administrator,
in accordance with the provisions of Sections 6.5 and 6.7, shall direct the
distribution to such Participant of all amounts credited to such Participant's
Combined Account as though he had retired.
6.4 DETERMINATION OF BENEFITS UPON TERMINATION
(a) On or before the Anniversary Date, or other valuation
date, coinciding with or subsequent to the termination of a
Participant's employment for any reason other than retirement,
death, or Total and Permanent Disability, the Administrator may
direct that the amount of the Vested portion of such Terminated
Participant's Combined Account be segregated and invested
separately. In the event the Vested portion of a Participant's
Combined Account is not segregated, the amount shall remain in a
separate account for the Terminated Participant and share in
allocations pursuant to Section 4.3 until such time as a
distribution is made to the Terminated Participant. The amount of
the portion of the Participant's Combined Account which is not
Vested may be credited to a separate account (which will always
share in gains and losses of the Trust Fund) and at such time as
the amount becomes a Forfeiture shall be treated in accordance
with the provisions of the Plan regarding Forfeitures.
Regardless of whether distributions in kind are permitted,
in the event that the amount of the Vested portion of the
Terminated Participant's Combined Account equals or exceeds the
fair market value of any insurance Contracts, the Trustee, when so
directed by the Administrator and agreed to by the Terminated
Participant, shall assign, transfer, and set over to such
Terminated Participant all Contracts on his life in such form or
with such endorsements, so that the settlement options and forms
of payment are consistent with the provisions of Section 6.5. In
the event that the Terminated Participant's Vested portion does
not at least equal the fair market value of the Contracts, if any,
the Terminated Participant may pay over to the Trustee the sum
needed to make the distribution equal to the value of the
Contracts being assigned or transferred, or the Trustee, pursuant
to the Participant's election, may borrow the cash value of the
Contracts from the Insurer so that the value of the Contracts is
equal to the Vested portion of the Terminated Participant's
Combined Account and then assign the Contracts to the Terminated
Participant.
Distribution of the funds due to a Terminated Participant
shall be made on the occurrence of an event which would result in
the distribution had the Terminated Participant remained in the
employ of the Employer (upon the Participant's death, Total and
Permanent Disability, Early or Normal Retirement). However, at the
election of the Participant, the Administrator shall direct that
the entire Vested portion of the Terminated Participant's Combined
Account to be payable to such
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<PAGE> 45
Terminated Participant provided the conditions, if any, set forth
in the Adoption Agreement have been satisfied. Any distribution
under this paragraph shall be made in a manner which is consistent
with and satisfies the provisions of Section 6.5, including but
not limited to, all notice and consent requirements of Code
Sections 41l(a)(11) and 417 and the Regulations thereunder.
Notwithstanding the above, if the value of a Terminated
Participant's Vested benefit derived from Employer and Employee
contributions does not exceed, and at the time of any prior
distribution, has never exceeded $3,500, the Administrator shall
direct that the entire Vested benefit be paid to such Participant
in a single lump-sum without regard to the consent of the
Participant or the Participant's spouse. A Participant's Vested
benefit shall not include Qualified Voluntary Employee
Contributions within the meaning of Code Section 72(o)(5)(B) for
Plan Years beginning prior to January 1, 1989.
(b) The Vested portion of any Participant's Account shall
be a percentage of such Participant's Account determined on the
basis of the Participant's number of Years of Service according to
the vesting schedule specified in the Adoption Agreement.
(c) For any Top Heavy Plan Year, one of the minimum top
heavy vesting schedules as elected by the Employer in the Adoption
Agreement will automatically apply to the Plan. The minimum top
heavy vesting schedule applies to all benefits within the meaning
of Code Section 411(a)(7) except those attributable to Employee
contributions, including benefits accrued before the effective
date of Code Section 416 and benefits accrued before the Plan
became top heavy. Further, no decrease in a Participant's Vested
percentage may occur in the event the Plan's status as top heavy
changes for any Plan Year. However, this Section does not apply to
the account balances of any Employee who does not have an Hour of
Service after the Plan has initially become top heavy and the
Vested percentage of such Employee's Participant's Account shall
be determined without regard to this Section 6.4(c).
If in any subsequent Plan Year, the Plan ceases to be a
Top Heavy Plan, the Administrator shall continue to use the
vesting schedule in effect while the Plan was a Top Heavy Plan for
each Employee who had an Hour of Service during a Plan Year when
the Plan was Top Heavy.
(d) Notwithstanding the vesting schedule above, upon the
complete discontinuance of the Employer's contributions to the
Plan or upon any full or partial termination of the Plan, all
amounts credited to the account of any affected Participant shall
become 100% Vested and shall not thereafter be subject to
Forfeiture.
(e) If this is an amended or restated Plan, then
notwithstanding the vesting schedule specified in the Adoption
Agreement, the Vested percentage of a Participant's Account shall
not be less than the Vested percentage attained as of the later of
the effective date or adoption date of this amendment and
restatement. The computation of a Participant's nonforfeitable
percentage of his interest in the Plan shall not be reduced as the
result of any direct or indirect amendment to this Article, or due
to changes in the Plan's status as a Top Heavy Plan.
(f) If the Plan's vesting schedule is amended, or if the
Plan is amended in any way that directly or indirectly affects the
computation of the Participant's nonforfeitable percentage or if
the Plan is deemed amended by an automatic change to a top heavy
vesting schedule, then each Participant with at least 3 Years of
Service as of the expiration date of the election period may elect
to have his nonforfeitable percentage computed under the Plan
without regard to such amendment or change. Notwithstanding the
foregoing, for Plan Years beginning before January 1, 1989, or
with respect to Employees who fail to complete at least one ( 1)
Hour of Service in a Plan Year beginning after December 31, 1988,
five (5) shall be substituted for three (3) in the preceding
sentence. If a
38
<PAGE> 46
Participant fails to make such election, then such Participant
shall be subject to the new vesting schedule. The Participant's
election period shall commence on the adoption date of the
amendment and shall end 60 days after the latest of:
(1) the adoption date of the amendment,
(2) the effective date of the amendment, or
(3) the date the Participant receives written notice of
the amendment from the Employer or Administrator.
(g)(1) If any Former Participant shall be reemployed by
the Employer before a 1-Year Break in Service occurs, he shall
continue to participate in the Plan in the same manner as if such
termination had not occurred.
(2) If any Former Participant shall be reemployed by the
Employer before five (5) consecutive 1-Year Breaks in
Service, and such Former Participant had received a
distribution of his entire Vested interest prior to his
reemployment, his forfeited account shall be reinstated
only if he repays the full amount distributed to him
before the earlier of five (5) years after the first date
on which the Participant is subsequently reemployed by the
Employer or the close of the first period of 5 consecutive
1-Year Breaks in Service commencing after the
distribution. If a distribution occurs for any reason
other than a separation from service, the time for
repayment may not end earlier than five (5) years after
the date of separation. In the event the Former
Participant does repay the full amount distributed to him,
the undistributed portion of the Participant's Account
must be restored in full, unadjusted by any gains or
losses occurring subsequent to the Anniversary Date or
other valuation date preceding his termination. If an
employee receives a distribution pursuant to this section
and the employee resumes employment covered under this
plan, the employee's employer-derived account balance will
be restored to the amount on the date of distribution if
the employee repays to the plan the full amount of the
distribution attributable to employer contributions before
the earlier of 5 years after the first date on which the
participant is subsequently re-employed by the employer,
or the date the participant incurs 5 consecutive 1-year
breaks in service following the date of the distribution.
If a non-Vested Former Participant was deemed to have
received a distribution and such Former Participant is
reemployed by the Employer before five (5) consecutive
1-Year Breaks in Service, then such Participant will be
deemed to have repaid the deemed distribution as of the
date of reemployment.
(3) If any Former Participant is reemployed after a I-Year
Break in Service has occurred, Years of Service shall
include Years of Service prior to his I-Year Break in
Service subject to the following rules:
(i) Any Former Participant who under the Plan does not
have a nonforfeitable right to any interest in the
Plan resulting from Employer contributions shall lose
credits if his consecutive 1-Year Breaks in Service
equal or exceed the greater of (A) five (5) or (B) the
aggregate number of his pre-break Years of Service;
(ii) After five (5) consecutive 1-Year Breaks in
Service, a Former Participant's Vested Account balance
attributable to pre-break service shall not be
increased as a result of post-break service;
39
<PAGE> 47
(iii) A Former Participant who is reemployed and who
has not had his Years of Service before a 1-Year Break
in Service disregarded pursuant to (i) above, shall
participate in the Plan as of his date of
reemployment;
(iv) If a Former Participant completes a Year of
Service (a 1-Year Break in Service previously
occurred, but employment had not terminated), he shall
participate in the Plan retroactively from the first
day of the Plan Year during which he completes one (1)
Year of Service.
(h) In determining Years of Service for purposes of
vesting under the Plan, Years of Service shall be excluded as
specified in the Adoption Agreement.
6.5 DISTRIBUTION OF BENEFITS
(a)(1) Unless otherwise elected as provided below, a
Participant who is married on the "annuity starting date" and who
does not die before the "annuity starting date" shall receive the
value of all of his benefits in the form of a Joint and Survivor
Annuity. The Joint and Survivor Annuity is an annuity that
commences immediately and shall be equal in value to a single life
annuity. Such joint and survivor benefits following the
Participant's death shall continue to the spouse during the
spouse's lifetime at a rate equal to 50% of the rate at which such
benefits were payable to the Participant. This Joint and Survivor
Annuity shall be considered the designated qualified Joint and
Survivor Annuity and automatic form of payment for the purposes of
this Plan. However, the Participant may elect to receive a smaller
annuity benefit with continuation of payments to the spouse at a
rate of seventy-five percent (75%) or one hundred percent (100%)
of the rate payable to a Participant during his lifetime which
alternative Joint and Survivor Annuity shall be equal in value to
the automatic Joint and 50% Survivor Annuity. An unmarried
Participant shall receive the value of his benefit in the form of
a life annuity. Such unmarried Participant, however, may elect in
writing to waive the life annuity. The election must comply with
the provisions of this Section as if it were an election to waive
the Joint and Survivor Annuity by a married Participant, but
without the spousal consent requirement. The Participant may elect
to have any annuity provided for in this Section distributed upon
the attainment of the "earliest retirement age" under the Plan.
The "earliest retirement age" is the earliest date on which, under
the Plan, the Participant could elect to receive retirement
benefits.
(2) Any election to waive the Joint and Survivor Annuity
must be made by the Participant in writing during the
election period and be consented to by the Participant's
spouse. If the spouse is legally incompetent to give
consent, the spouse's legal guardian, even if such
guardian is the Participant, may give consent. Such
election shall designate a Beneficiary (or a form of
benefits) that may not be changed without spousal consent
(unless the consent of the spouse expressly permits
designations by the Participant without the requirement of
further consent by the spouse). Such spouse's consent
shall be irrevocable and must acknowledge the effect of
such election and be witnessed by a Plan representative or
a notary public. Such consent shall not be required if it
is established to the satisfaction of the Administrator
that the required consent cannot be obtained because there
is no spouse, the spouse cannot be located, or other
circumstances that may be prescribed by Regulations. The
election made by the Participant and consented to by his
spouse may be revoked by the Participant in writing
without the consent of the spouse at any time during the
election period. The number of revocations shall not be
limited. Any new election must comply with the
requirements of this paragraph. A former spouse's waiver
shall not be binding on a new spouse.
(3) The election period to waive the Joint and Survivor
Annuity shall be the 90 day period ending on the "annuity
starting date."
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<PAGE> 48
(4) For purposes of this Section and Section 6.6, the
"annuity Starting date" means the first day Of the first
period for which an amount is paid as an annuity, or, in
the case of a benefit not payable in the form of an
annuity, the first day on which all events have occurred
which entities the Participant to such benefit.
(5) With regard to the election, the Administrator shall
provide to the Participant no less than 30 days and no
more than 90 days before the "annuity starting date" a
written explanation of:
(i) the terms and conditions of the Joint and Survivor
Annuity, and
(ii) the Participant's right to make and the effect of
an election to waive the Joint and Survivor Annuity,
and
(iii) the right of the Participant's spouse to consent
to any election to waive the Joint and Survivor
Annuity, and
(iv) the right of the Participant to revoke such
election, and the effect of such revocation.
(b) In the event a married Participant duly elects
pursuant to paragraph (a)(2) above not to receive his benefit in
the form of a Joint and Survivor Annuity, or if such Participant
is not married, in the form of a life annuity, the Administrator,
pursuant to the election of the Participant, shall direct the
distribution to a Participant or his Beneficiary any amount to
which he is entitled under the Plan in one or more of the
following methods which are permitted pursuant to the Adoption
Agreement:
(1) One lump-sum payment in cash or in property;
(2) Payments over a period certain in monthly, quarterly,
semiannual, or annual cash installments. In order to
provide such installment payments, the Administrator may
direct that the Participant's interest in the Plan be
segregated and invested separately, and that the funds in
the segregated account be used for the payment of the
installments. The period over which such payment is to be
made shall not extend beyond the Participant's life
expectancy (or the life expectancy of the Participant and
his designated Beneficiary);
(3) Purchase of or providing an annuity. However, such
annuity may not be in any form that will provide for
payments over a period extending beyond either the life of
the Participant (or the lives of the Participant and his
designated Beneficiary) or the life expectancy of the
Participant (or the life expectancy of the Participant and
his designated Beneficiary).
(c) The present value of a Participant's Joint and
Survivor Annuity derived from Employer and Employee contributions
may not be paid without his written consent if the value exceeds,
or has ever exceeded at the time of any prior distribution,
$3,500. Further, the spouse of a Participant must consent in
writing to any immediate distribution. If the value of the
Participant's benefit derived from Employer and Employee
contributions does not exceed $3,500 and has never exceeded $3,500
at the time of any prior distribution, the Administrator may
immediately distribute such benefit without such Participant's
consent. No distribution may be made under the preceding sentence
after the "annuity starting date" unless the Participant and his
spouse consent in writing to such distribution. Any written
consent required under this paragraph must be obtained not more
than 90 days before commencement of the distribution and shall be
made in a manner consistent with Section 6.5(a)(2).
(d) Any distribution to a Participant who has a benefit
which exceeds, or has ever exceeded at the time of any prior
distribution, S3,500 shall require such Participant's consent if
such
41
<PAGE> 49
distribution commences prior to the later of his Normal Retirement
Age or age 62. With regard to this required consent:
(1) No consent shall be valid unless the Participant has
received a general description of the material features
and an explanation of the relative values of the optional
forms of benefit available under the Plan that would
satisfy the notice requirements of Code Section 417.
(2) The Participant must be informed of his right to defer
receipt of the distribution. If a Participant fails to
consent, it shall be deemed an election to defer the
commencement of payment of any benefit. However, any
election to defer the receipt of benefits shall not apply
with respect to distributions which are required under
Section 6.5(e).
(3) Notice of the rights specified under this paragraph
shall be provided no less than 30 days and no more than 90
days before the "annuity starting date."
(4) Written consent of the Participant to the distribution
must not be made before the Participant receives the
notice and must not be made more than 90 days before the
"annuity starting date."
(5) No consent shall be valid if a significant detriment
is imposed under the Plan on any Participant who does not
consent to the distribution.
(e) Notwithstanding any provision in the Plan to the
contrary, the distribution of a Participant's benefits, made on or
after January 1, 1985, whether under the Plan or through the
purchase of an annuity Contract, shall be made in accordance with
the following requirements and shall otherwise comply with Code
Section 401(a)(9) and the Regulations thereunder (including
Regulation Section 1.401(a)(9)-2), the provisions of which are
incorporated herein by reference:
(1) A Participant's benefits shall be distributed to him
not later than April 1st of the calendar year following
the later of (i) the calendar year in which the
Participant attains age 70 1/2 or (ii) the calendar year
in which the Participant retires, provided, however, that
this clause (ii) shall not apply in the case of a
Participant who is a "five (5) percent owner" at any time
during the five (5) Plan Year period ending in the
calendar year in which he attains age 70 1/2 or, in the
case of a Participant who becomes a "ive (5) percent
owner" during any subsequent Plan Year, clause (ii) shall
no longer apply and the required beginning date shall be
the April 1st of the calendar year following the calendar
year in which such subsequent Plan Year ends.
Alternatively, distributions to a Participant must begin
no later than the applicable April 1st as determined under
the preceding sentence and must be made over the life of
the Participant (or the lives of the Participant and the
Participant's designated Beneficiary) or, if benefits are
paid in the form of a Joint and Survivor Annuity, the life
expectancy of the Participant (or the life expectancies of
the Participant and his designated Beneficiary) in
accordance with Regulations. For Plan Years beginning
after December 31, 1988, clause (ii) above shall not apply
to any Participant unless the Participant had attained age
70 1/2 before January 1, 1988 and was not a "five (5)
percent owner" at any time during the Plan Year ending
with or within the calendar year in which the Participant
attained age 66 1/2 or any subsequent Plan Year.
(2) Distributions to a Participant and his Beneficiaries
shall only be made in accordance with the incidental death
benefit requirements of Code Section 401(a)(9)(G) and the
Regulations thereunder.
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<PAGE> 50
Additionally, for calendar years beginning before 1989,
distributions may also be made under an alternative method
which provides that the then present value of the payments
to be made over the period of the Participant's life
expectancy exceeds fifty percent (50%) of the then present
value of the total payments to be made to the Participant
and his Beneficiaries.
(f) For purposes of this Section, the life expectancy
of a Participant and a Participant's spouse (other than in the
case of a life annuity) shall be redetermined annually in
accordance with Regulations if permitted pursuant to the Adoption
Agreement. If the Participant or the Participant's spouse may
elect whether recalculations will be made, then the election, once
made, shall be irrevocable. If no election is made by the time
distributions must commence, then the life expectancy of the
Participant and the Participant's spouse shall not be subject to
recalculation. Life expectancy and joint and last survivor
expectancy shall be computed using the return multiples in Tables
V and VI of Regulation 1.72-9.
(g) All annuity Contracts under this Plan shall be
non-transferable when distributed. Furthermore, the terms of any
annuity Contract purchased and distributed to a Participant or
spouse shall comply with all of the requirements of this Plan.
(h) Subject to the spouse's right of consent afforded
under the Plan, the restrictions imposed by this Section shall not
apply if a Participant has, prior to January 1, 1984, made a
written designation to have his retirement benefit paid in an
alternative method acceptable under Code Section 401(a) as in
effect prior to the enactment of the Tax Equity and Fiscal
Responsibility Act of 1981.
(i) If a distribution is made at a time when a Participant
who has not terminated employment is not fully Vested in his
Participant's Account and the Participant may increase the Vested
percentage in such account:
(1) A separate account shall be established for the
Participant's interest in the Plan as of the time of the
distribution, and
(2) At any relevant time the Participant's Vested portion
of the separate account shall be equal to an amount ("X")
determined by the formula:
X equals P(AB plus (RxD)) - (R x D)
For purposes of applying the formula: P is the Vested
percentage at the relevant time, AB is the account balance
at the relevant time, D is the amount of distribution, and
R is the ratio of the account balance at the relevant time
to the account balance after distribution.
6.6 DISTRIBUTION OF BENEFITS UPON DEATH
(a) Unless otherwise elected as provided below, a Vested
Participant who dies before the annuity starting date and who has
a surviving spouse shall have the Pre-Retirement Survivor Annuity
paid to his surviving spouse. The Participant's spouse may direct
that payment of the Pre-Retirement Survivor Annuity commence
within a reasonable period after the Participant's death. If the
spouse does not so direct, payment of such benefit will commence
at the time the Participant would have attained the later of his
Normal Retirement Age or age 62. However, the spouse may elect a
later commencement date. Any distribution to the Participant's
spouse shall be subject to the rules specified in Section 6.6(h).
43
<PAGE> 51
(b) Any election to waive the Pre-Retirement Survivor
Annuity before the Participant's death must be made by the
Participant in writing during the election period and shall
require the spouse's irrevocable consent in the same manner
provided for in Section 6.5(a)(2). Further, the spouse's consent
must acknowledge the specific nonspouse Beneficiary.
Notwithstanding the foregoing, the nonspouse Beneficiary need not
be acknowledged, provided the consent of the spouse acknowledges
that the spouse has the right to limit consent only to a specific
Beneficiary and that the spouse voluntarily elects to relinquish
such right.
(c) The election period to waive the Pre-Retirement
Survivor Annuity shall begin on the first day of the Plan Year in
which the Participant attains age 35 and end on the date of the
Participant's death. An earlier waiver (with spousal consent) may
be made provided a written explanation of the Pre-Retirement
Survivor Annuity is given to the Participant and such waiver
becomes invalid at the beginning of the Plan Year in which the
Participant turns age 35. In the event a Vested Participant
separates from service prior to the beginning of the election
period, the election period shall begin on the date of such
separation from service.
(d) With regard to the election, the Administrator shall
provide each Participant within the applicable period, with
respect to such Participant (and consistent with Regulations), a
written explanation of the Pre-Retirement Survivor Annuity
containing comparable information to that required pursuant to
Section 6.5(a)(4). For the purposes of this paragraph, the term
"applicable period" means, with respect to a Participant,
whichever of the following periods ends last:
(1) The period beginning with the first day of the Plan
Year in which the Participant attains age 32 and ending
with the close of the Plan Year preceding the Plan Year in
which the Participant attains age 35;
(2) A reasonable period after the individual becomes a
Participant. For this purpose, in the case of an
individual who becomes a Participant after age 32, the
explanation must be provided by the end of the three-year
period beginning with the first day of the first Plan Year
for which the individual is a Participant;
(3) A reasonable period ending after the Plan no longer
fully subsidizes the cost of the Pre-Retirement Survivor
Annuity with respect to the Participant;
(4) A reasonable period ending after Code Section 401(a)X
11) applies to the Participant; or
(5) A reasonable period after separation from service in
the case of a Participant who separates before attaining
age 35. For this purpose, the Administrator must provide
the explanation beginning one year before the separation
from service and ending one year after separation.
(e) The Pre-Retirement Survivor Annuity provided for in
this Section shall apply only to Participants who are credited
with an Hour of Service on or after August 23, 1984. Former
Participants who are not credited with an Hour of Service on or
after August 23, 1984 shall be provided with Tights to the
Pre-Retirement Survivor Annuity in accordance with Section
303(e)(2) of the Retirement Equity Act of 1984.
(f) If the value of the Pre-retirement Survivor Annuity
derived from Employer and Employee contributions does not exceed
S3,500 and has never exceeded $3,500 at the time of any prior
distribution, the Administrator shall direct the immediate
distribution of such amount to the Participant's spouse. No
distribution may be made under the preceding sentence after the
annuity starting date unless the spouse consents in writing. If
the value exceeds, or has ever exceeded at the
44
<PAGE> 52
time of any prior distribution, $3,500, an immediate distribution
of the entire amount may be made to the surviving spouse, provided
such surviving spouse consents in writing to such distribution.
Any written consent required under this paragraph must be obtained
not more than 90 days before commencement of the distribution and
shall be made in a manner consistent with Section 6.5(a)(2).
(g)(1) In the event there is an election to waive the
Pre-Retirement Survivor Annuity, and for death benefits in excess
of the Pre-Retirement Survivor Annuity, such death benefits shall
be paid to the Participant's Beneficiary by either of the
following methods, as elected by the Participant (or if no
election has been made prior to the Participant's death, by his
Beneficiary) subject to the rules specified in Section 6.6(h) and
the selections made in the Adoption Agreement:
(i) One lump-sum payment in cash or in property;
(ii)Payment in monthly, quarterly, semi-annual, or annual
cash installments over a period to be determined by the
Participant or his Beneficiary. After periodic
installments commence, the Beneficiary shall have the
right to reduce the period over which such periodic
installments shall be made, and the cash amount of such
periodic installments shall be adjusted accordingly.
(iii) If death benefits in excess of the Pre-Retirement
Survivor Annuity are to be paid to the surviving spouse,
such benefit-its may be paid pursuant to (i) or (ii)
above, or used to purchase an annuity so as to increase
the payments made pursuant to the Pre-Retirement Survivor
Annuity;
(2) In the event the death benefit payable pursuant to
Section 6.2 is payable in installments, then, upon the
death of the Participant, the Administrator may direct
that the death benefit be segregated and invested
separately, and that the funds accumulated in the
segregated account be used for the payment of the
installments.
(h) Notwithstanding any provision in the Plan to the
contrary, distributions upon the death of a Participant made on or
after January 1, 1985, shall be made in accordance with the
following requirements and shall otherwise comply with Code
Section 401(a)(9) and the Regulations thereunder.
(1) If it is determined, pursuant to Regulations, that the
distribution of a Participant's interest has begun and the
Participant dies before his entire interest has been
distributed to him, the remaining portion of such interest
shall be distributed at least as rapidly as under the
method of distribution selected pursuant to Section 6.5 as
of his date of death.
(2) If a Participant dies before he has begun to receive
any distributions of his interest in the Plan or before
distributions are deemed to have begun pursuant to
Regulations, then his death benefit shall be distributed
to his Beneficiaries in accordance with the following
rules subject to the selections made in the Adoption
Agreement and Subsections 6.6(h)(3) and 6.6(i) below:
(i) The entire death benefit shall be distributed to
the Participant's Beneficiaries by December 31st of
the calendar year in which the fifth anniversary of
the Participant's death occurs;
(ii) The 5-year distribution requirement of (i) above
shall not apply to any portion of the deceased
Participant's interest which is payable to or for the
benefit of a designated Beneficiary. In such event,
such portion shall be distributed over the life of
such designated Beneficiary (or over a period not
extending beyond the life expectancy of such
45
<PAGE> 53
designated Beneficiary) provided such distribution
begins not later than December 31st of the calendar
year immediately following the calendar year in which
the Participant died;
(iii) However, in the event the Participant's spouse
(determined as of the date of the Participant's death)
is his designated Beneficiary, the provisions of (ii)
above shall apply except that the requirement that
distributions commence within one year of the
Participant's death shall not apply. In lieu thereof,
distributions must commence on or before the later of:
(1) December 31st of the calendar year immediately
following the calendar year in which the Participant
died; or (2) December 31st of the calendar year in
which the Participant would have attained age 70 1/2.
If the surviving spouse dies before distributions to
such spouse begin, then the 5-year distribution
requirement of this Section shall apply as if the
spouse was the Participant.
(3) Notwithstanding subparagraph (2) above, or any
selections made in the Adoption Agreement, if a
Participant's death benefits are to be paid in the form of
a Pre-Retirement Survivor Annuity, then distributions to
the Participant's surviving spouse must commence on or
before the later of: (1) December 31st of the calendar
year immediately following the calendar year in which the
Participant died; or (2) December 31st of the calendar
year in which the Participant would have attained age 70
1/2.
(i) For purposes of Section 6.6(h)(2), the election by a
designated Beneficiary to be excepted from the 5-year distribution
requirement (if permitted in the Adoption Agreement) must be made
no later than December 31st of the calendar year following the
calendar year of the Participant's death. Except, however, with
respect to a designated Beneficiary who is the Participant's
surviving spouse, the election must be made by the earlier of: (1)
December 31st of the calendar year immediately following the
calendar year in which the Participant died or, if later, the
calendar year in which the Participant would have attained age 70
1/2; or (2) December 31st of the calendar year which contains the
fifth anniversary of me date of me Participant's death. An
election by a designated Beneficiary must be in writing and shall
be irrevocable as of the last day of the election period stated
herein. In the absence of an election by the Participant or a
designated Beneficiary, the 5-year distribution requirement shall
apply.
(j) For purposes of this Section, the life expectancy of a
Participant and a Participant's spouse (other than in the case of
a life annuity) shall or shall not be redetermined annually as
provided in the Adoption Agreement and in accordance with
Regulations. If the Participant or the Participant's spouse may
elect, pursuant to the Adoption Agreement, to have life
expectancies recalculated, then the election, once made shall be
irrevocable. If no election is made by the time distributions must
commence, then the life expectancy of the Participant and the
Participant's spouse shall not be subject to recalculation. Life
expectancy and joint and last survivor expectancy shall be
computed using the return multiples in Tables V and VI of
Regulation Section 1.72-9.
(k) In the event that less than 100% of a Participant's
interest in the Plan is distributed To such Participant's spouse,
the portion of the distribution attributable to the Participant's
Voluntary Contribution Account shall be in the same proportion
that the Participant's Voluntary Contribution Account bears to the
Participant's total interest in the Plan.
(l) Subject to the spouse's right of consent afforded
under the Plan, the restrictions imposed by this Section shall not
apply if a Participant has, prior to January 1, 1984, made a
written designation to have his death benefits paid in an
alternative method acceptable under Code Section 401 (a) as in
effect prior to the enactment of the Tax Equity and Fiscal
Responsibility Act of 1982.
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6.7 TIME OF SEGREGATION OR DISTRIBUTION
Except as limited by Sections 6.5 and 6.6, whenever a distribution is
to be made, or a series of payments are to commence, on or as of an Anniversary
Date, the distribution or series of payments may be made or begun on such date
or as soon thereafter as is practicable, but in no event later than 180 days
after the Anniversary Date. However, unless a Former Participant elects in
writing to defer the receipt of benefits (such election may not result in a
death benefit that is more than incidental), the payment of benefits shall begin
not later than the 60th day after the close of the Plan Year in which the latest
of the following events occurs: (a) the date on which the Participant attains
the earlier of age 65 or the Normal Retirement Age specified herein; (b) the
10th anniversary of the year in which the Participant commenced participation in
the Plan; or (c) the date the Participant terminates his service with the
Employer.
Notwithstanding the foregoing, the failure of a Participant and, if
applicable, the Participant's spouse, to consent to a distribution pursuant to
Section 6.5(d), shall be deemed to be an election to defer the commencement of
payment of any benefit sufficient to satisfy this Section.
6.8 DISTRIBUTION FOR MINOR BENEFICIARY
In the event a distribution is to be made to a minor, then the
Administrator may direct that such distribution be paid to the legal guardian,
or if none, to a parent of such Beneficiary or a responsible adult with whom the
Beneficiary maintains his residence, or to the custodian for such Beneficiary
under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted
by the laws of the state in which said Beneficiary resides. Such a payment to
the legal guardian, custodian or parent of a minor Beneficiary shall fully
discharge the Trustee, Employer, and Plan from further liability on account
thereof.
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN
In the event that all, or any portion, of the distribution payable to
a Participant or his Beneficiary hereunder shall, at the later of the
Participant's attainment of age 62 or his Normal Retirement Age, remain unpaid
solely by reason of the inability of the Administrator, after sending a
registered letter, return receipt requested, to the last known address, and
after further diligent effort, to ascertain the whereabouts of such Participant
or his Beneficiary, the amount so distributable shall be treated as a Forfeiture
pursuant to the Plan. In the event a Participant or Beneficiary is located
subsequent to his benefit being reallocated, such benefit shall be restored,
first from Forfeitures, if any, and then from an additional Employer
contribution if necessary.
6.10 PRE-RETIREMENT DISTRIBUTION
For Profit Sharing Plans and 401(k) Profit Sharing Plans, if elected
in the Adoption Agreement, at such time as a Participant shall have attained the
age specified in the Adoption Agreement, the Administrator, at the election of
the Participant, shall direct the distribution of up to the entire amount then
credited to the accounts maintained on behalf of the Participant. However, no
such distribution from the Participant's Account shall occur prior to 100%
Vesting. In the event that the Administrator makes such a distribution, the
Participant shall continue to be eligible to participate in the Plan on the same
basis as any other Employee. Any distribution made pursuant to this Section
shall be made in a manner consistent with Section 6.5, including, but not
limited to, all notice and consent requirements of Code Sections 411(a)(11) and
417 and the Regulations thereunder.
6.11 ADVANCE DISTRIBUTION FOR HARDSHIP
(a) For Profit Sharing Plans, if elected in the Adoption
Agreement, the Administrator, at the election of the Participant,
shall direct the distribution to any Participant in any one Plan Year
up to the lesser of 100% of his Participant's Combined Account valued
as of the last Anniversary Date
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or other valuation date or the amount necessary to satisfy the
immediate and heavy Financial need of the Participant. Any
distribution made pursuant to this Section shall be deemed to be made
as of the first day of the Plan Year or, if later, the valuation date
immediately preceding the date of distribution, and the account from
which the distribution is made shall be reduced accordingly.
Withdrawal under this Section shall be authorized only if the
distribution is on account of:
(1) Medical expenses described in Code Section 213(d)
incurred by the Participant, his spouse, or any of his
dependents (as defined in Code Section 152) or expenses
necessary for these persons to obtain medical care;
(2) The purchase (excluding mortgage payments) of a
principal residence for the Participant;
(3) Funeral expenses for a member of the Participant's
family;
(4) Payment of tuition and related educational fees for the
next 12 months of post-secondary education for the
Participant, his spouse, children, or dependents; or
(5) The need to prevent the eviction of the Participant from
his principal residence or foreclosure on the mortgage of
the Participant's principal residence.
(b) No such distribution shall be made from the
Participant's Account until such Account has become fully Vested.
(c) Any distribution made pursuant to this Section shall be
made in a manner which is consistent with and satisfies the
provisions of Section 6.5, including, but not limited to, all notice
and consent requirements of Code Sections 411(a)(11) and 417 and the
Regulations thereunder.
6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS
All rights and benefits, including elections, provided to a
Participant in this Plan shall be subject to the rights afforded to any
"alternate payee" under a "qualified domestic relations order." Furthermore, a
distribution to an "alternate payee" shall be permitted if such distribution is
authorized by a "qualified domestic relations order," even if the affected
Participant has not reached the "earliest retirement age" under the Plan. For
the purposes of this Section, "alternate payee," "qualified domestic relations
order" and "earliest retirement age" shall have the meaning set forth under Code
Section 414(p).
6.13 SPECIAL RULE FOR NON-ANNUITY PLANS
If elected in the Adoption Agreement, the following shall apply to a
Participant in a Profit Sharing Plan or 401(k) Profit Sharing Plan and To any
distribution, made on or after the First day of the first plan year beginning
after December 31, 1988, from or under a separate account attributable solely to
accumulated deductible employee contributions, as defined in Code Section
72(o)(5)(B), and maintained on behalf of a participant in a money purchase
pension plan, (including a target benefit plan):
(a) The Participant shall be prohibited from electing benefits in the
form of a life annuity;
(b) Upon the death of the Participant, the Participant's entire
Vested account balances will be paid to his or her surviving spouse, or,
if there is no surviving spouse or the surviving spouse has already
consented to waive his or her benefit, in accordance with Section 6.6, to
his designated Beneficiary;
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(c) Except to the extent otherwise provided in this Section and
Section 6.5(h), the other provisions of Sections 6.2, 6.5 and 6.6
regarding spousal consent and the forms of distributions shall be
inoperative with respect to this Plan.
(d) If a distribution is one to which Sections 401(a)(11) and 417 of
the Internal Revenue Code do not apply, such distribution may commence
less than 30 days after the notice required under Section 1.411(a)-11(c)
of the Income Tax Regulations is given, provided that:
(1) the Plan Administrator clearly informs the Participant that
the Participant has a right to a period of at least 30 days after the
notice to consider the decision of whether or not to elect a
distribution (and, if applicable, a particular distribution option),
and
(2) the Participant, after receiving the notice, affirmatively
elects a distribution.
This Section shall not apply to any Participant if it is determined
that this Plan is a direct or indirect transferee of a defined benefit plan or
money purchase plan, or a target benefit plan, stock bonus or profit sharing
plan which would otherwise provide for a life annuity form of payment to the
Participant.
ARTICLE VII
TRUSTEE
7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE
The Trustee shall have the following categories of responsibilities
except that if selected in the Adoption Agreement, the separate trust document
shall apply in lieu of the Sections set forth in this Article VII other than
Sections 7.2(e) and (f), 7.3(r), 7.4 and 7.10:
(a) Consistent with the "funding policy and method" determined by
the Employer to invest, manage, and control the Plan assets subject,
however, to the direction of an Investment Manager if the Employer
should appoint such manager as to all or a portion of the assets of
the Plan;
(b) At the direction of the Administrator, to pay benefits
required under the Plan to be paid to Participants, or, in the event
of their death, to their Beneficiaries
(c) To maintain records of receipts and disbursements and furnish
to the Employer and/or Administrator for each Plan Year a written
annual report per Section 7.7; and
(d) If there shall be more than one Trustee, they shall act by a
majority of their number, but may authorize one or more of them to
sign papers on their behalf.
7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE
(a) The Trustee shall invest and reinvest the Trust Fund to keep
the Trust Fund invested without distinction between principal and
income and in such securities or property, real or personal, wherever
situated, as the Trustee shall deem advisable, including, but not
limited to, stocks, common or preferred, bonds and other evidences of
indebtedness or ownership, and real estate or any interest therein.
The Trustee shall at all times in making investments of the Trust
Fund consider, among other factors, the short and long-term financial
needs of the Plan on the basis of information furnished by the
Employer. In making such investments, the Trustee shall not be
restricted to securities or other property of the character expressly
authorized by the applicable law for trust investments; however, the
Trustee shall give due regard to any limitations imposed by the Code
or the Act so that at all times this Plan may qualify as a qualified
Plan and Trust.
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(b) The Trustee may employ a bank or trust company pursuant to
the terms of its usual and customary bank agency agreement, under
which the duties of such bank or trust company shall be of a
custodial, clerical and record-keeping nature.
(c) Notwithstanding Section 7.2(a), the Employer, in writing to
the Trustee, may delegate investment responsibility to the
Administrator. If the Administrator has been delegated such
authority, the Trustee shall invest trust assets in accordance with
the Administrator's direction, unless the Trustee determines, in the
exercise of its responsibility under ERISA as a co-fiduciary of the
Plan, that such investments are not permitted under the terms of the
Plan, Trust, or the Act. The Trustee shall not be liable or
responsible for losses or unfavorable results arising from the
Trustee's compliance with directions received from the Administrator.
(d) The Trustee may from time to time transfer to a common,
collective, or pooled trust fund maintained by any corporate Trustee
hereunder pursuant to Revenue Ruling 81-100, all or such part of the
Trust Fund as the Trustee may deem advisable, and such part or all of
the Trust Fund so transferred shall be subject to all the terms and
provisions of the common, collective, or pooled trust fund which
contemplate the commingling for investment purposes of such trust
assets with trust assets of other trusts. The Trustee may withdraw
from such common, collective, or pooled trust fund all or such part
of the Trust Fund as the Trustee may deem advisable.
(e) The Trustee, at the direction of the Administrator and
pursuant to instructions from the individual designated in the
Adoption Agreement for such purpose shall ratably apply for, own, and
pay all premiums on Contracts on the lives of the Participants. Any
initial or additional Contract purchased on behalf of a Participant
shall have a face amount of not less than $1,000 or the limitation of
the Insurer, whichever is greater. If a life insurance Contract is to
be purchased for a Participant, the aggregate premium for ordinary
life insurance for each Participant must be less than 50% of the
aggregate contributions and Forfeitures allocated to a Participant's
Combined Account. For purposes of this limitation, ordinary life
insurance Contracts are Contracts with both non-decreasing death
benefits and non-increasing premiums. If term insurance or universal
life insurance is purchased with such contributions, the aggregate
premium must be 25% or less of the aggregate contributions and
Forfeitures allocated to a Participant's Combined Account. If both
term insurance and ordinary life insurance are purchased with such
contributions, the amount expended for term insurance plus one-half
of the premium for ordinary life insurance may not in the aggregate
exceed 25% of the aggregate Employer contributions and Forfeitures
allocated to a Participant's Combined Account. The Trustee must
distribute the Contracts to the Participant or convert the entire
value of the Contracts at or before retirement into cash or provide
for a periodic income so that no portion of such value may be used to
continue life insurance protection beyond retirement. Notwithstanding
the above, the limitations imposed herein with respect to the
purchase of life insurance shall not apply, in the case of a Profit
Sharing Plan, to the portion of a Participant's Account that has
accumulated for at least two (2) Plan Years.
Notwithstanding anything hereinabove to the contrary, amounts
credited to a Participant's Qualified Voluntary Employee Contribution
Account pursuant to Section 4.9, shall not be applied to the purchase
of life insurance contracts.
(f) The Trustee will be the owner of any life insurance Contract
purchased under the terms of this Plan. The Contract must provide
that the proceeds will be payable to the Trustee; however, the
Trustee shall be required to pay over all proceeds of the Contract to
the Participant's designated Beneficiary in accordance with the
distribution provisions of Article VI. A Participant's spouse will be
the designated Beneficiary pursuant to Section 6.2, unless a
qualified election has been made in accordance with Sections 6.5 and
6.6 of the Plan, if applicable. Under no circumstances shall the
Trust retain any part of the proceeds. However, the Trustee shall not
pay the proceeds in a method
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that would violate the requirements of the Retirement Equity Act, as
stated in Article VI of the Plan, or Code Section 401(a)(9) and the
Regulations thereunder.
7.3 OTHER POWERS OF THE TRUSTEE
The Trustee, in addition to all powers and authorities under common
law, statutory authority, including the Act, and other provisions of this Plan,
shall have the following powers and authorities to be exercised in the Trustee's
sole discretion:
(a) To purchase, or subscribe for, any securities or other
property and to retain the same. In conjunction with the purchase of
securities, margin accounts may be opened and maintained;
(b) To sell, exchange, convey, transfer, grant options to
purchase, or otherwise dispose of any securities or other property
held by the Trustee, by private contract or at public auction. No
person dealing with the Trustee shall be bound to see to the
application of the purchase money or to inquire into the validity,
expediency, or propriety of any such sale or other disposition, with
or without advertisement;
(c) To vote upon any stocks, bonds, or other securities; to give
general or special proxies or powers of attorney with or without
power of substitution; to exercise any conversion privileges,
subscription rights or other options, and to make any payments
incidental thereto; to oppose, or to consent to, or otherwise
participate in, corporate reorganizations or other changes affecting
corporate securities, and to delegate discretionary powers, and to
pay any assessments or charges in connection therewith; and generally
to exercise any of the powers of an owner with respect to stocks,
bonds, securities, or other property. However, the Trustee shall not
vote proxies relating to securities for which it has not been
assigned full investment management responsibilities. In those cases
where another party has such investment authority or discretion, be
it the Administrator or an outside Investment Manager, the Trustee
will deliver all proxies to said party who will then have full
responsibility for voting those proxies;
(d) To cause any securities or other property to be registered in
the Trustee's own name or in the name of one or more of the Trustee's
nominees, and to hold any investments in bearer form, but the books
and records of the Trustee shall at all times show that all such
investments are part of the Trust Fund;
(e) To borrow or raise money for the purposes of the Plan in such
amount, and upon such terms and conditions, as the Trustee shall deem
advisable; and for any sum so borrowed, to issue a promissory note as
Trustee, and to secure the repayment thereof by pledging all, or any
part, of the Trust Fund; and no person lending money to the Trustee
shall be bound to see To the application of the money lent or to
inquire into the validity, expediency, or propriety of any borrowing;
(f) To keep such portion of the Trust Fund in cash or cash
balances as the Trustee may, from time to time, deem to be in the
best interests of the Plan, without liability for interest thereon;
(g) To accept and retain for such time as it may deem advisable
any securities or other property received or acquired by it as
Trustee hereunder, whether or not such securities or other property
would normally be purchased as investments hereunder;
(h) To make, execute, acknowledge, and deliver any and all
documents of transfer and conveyance and any and all other
instruments that may be necessary or appropriate to carry out the
powers herein granted;
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(i) To settle, compromise, or submit to arbitration any claims,
debts, or damages due or owing to or from the Plan, to commence or
defend suits or legal or administrative proceedings, and to represent
the Plan in all suits and legal and administrative proceedings;
(j) To employ suitable agents and counsel and to pay their
reasonable expenses and compensation, and such agent or counsel may
or may not be agent or counsel for the Employer;
(k) To apply for and procure from the Insurer as an investment of
the Trust Fund such annuity, or other Contracts (on the life of any
Participant) as the Administrator shall deem proper; to exercise, at
any time or from time to time, whatever rights and privileges may be
granted under such annuity, or other Contracts; to collect, receive,
and settle for the proceeds of all such annuity, or other Contracts
as and when entitled to do so under the provisions thereof;
(l) To invest funds of the Trust in time deposits or savings
accounts bearing a reasonable rate of interest in the Trustee's bank;
(m) To invest in Treasury Bills and other forms of United States
government obligations;
(n) To sell, purchase and acquire put or call options if the
options are traded on and purchased through a national securities
exchange registered under the Securities Exchange Act of 1934, as
amended, or, if the options are not traded on a national securities
exchange, are guaranteed by a member firm of the New York Stock
Exchange;
(o) To deposit monies in federally insured savings accounts or
certificates of deposit in banks or savings and loan associations;
(p) To pool all or any of the Trust Fund, from time to time, with
assets belonging to any other qualified employee pension benefit
trust created by the Employer or any Affiliated Employer, and to
commingle such assets and make joint or common investments and carry
joint accounts on behalf of this Plan and such other trust or trusts,
allocating undivided shares or interests in such investments or
accounts or any pooled assets of the two or more trusts in accordance
with their respective interests;
(q) To do all such acts and exercise all such rights and
privileges, although not specifically mentioned herein, as the
Trustee may deem necessary to carry out the purposes of the Plan.
(r) Directed Investment Account. The powers granted to the
Trustee shall be exercised in the sole fiduciary discretion of the
Trustee. However, if elected in the Adoption Agreement, each
Participant shall direct the Trustee to separate and keep separate
all or a portion of his interest in the Plan-, and further each
Participant is authorized and empowered, in his sole and absolute
discretion, to give directions to the Trustee in such form as the
Trustee may require concerning the investment of the Participant's
Directed Investment Account, which directions must be followed by the
Trustee subject, however, to restrictions on payment of life
insurance premiums. Neither the Trustee nor any other persons
including the Administrator or otherwise shall be under any duty to
question any such direction of the Participant or to review any
securities or other property, real or personal, or to make any
suggestions to the Participant in connection therewith, and the
Trustee shall comply as promptly as practicable with directions given
by the Participant hereunder. Any such direction may be of a
continuing nature or otherwise and may be revoked by the Participant
at any time in such form as the Trustee may require. The Trustee may
refuse to comply with any direction from the Participant in the event
the Trustee, in its sole and absolute discretion, deems such
directions improper by virtue of applicable law, and in such event,
the Trustee shall not be responsible or liable for any loss or
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expense which may result. Any costs and expenses related to
compliance with the Participant's directions shall be borne by the
Participant's Directed Investment Account.
(s) Notwithstanding anything in this Section, if this Plan is
used in conjunction with a separate trust, the separate trust shall
control with respect to the powers and duties of the Trustee.
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7.4 LOANS TO PARTICIPANTS
(a) If specified in the Adoption Agreement, the Trustee (or, if
loans are treated as Directed Investment pursuant to the Adoption
Agreement, the Administrator) may, in the Trustee's (or, if
applicable, the Administrator's) sole discretion, make loans to
Participants or Beneficiaries under the following circumstances: (1)
loans shall be made available to all Participants and Beneficiaries
on a reasonably equivalent basis; (2) loans shall not be made
available to Highly Compensated Employees in an amount greater than
the amount made available to other Participants; (3) loans shall bear
a reasonable rate of interest; (4) loans shall be adequately secured;
and (5) shall provide for periodic repayment over a reasonable period
of time.
(b) Loans shall not be made to any Shareholder-Employee or
Owner-Employee unless an exemption for such loan is obtained pursuant
to Act Section 408 and further provided that such loan would not be
subject to tax pursuant to Code Section 4975.
(c) Loans shall not be granted to any Participant that provide
for a repayment period extending beyond such Participant's Normal
Retirement Date.
(d) Loans made pursuant to this Section (when added to the
outstanding balance of all other loans made by the Plan to the
Participant) shall be limited to the lesser of:
(1) $50,000 reduced by the excess (if any) of the highest
outstanding balance of loans from the Plan to the Participant
during the one year period ending on the day before the date on
which such loan is made, over the outstanding balance of loans
from the Plan to the Participant on the date on which such loan
was made, or
(2) one-half (1/2) of the present value of the non-forfeitable
accrued benefit of the Employee under the Plan.
For purposes of this limit, all plans of the Employer shall
be considered one plan. Additionally, with respect to any loan made
prior to January 1, 1987, the $50,000 limit specified in (1) above
shall be unreduced.
(e) No Participant loan shall take into account the present value
of such Participant's Qualified Voluntary Employee Contribution
Account.
(f) Loans shall provide for level amortization with payments to
be made not less frequently than quarterly over a period not to
exceed five (5) years. However, loans used to acquire any dwelling
unit which, within a reasonable time, is to be used (determined at
the time the loan is made) as a principal residence of the
Participant shall provide for periodic repayment over a reasonable
period of time that may exceed five (5) years. Notwithstanding the
foregoing, loans made prior to January 1, 1987 which are used to
acquire, construct, reconstruct or substantially rehabilitate any
dwelling unit which, within a reasonable period of time is to be used
(determined at the time the loan is made) as a principal residence of
the Participant or a member of his family (within the meaning of Code
Section 267(c)(4)) may provide for periodic repayment over a
reasonable period of time that may exceed five (5) years.
Additionally, loans made prior to January 1, 1987, may provide for
periodic payments which are made less frequently than quarterly and
which do not necessarily result in level amortization.
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(g) An assignment or pledge of any portion of a Participant's
interest in the Plan and a loan, pledge, or assignment with respect
to any insurance Contract purchased under the Plan, shall be treated
as a loan under this Section.
(h) Any loan made pursuant to this Section after August 18, 1985
where the Vested interest of the Participant is used to secure such
loan shall require the written consent of the Participant's spouse in
a manner consistent with Section 6.5(a) provided the spousal consent
requirements of such Section apply to the Plan. Such written consent
must be obtained within the 90-day period prior to the date the loan
is made. Any security interest held by the Plan by reason of an
outstanding loan to the Participant shall be taken into account in
determining the amount of the death benefit or Pre-Retirement
Survivor Annuity. However, no spousal consent shall be required under
this paragraph if the total accrued benefit subject to the security
is not in excess of $3,500.
(i) With regard to any loans granted or renewed on or after the
last day of the first Plan Year beginning after December 31, 1988, a
Participant loan program shall be established which must include, but
need not be limited to, the following:
(1) the identity of the person or positions authorized to
administer the Participant loan program;
(2) a procedure for applying for loans;
(3) the basis on which loans will be approved or denied;
(4) limitations, if any, on the types and amounts of loans
offered, including what constitutes a hardship or financial need
if selected in the Adoption Agreement;
(5) the procedure under the program for determining a reasonable
rate of interest;
(6) the types of collateral which may secure a Participant loan;
and
(7) the events constituting default and the steps that will be
taken to preserve plan assets.
Such Participant loan program shall be contained in a
separate written document which, when properly executed, is hereby
incorporated by reference and made a part of this plan. Furthermore,
such Participant loan program may be modified or amended in writing
from time to time without the necessity of amending this Section of
the Plan.
7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS
At the direction of the Administrator, the Trustee shall, from time
to time, in accordance with the terms of the Plan, make payments out of the
Trust Fund. The Trustee shall not be responsible in any way for the application
of such payments.
7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES
The Trustee shall be paid such reasonable compensation as set forth
in the Trustee's fee schedule (if the Trustee has such a schedule) or as agreed
upon in writing by the Employer and the Trustee. An individual serving as
Trustee who already receives full-time pay from the Employer shall not receive
compensation from this Plan. In addition, the Trustee shall be reimbursed for
any reasonable expenses, including reasonable counsel fees incurred by it as
Trustee. Such compensation and expenses shall be paid from the Trust Fund unless
paid or advanced by the Employer. All taxes of any kind and all kinds whatsoever
that
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may be levied or assessed under existing or future laws upon, or in respect of,
the Trust Fund or the income thereof, shall be paid from the Trust Fund.
7.7 ANNUAL REPORT OF THE TRUSTEE
Within a reasonable period of time after the later of the Anniversary
Date or receipt of the Employer's contribution for each Plan Year, the Trustee,
or its agent, shall furnish to the Employer and Administrator a written
statement of account with respect to the Plan Year for which such contribution
was made setting forth:
(a) the net income, or loss, of the Trust Fund;
(b) the gains, or losses, realized by the Trust Fund upon sales
or other disposition of the assets;
(c) the increase, or decrease, in the value of the Trust Fund;
(d) all payments and distributions made from the Trust Fund; and
(e) such further information as the Trustee and/or Administrator
deems appropriate. The Employer, forthwith upon its receipt of each
such statement of account, shall acknowledge receipt thereof in
writing and advise the Trustee and/or Administrator of its approval
or disapproval thereof. Failure by the Employer to disapprove any
such statement of account within thirty (30) days after its receipt
thereof shall be deemed an approval thereof. The approval by the
Employer of any statement of account shall be binding as to all
matters embraced therein as between the Employer and the Trustee to
the same extent as if the account of the Trustee had been settled by
judgment or decree in an action for a judicial settlement of its
account in a court of competent jurisdiction in which the Trustee,
the Employer and all persons having or claiming an interest in the
Plan were parties; provided, however, that nothing herein contained
shall deprive the Trustee of its right to have its accounts
judicially settled if the Trustee so desires.
7.8 AUDIT
(a) If an audit of the Plan's records shall be required by the
Act and the regulations thereunder for any Plan Year, the
Administrator shall direct the Trustee to engage on behalf of all
Participants an independent qualified public accountant for that
purpose. Such accountant shall, after an audit of the books and
records of the Plan in accordance with generally accepted auditing
standards, within a reasonable period after the close of the Plan
Year, furnish to the Administrator and the Trustee a report of his
audit setting forth his opinion as to whether any statements,
schedules or lists, that are required by Act Section 103 or the
Secretary of Labor to be filed with the Plan's annual report, are
presented fairly in conformity with generally accepted accounting
principles applied consistently.
(b) All auditing and accounting fees shall be an expense of and
may, at the election of the Administrator, be paid from the Trust
Fund.
(c) If some or all of the information necessary to enable the
Administrator to comply With Act Section 103 is maintained by a bank,
insurance company, or similar institution, regulated and supervised
and subject to periodic examination by a state or federal agency, it
shall transmit and certify the accuracy of that information to the
Administrator as provided in Act Section 103(b) within one hundred
twenty ( 120) days after the end of the Plan Year or such other date
as may be prescribed under regulations of the Secretary of Labor.
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7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE
(a) The Trustee may resign at any time by delivering to the
Employer, at least thirty (30) days before its effective date, a
written notice of his resignation.
(b) The Employer may remove the Trustee by mailing by registered
or certified mail, addressed to such Trustee at his last known
address, at least thirty (30) days before its effective date, a
written notice of his removal.
(c) Upon the death, resignation, incapacity, or removal of any
Trustee, a successor may be appointed by the Employer; and such
successor, upon accepting such appointment in writing and delivering
same to the Employer, shall, without further act, become vested with
all the estate, rights, powers, discretions, and duties of his
predecessor with like respect as if he were originally named as a
Trustee herein. Until such a successor is appointed, the remaining
Trustee or Trustees shall have full authority to act under the terms
of the Plan.
(d) The Employer may designate one or more successors prior to
the death, resignation, incapacity, or removal of a Trustee, In the
event a successor is so designated by the Employer and accepts such
designation, the successor shall, without further act, become vested
with all the estate, rights, powers, discretions, and duties of his
predecessor with the like effect as if he were originally named as
Trustee herein immediately upon the death, resignation, incapacity,
or removal of his predecessor.
(e) Whenever any Trustee hereunder ceases to serve as such, he
shall furnish to the Employer and Administrator a written statement
of account with respect to the portion of the Plan Year during which
he served as Trustee. This statement shall be either (i) included as
part of the annual statement of account for the Plan Year required
under Section 7.7 or (ii) set forth in a special statement. Any such
special statement of account should be rendered to the Employer no
later than the due date of the annual statement of account for the
Plan Year. The procedures set forth in Section 7.7 for the approval
by the Employer of annual statements of account shall apply to any
special statement of account rendered hereunder and approval by the
Employer of any such special statement in the manner provided in
Section 7.7 shall have the same effect upon the statement as the
Employer's approval of an annual statement of account. No successor
to the Trustee shall have any duty or responsibility to investigate
the acts or transactions of any predecessor who has rendered all
statements of account required by Section 7.7 and this subparagraph.
7.10 TRANSFER OF INTEREST
Notwithstanding any other provision contained in this Plan, the
Trustee at the direction of the Administrator shall transfer the Vested
interest, if any, of such Participant in his account to another trust forming
part of a pension, profit sharing, or stock bonus plan maintained by such
Participant's new employer and represented by said employer in writing as
meeting the requirements of Code Section 401 (a), provided that the trust to
which such transfers are made permits the transfer to be made.
(a) Notwithstanding any provision of the plan to the contrary, with
respect to distributions made after December 31, 1992, a Participant shall be
permitted to elect to have any "eligible rollover distribution" transferred
directly To an "eligible retirement plan" specified by the Participant. The Plan
provisions otherwise applicable to distributions continue to apply to the direct
transfer option. The Participant shall, in the time and manner prescribed by the
Administrator, specify the amount to be directly transferred and the "eligible
retirement plan" to receive the transfer. Any portion of a distribution which is
not transferred shall be distributed to the Participant.
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(b) For purposes of this Section, the term "eligible rollover
distribution" means any distribution other than a distribution of substantially
equal periodic payments over the life or life expectancy of the Participant (or
joint life or joint life expectancies of the Participant and the designated
beneficiary) or a distribution over a period certain of ten years or more.
Amounts required to be distributed under Code Section 401 (a)(9) are not
eligible rollover distributions. The direct transfer option described in
subsection (a) applies only to eligible rollover distributions which would
otherwise be includible in gross income if not transferred.
(c) For purposes of this Section, the term "eligible retirement plan"
means an individual retirement account as described in Code Section 408(a), an
individual retirement annuity as described in Code Section 408(b), an annuity
plan as described in Code Section 403(a), or a defined contribution plan as
described in Code Section 401(a) which is exempt from tax under Code Section
501(a) and which accepts rollover distributions.
(d) The election described in subsection (a) also applies to the
surviving spouse after the Participant's death; however, distributions to the
surviving spouse may only be transferred to an individual retirement account or
individual retirement annuity. For purposes of subsection (a), a spouse or
former spouse who is the alternate payee under a qualified domestic relations
order as defined in Code Section 414(p) will be treated as the Participant.
7.11 TRUSTEE INDEMNIFICATION
The Employer agrees to indemnify and save harmless the Trustee
against any and all claims, losses, damages, expenses and liabilities the
Trustee may incur in the exercise and performance of the Trustee's powers and
duties hereunder, unless the same are determined to be due to gross negligence
or willful misconduct.
7.12 EMPLOYER SECURITIES AND REAL PROPERTY
The Trustee shall be empowered to acquire and hold "qualifying
Employer securities" and "qualifying Employer real property," as those terms are
defined in the Act. However, no more than 100%, in the case of a Profit Sharing
Plan or 401(k) Plan or 10%, in the case of a Money Purchase Plan of the fair
market value of all the assets in the Trust Fund may be invested in "qualifying
Employer securities" and "qualifying Employer real property."
ARTICLE VIII
AMENDMENT, TERMINATION, AND MERGERS
8.1 AMENDMENT
(a) The Employer shall have the right at any time to amend this
Plan subject to the limitations of this Section. However, any
amendment which affects the rights, duties or responsibilities of the
Trustee and Administrator may only be made with the Trustee's and
Administrator's written consent. Any such amendment shall become
effective as provided therein upon its execution. The Trustee shall
not be required to execute any such amendment unless the amendment
affects the duties of the Trustee hereunder.
(b) The Employer may (1) change the choice of options in the
Adoption Agreement, (2) add overriding language in the Adoption
Agreement when such language is necessary to satisfy Code Sections
415 or 416 because of the required aggregation of multiple plans, and
(3) add certain model amendments published by the Internal Revenue
Service which specifically provide that their adoption will not cause
the Plan to be treated as an individually designed plan. An Employer
that amends the Plan for any other reason, including a waiver of the
minimum funding requirement under Code
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Section 412(d), will no longer participate in this Prototype Plan
and will be considered to have an individually designed plan.
(c) The Employer expressly delegates authority to the sponsoring
organization of this Plan, the right to amend this Plan by submitting
a copy of the amendment to each Employer who has adopted this Plan
after first having received a ruling or favorable determination from
the Internal Revenue Service that the Plan as amended qualifies under
Code Section 401(a) and the Act. For purposes of this Section, the
mass submitter shall be recognized as the agent of the sponsoring
organization. If the sponsoring organization does not adopt the
amendments made by the mass submitter, it will no longer be identical
to or a minor modifier of the mass submitter plan.
(d) No amendment to the Plan shall be effective if it authorizes
or permits any part of the Trust Fund (other than such part as is
required to pay taxes and administration expenses) to be used for or
diverted to any purpose other than for the exclusive benefit of the
Participants or their Beneficiaries or estates; or causes any
reduction in the amount credited to the account of any Participant;
or causes or permits any portion of the Trust Fund to revert to or
become property of the Employer.
(e) Except as permitted by Regulations (including Regulation
1.411(d)-4, no Plan amendment or transaction having the effect of a
Plan amendment (such as a merger, plan transfer or similar
transaction) shall be effective if it eliminates or reduces any
"Section 41l(d)(6) protected benefit" or adds or modifies conditions
relating to "Section 411(d)(6) protected benefits" the result of
which is a further restriction on such benefit unless such protected
benefits are preserved with respect to benefits accrued as of the
later of the adoption date or effective date of the amendment.
"Section 41l(d)(6) protected benefits" are benefits described in Code
Section 41l(d)(6)(A), early retirement benefits and retirement-type
subsidies, and optional forms of benefit.
8.2 TERMINATION
(a) The Employer shall have the right at any time to terminate
the Plan by delivering to the Trustee and Administrator written
notice of such termination. Upon any full or partial termination all
amounts credited to the affected Participants' Combined Accounts
shall I become 100% Vested and shall not thereafter be subject to
forfeiture, and all unallocated amounts shall be allocated to the
accounts of all Participants in accordance with the provisions
hereof.
(b) Upon the full termination of the Plan, the Employer shall
direct the distribution of the assets to Participants in a manner
which is consistent with and satisfies the provisions of Section 6.5.
Distributions to a Participant shall be made in cash (or in property
if permitted in the Adoption Agreement) or through the purchase of
irrevocable nontransferable deferred commitments from the Insurer.
Except as permitted by Regulations, the termination of the Plan shall
not result in the reduction of "Section 411(d)(6) protected benefits"
as described in Section 8.1.
8.3 MERGER OR CONSOLIDATION
This Plan may be merged or consolidated with, or its assets and/or
liabilities may be transferred to any other plan only if the benefits which
would be received by a Participant of this Plan, in the event of a termination
of the plan immediately after such transfer, merger or consolidation, are at
least equal to the benefits the Participant would have received if the Plan had
terminated immediately before the transfer, merger or consolidation and such
merger or consolidation does not otherwise result in the elimination or
reduction of any "Section 411(d)(6) protected benefits" as described in Section
8.1(c).
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ARTICLE IX
MISCELLANEOUS
9.1 EMPLOYER ADOPTIONS
(a) Any organization may become the Employer hereunder by
executing the Adoption Agreement in form satisfactory to the Trustee,
and it shall provide such additional information as the Trustee may
require. The consent of the Trustee to act as such shall be signified
by its execution of the Adoption Agreement.
(b) Except as otherwise provided in this Plan, the affiliation of
the Employer and the participation of its Participants shall be
separate and apart from that of any other employer and its
participants hereunder.
9.2 PARTICIPANT'S RIGHTS
This Plan shall not be deemed to constitute a contract between the
Employer and any Participant or to be a consideration or an inducement for the
employment of any Participant or Employee. Nothing contained in this Plan shall
be deemed to give any Participant or Employee the right to be retained in the
service of the Employer or to interfere with the right of the Employer to
discharge any Participant or Employee at any time regardless of the effect which
such discharge shall have upon him as a Participant of this Plan.
9.3 ALIENATION
(a) Subject to the exceptions provided below, no benefit which
shall be payable to any person (including a Participant or his
Beneficiary) shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or
charge, and any attempt to anticipate, alienate, sell, transfer,
assign, pledge, encumber, or charge the same shall be void; and no
such benefit shall in any manner be liable for, or subject to, the
debts, contracts, liabilities, engagements, or torts of any such
person, nor shall it be subject to attachment or legal process for or
against such person, and the same shall not be recognized except to
such extent as may be required by law.
(b) This provision shall not apply to the extent a Participant or
Beneficiary is indebted to the Plan, for any reason, under any
provision of this Plan. At the time a distribution is to be made to
or for a Participant's or Beneficiary's benefit, such proportion of
the amount to be distributed as shall equal such indebtedness shall
be paid to the Plan, to apply against or discharge such indebtedness.
Prior to making a payment, however, the Participant or Beneficiary
must be given written notice by the Administrator that such
indebtedness is to be so paid in whole or part from his Participant's
Combined Account. If the Participant or Beneficiary does not agree
that the indebtedness is a valid claim against his Vested
Participant's Combined Account, he shall be entitled to a review of
the validity of the claim in accordance with procedures provided in
Sections 2.12 and 2.13.
(c) This provision shall not apply to a "qualified domestic
relations order" defined in Code Section 414(p), and those other
domestic relations orders permitted to be so treated by the
Administrator under the provisions of the Retirement Equity Act Of
1984. The Administrator shall establish a written procedure to
determine the qualified status of domestic relations orders and to
administer distributions under such qualified orders. Further, to the
extent provided under a "qualified domestic relations order," a
former spouse of a Participant shall be treated as the spouse or
surviving spouse for all purposes under the Plan.
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9.4 CONSTRUCTION OF PLAN
This Plan and Trust shall be construed and enforced according to the
Act and the laws of the State or Commonwealth in which the Employer's principal
office is located, other than its laws respecting choice of law, to the extent
not pre-empted by the Act.
9.5 GENDER AND NUMBER
Wherever any words are used herein in the masculine, feminine or
neuter gender, they shall be construed as though they were also used in another
gender in all cases where they would so apply, and whenever any words are used
herein in the singular or plural form, they shall be construed as though they
were also used in the other form in all cases where they would so apply.
9.6 LEGAL ACTION
In the event any claim, suit, or proceeding is brought regarding the
Trust and/or Plan established hereunder to which the Trustee or the
Administrator may be a party, and such claim, suit, or proceeding is resolved in
favor of the Trustee or Administrator, they shall be entitled to be reimbursed
from the Trust Fund for any and all costs, attorney's fees, and other expenses
pertaining thereto incurred by them for which they shall have become liable.
9.7 PROHIBITION AGAINST DIVERSION OF FUNDS
(a) Except as provided below and otherwise specifically permitted
by law, it shall be impossible by operation of the Plan or of the
Trust, by termination of either, by power of revocation or amendment,
by the happening of any contingency, by collateral arrangement or by
any other means, for any part of the corpus or income of any Trust
Fund maintained pursuant to the Plan or any funds contributed thereto
to be used for, or diverted to, purposes other than the exclusive
benefit of Participants, Retired Participants, or their
Beneficiaries.
(b) In the event the Employer shall make a contribution under a
mistake of fact pursuant to Section 403(c)(2)(A) of the Act, the
Employer may demand repayment of such contribution at any time within
one (1) year following the time of payment and the Trustees shall
return such amount to the Employer within the one (1) year period.
Earnings of the Plan attributable to the contributions may not be
returned to the Employer but any losses attributable thereto must
reduce the amount so returned.
9.8 BONDING
Every Fiduciary, except a bank or an insurance company, unless
exempted by the Act and regulations thereunder, shall be bonded in an amount not
less than 10% of the amount of the funds such Fiduciary handles; provided,
however, that the minimum bond shall be $1,000 and the maximum bond, $500,000.
The amount of funds handled shall be determined at the beginning of each Plan
Year by the amount of funds handled by such person, group, or class to be
covered and their predecessors, if any, during the preceding Plan Year, or if
there is no preceding Plan year, then by the amount of me funds to be handled
during the then current year. The bond shall provide protection to the Plan
against any loss by reason of acts of fraud or dishonesty by the Fiduciary alone
or in connivance with others. The surety shall be a corporate surety company (as
such term is used in Act Section 412(a)(2)), and the bond shall be in a form
approved by the Secretary of Labor. Notwithstanding anything in the Plan to the
contrary, the cost of such bonds shall be an expense of and may, at the election
of the Administrator, be paid from the Trust Fund or by the Employer.
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9.9 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE
Neither the Employer nor the Trustee, nor their successors, shall be
responsible for the validity of any Contract issued hereunder or for the failure
on the part of the Insurer to make payments provided by any such Contract, or
for the action of any person which may delay payment or render a Contract null
and void or unenforceable in whole or in part.
9.10 INSURER'S PROTECTIVE CLAUSE
The Insurer who shall issue Contracts hereunder shall not have any
responsibility for the validity of this Plan or for the tax or legal aspects of
this Plan. The Insurer shall be protected and held harmless in acting in
accordance with any written direction of the Trustee, and shall have no duty to
see to the application of any funds paid to the Trustee, nor be required to
question any actions directed by the Trustee. Regardless of any provision of
this Plan, the Insurer shall not be required to take or permit any action or
allow any benefit or privilege contrary to the terms of any Contract which it
issues hereunder, or the rules of the Insurer.
9.11 RECEIPT AND RELEASE FOR PAYMENTS
Any payment to any Participant, his legal representative,
Beneficiary, or to any guardian or committee appointed for such Participant or
Beneficiary in accordance with the provisions of this Plan, shall, to the extent
thereof, be in full satisfaction of all claims hereunder against the Trustee and
the Employer.
9.12 ACTION BY THE EMPLOYER
Whenever the Employer under the terms of the Plan is permitted or
required to do or perform any act or matter or thing, it shall be done and
performed by a person duly authorized by its legally constituted authority.
9.13 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY
The "named Fiduciaries" of this Plan are (1) the Employer, (2) the
Administrator, (3) the Trustee, and (4) any Investment Manager appointed
hereunder. The named Fiduciaries shall have only those specific powers, duties,
responsibilities, and obligations as are specifically given them under the Plan.
In general, the Employer shall have the sole responsibility for making the
contributions provided for under Section 4.1; and shall have the sole authority
to appoint and remove the Trustee and the Administrator; to formulate the Plan's
"funding policy and method"; and to amend the elective provisions of the
Adoption Agreement or terminate, in whole or in part, the Plan. The
Administrator shall have the sole responsibility for the administration of the
Plan, which responsibility is specifically described in the Plan. The Trustee
shall have the sole responsibility of management of the assets held under the
Trust, except those assets, the management of which has been assigned to an
Investment Manager or Administrator, who shall be solely responsible for the
management of the assets assigned to it, all as specifically provided in the
Plan. Each named Fiduciary warrants that any directions given, information
furnished, or action taken by it shall be in accordance with the provisions of
the Plan, authorizing or providing for such direction, information or action.
Furthermore, each named Fiduciary may rely upon any such direction, information
or action of another named Fiduciary as being proper under the Plan, and is not
required under the Plan to inquire into the propriety of any such direction,
information or action. It is intended under the Plan that each named Fiduciary
shall be responsible for the proper exercise of its own powers, duties,
responsibilities and obligations under the Plan. No named Fiduciary shall
guarantee the Trust Fund in any manner against investment loss or depreciation
in asset value. Any person or group may serve in more than one Fiduciary
capacity.
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9.14 HEADINGS
The headings and subheadings of this Plan have been inserted for
convenience of reference and are to be ignored in any construction of the
provisions hereof.
9.15 APPROVAL BY INTERNAL REVENUE SERVICE
(a) Notwithstanding anything herein to the contrary, if, pursuant
to a timely application filed by or in behalf of the Plan, the
Commissioner of Internal Revenue Service or his delegate should
determine that the Plan does not initially qualify as a tax-exempt
plan under Code Sections 401 and 501, and such determination is not
contested, or if contested, is finally upheld, then if the Plan is a
new plan, it shall be void av initio and all amounts contributed to
the Plan, by the Employer, less expenses paid, shall be returned
within one year and the Plan shall terminate, and the Trustee shall
be discharged from all further obligations. If the disqualification
relates to an amended plan, then the Plan shall operate as if it had
not been amended and restated.
(b) Except as specifically stated in the Plan, any contribution
by the Employer to the Trust Fund is conditioned upon the
deductibility of the contribution by the Employer under the Code and,
to the extent any such deduction is disallowed, the Employer may
within one (1) year following a final determination of the
disallowance, whether by agreement with the Internal Revenue Service
or by final decision of a court of competent jurisdiction, demand
repayment of such disallowed contribution and the Trustee shall
return such contribution within one (1) year following the
disallowance. Earnings of the Plan attributable to the excess
contribution may not be returned to the Employer, but any losses
attributable thereto must reduce the amount so returned.
9.16 UNIFORMITY
All provisions of this Plan shall be interpreted and applied in a
uniform, nondiscriminatory manner.
9.17 PAYMENT OF BENEFITS
Benefits under this Plan shall be paid, subject to Section 6.10 and
Section 6.11 only upon death, Total and Permanent Disability, normal or early
retirement, termination of employment, or upon Plan Termination.
ARTICLE X
PARTICIPATING EMPLOYERS
10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER
Notwithstanding anything herein to the contrary, with the consent of
the Employer and Trustee, any Affiliated Employer may adopt this Plan and all of
the provisions hereof, and participate herein and be known as a Participating
Employer, by a properly executed document evidencing said intent and will of
such Participating Employer.
10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS
(a) Each Participating Employer shall be required to select the
same Adoption Agreement provisions as those selected by the Employer
other than the Plan Year, the Fiscal Year, and such other items that
must, by necessity, vary among employers.
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(b) Each such Participating Employer shall be required to use the
same Trustee as provided in this Plan.
(c) The Trustee may, but shall not be required to, commingle,
hold and invest as one Trust Fund all contributions made by
Participating Employers, as well as all increments thereof.
(d) The transfer of any Participant from or to an Employer
participating in this Plan, whether he be an Employee of the Employer
or a Participating Employer, shall not affect such Participant's
rights under the Plan, and all amounts credited to such Participant's
Combined Account as well as his accumulated service time with the
transferor or predecessor, and his length of participation in the
Plan, shall continue to his credit.
(e) Any expenses of the Plan which are to be paid by the Employer
or borne by the Trust Fund shall be paid by each Participating
Employer in the same proportion that the total amount standing to the
credit of all Participants employed by such Employer bears to the
total standing to the credit of all Participants.
10.3 DESIGNATION OF AGENT
Each Participating Employer shall be deemed to be a part of this
Plan; provided, however, that with respect to all of its relations with the
Trustee and Administrator for the purpose of this Plan, each Participating
Employer shall be deemed to have designated irrevocably the Employer as its
agent. Unless the context of the Plan clearly indicates the contrary, the word
"Employer" shall be deemed to include each Participating Employer as related to
its adoption of the Plan.
10.4 EMPLOYEE TRANSFERS
It is anticipated that an Employee may be transferred between
Participating Employers, and in the event of any such transfer, the Employee
involved shall carry with him his accumulated service and eligibility. No such
transfer shall effect a termination of employment hereunder, and the
Participating Employer to which the Employee is transferred shall thereupon
become obligated hereunder with respect to such Employee in the same manner as
was the Participating Employer from whom the Employee was transferred.
10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES
Any contribution or Forfeiture subject to allocation during each Plan
Year shall be allocated among all Participants of all Participating Employers in
accordance with the provisions of this Plan. On the basis of the information
furnished by the Administrator, the Trustee shall keep separate books and
records concerning the affairs of each Participating Employer hereunder and as
to the accounts and credits of the Employees of each Participating Employer. The
Trustee may, but need not, register Contracts so as to evidence that a
particular Participating Employer is the interested Employer hereunder, but in
the event of an Employee transfer from one Participating Employer to another,
the employing Employer shall immediately notify the Trustee thereof.
10.6 AMENDMENT
Amendment of this Plan by the Employer at any time when there shall
be a Participating Employer hereunder shall only be by the written action of
each and every Participating Employer and with the consent of the Trustee where
such consent is necessary in accordance with the terms of this Plan.
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10.7 DISCONTINUANCE OF PARTICIPATION
Except in the case of a Standardized Plan, any Participating Employer
shall be permitted to discontinue or revoke its participation in the Plan at any
time. At the time of any such discontinuance or revocation, satisfactory
evidence thereof and of any applicable conditions imposed shall be delivered to
the Trustee. The Trustee shall thereafter transfer, deliver and assign Contracts
and other Trust Fund assets allocable to the Participants of such Participating
Employer to such new Trustee as shall have been designated by such Participating
Employer, in the event that it has established a separate pension plan for its
Employees provided, however, that no such transfer shall be made if the result
is the elimination or reduction of any "Section 411(d)(6) protected benefits" in
accordance with Section 8.1(e). If no successor is designated, the Trustee shall
retain such assets for the Employees of said Participating Employer pursuant to
the provisions of Article VII hereof. In no such event shall any part of the
corpus or income of the Trust Fund as it relates to such Participating Employer
be used for or diverted for purposes other than for the exclusive benefit of the
Employees of such Participating Employer.
10.8 ADMINISTRATOR'S AUTHORITY
The Administrator shall have authority to make any and all necessary
rules or regulations, binding upon all Participating Employers and all
Participants, to effectuate the purpose of this Article.
10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE
If any Participating Employer is prevented in whole or in part from
making a contribution which it would otherwise have made under the Plan by
reason of having no current or accumulated earnings or profits, or because such
earnings or profits are less than the contribution which it would otherwise have
made, then, pursuant to Code Section 404(a)(3)(B), so much of the contribution
which such Participating Employer was so prevented from making may be made, for
the benefit of the participating employees of such Participating Employer, by
other Participating Employers who are members of the same affiliated group
within the meaning of Code Section 1504 to the extent of their current or
accumulated earnings or profits, except that such contribution by each such
other Participating Employer shall be limited to the proportion of its total
current and accumulated earnings or profits remaining after adjustment for its
contribution to the Plan made without regard to this paragraph which the total
prevented contribution bears to the total current and accumulated earnings or
profits of all the Participating Employers remaining after adjustment for all
contributions made to the Plan without regard to this paragraph.
A Participating Employer on behalf of whose employees a contribution
is made under this paragraph shall not be required to reimburse the contributing
Participating Employers.
ARTICLE XI
CASH OR DEFERRED PROVISIONS
Notwithstanding any provisions in the Plan to the contrary, the
provisions of this Article shall apply with respect To any 401(k) Profit Sharing
Plan.
Notwithstanding anything in this Article to the contrary, effective
as of the Plan Year in which this amendment becomes effective, the Actual
Deferral Percentage Test and the Actual Contribution Percentage Test shall be
applied (and adjusted) by applying the Family Member aggregation rules of Code
Section 414(q)(6).
11.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION
For each Plan Year, the Employer shall contribute to the Plan:
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(a) The amount of the total salary reduction elections of all
Participants made pursuant to Section 11.2(a), which amount shall be
deemed an Employer's Elective Contribution, plus
(b) If specified in E3 of the Adoption Agreement, a matching
contribution equal to the percentage specified in the Adoption
Agreement of the Deferred Compensation of each Participant eligible
to share in the allocations of the matching contribution, which
amount shall be deemed an Employer's Non-Elective or Elective
Contribution as selected in the Adoption Agreement, plus
(c) If specified in E4 of the Adoption Agreement, a discretionary
amount, if any, which shall be deemed an Employer's Non-Elective
Contribution, plus
(d) If specified in E5 of the Adoption Agreement, a Qualified
Non-Elective Contribution.
(e) Notwithstanding the foregoing, however, the Employer's
contributions for any Fiscal Year shall not exceed the maximum amount
allowable as a deduction to the Employer under the provisions of Code
Section 404. All contributions by the Employer shall be made in cash
or in such property as is acceptable to the Trustee.
(f) Except, however, to the extent necessary to provide the top
heavy minimum allocations, the Employer shall make a contribution
even if it exceeds current or accumulated Net Profit or the amount
which is deductible under Code Section 404.
(g) Employer Elective Contributions accumulated through payroll
deductions shall be paid to the Trustee as of the earliest date on
which such contributions can reasonably be segregated from the
Employer's general assets, but in any event within ninety (90) days
from the date on which such amounts would otherwise have been payable
to the Participant in cash. The provisions of Department of Labor
regulations 2510.3-102 are incorporated herein by reference.
Furthermore, any additional Employer contributions which are
allocable to the Participant's Elective Account for a Plan Year shall
be paid to the Plan no later than the twelve-month period immediately
following the close of such Plan Year.
11.2 PARTICIPANT'S SALARY REDUCTION ELECTION
(a) If selected in the Adoption Agreement, each Participant may
elect to defer his Compensation which would have been received in the
Plan Year, but for the deferral election, subject to the limitations
of this Section and the Adoption Agreement. A deferral election (or
modification of an earlier election) may not be made with respect to
Compensation which is currently available on or before the date the
Participant executed such election, or if later, the latest of the
date the Employer adopts this cash or deferred arrangement, or the
date such arrangement first became effective. Any elections made
pursuant to this Section shall become effective as soon as is
administratively feasible.
Additionally, if elected in the Adoption Agreement, each
Participant may elect to defer and have allocated for a Plan Year all
or a portion of any cash bonus attributable to services performed by
the Participant for the Employer during such Plan Year and which
would have been received by the Participant on or before two and
once-half months following the end of the Plan Year but for the
deferral. A deferral election may not be made with respect to cash
bonuses which are currently available on or before the date the
Participant executed such election. Notwithstanding the foregoing,
cash bonuses attributable to services performed by the Participant
during a Plan Year but which are to be paid to the Participant later
than two and one-half months after the close of such Plan Year will
be subjected to whatever deferral election is in effect at the time
such cash bonus would have otherwise been received.
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The amount by which Compensation and/or cash bonuses are
reduced shall be that Participant's Deferred Compensation and be
treated as an Employer Elective Contribution and allocated to that
Participant's Elective Account.
Once made, a Participant's election to reduce Compensation
shall remain in effect until modified or terminated. Modifications
may be made as specified in the Adoption Agreement, and terminations
may be made at any time. Any modification or termination of an
election will become effective as soon as is administratively
feasible.
(b) The balance in each Participant's Elective Account shall be
fully Vested at all times and shall not be subject to Forfeiture for
any reason.
(c) Amounts held in the Participant's Elective Account and
Qualified Non-Elective Account may be distributable as permitted
under the Plan, but in no event prior to the earlier of:
(1) a Participant's termination of employment, Total and
Permanent Disability, or death;
(2) a Participant's attainment of age 59 1/2;
(3) the proven financial hardship of a Participant, subject to
the limitations of Section 11.8;
(4) the termination of the Plan without the existence at the time
of Plan termination of another defined contribution plan (other
than an employee stock ownership plan as defined in Code Section
4975(e)(7)) or the establishment of a successor defined
contribution plan (other than an employee stock ownership plan as
defined in Code Section 4975(e)(7)) by the Employer or an
Affiliated Employer within the period ending twelve months after
distribution of all assets from the Plan maintained by the
Employer;
(5) the date of the sale by the Employer to an entity that is not
an Affiliated Employer of substantially all of the assets (within
the meaning of Code Section 409(d)(2)) with respect to a
Participant who continues employment with the corporation
acquiring such assets; or
(6) the date of the sale by the Employer or an Affiliated
Employer of its interest in a subsidiary (within the meaning of
Code Section 409(d)(3)) to an entity that is not an Affiliated
Employer with respect to a Participant who continues employment
with such subsidiary.
(d) In any Plan Year beginning after December 31, 1986, a
Participant's Deferred Compensation made under this Plan and all
other plans, contracts or arrangements of the Employer maintaining
this Plan shall not exceed the limitation imposed by Code Section
402(g), as in effect for the calendar year in which such Plan Year
began. If such dollar limitation is exceeded solely from elective
deferrals made under this Plan or any other Plan maintained by the
Employer, a Participant will be deemed to have notified the
Administrator of such excess amount which shall be distributed in a
manner consistent with Section 11.2(f). This dollar limitation shall
be adjusted annually pursuant to the method provided in Code Section
415(d) in accordance with Regulations.
(e) In the event a Participant has received a hardship
distribution pursuant to Regulation 1.401(k)-1(d)(2)(iii)(B) from any
other plan maintained by the Employer or from his Participant's
Elective Account pursuant to Section 11.8, then such Participant
shall not be permitted to elect to have Deferred Compensation
contributed to the Plan on his behalf for a period of twelve (12)
months following the receipt of the distribution. Furthermore, the
dollar limitation under Code Section 402(g) shall he reduced, with
respect to the Participant's taxable year following the taxable year
in which
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the hardship distribution was made, by the amount of such
Participant's Deferred Compensation, if any, made pursuant to this
Plan (and any other plan maintained by the Employer) for the taxable
year of the hardship distribution.
(f) If a Participant's Deferred Compensation under this Plan
together with any elective deferrals (as defined in Regulation
1.402(g)-1(b)) under another qualified cash or deferred arrangement
(as defined in Code Section 401(k)), a simplified employee pension
(as defined in Code Section 408(k)), a salary reduction arrangement
(within the meaning of Code Section 3121(a)(5)(D)), a deferred
compensation plan under Code Section 457, or a trust described in
Code Section 501(c)(18) cumulatively exceed the limitation imposed by
Code Section 402(g) (as adjusted annually in accordance with the
method provided in Code Section 415(d) pursuant to Regulations) for
such Participant's taxable year, the Participant may, not later than
Mareh 1st following the close of his taxable year, notify the
Administrator in writing of such excess and request that his Deferred
Compensation under this Plan be reduced by an amount specified by the
Participant. In such event, the Administrator shall direct the
Trustee to distribute such excess amount (and any Income allocable to
such excess amount) to the Participant not later than the first April
15th following the close of the Participant's taxable year.
Distributions in accordance with this paragraph may be made for any
taxable year of the Participant which begins after December 31, 1986.
Any distribution of less than the entire amount of Excess Deferred
Compensation and Income shall be treated as a pro rata distribution
of Excess Deferred Compensation and Income. The amount distributed
shall not exceed the Participant's Deferred Compensation under the
Plan for the taxable year. Any distribution on or before the last day
of the Participant's taxable year must satisfy each of the following
conditions:
(1) the Participant shall designate the distribution as Excess
Deferred Compensation;
(2) the distribution must be made after the date on which the
Plan received the Excess Deferred Compensation; and
(3) the Plan must designate the distribution as a distribution of
Excess Deferred Compensation.
Any distribution under this Section shall be made first from
unmatched Deferred Compensation and, thereafter, simultaneously from
Deferred Compensation which is matched and matching contributions
which relate to such Deferred Compensation. However, any such
matching contributions which are not Vested shall be forfeited in
lieu of being distributed.
For the purpose of this Section, "Income" means the amount of
income or loss allocable to a Participant's Excess Deferred
Compensation and shall be equal to the sum of the allocable gain or
loss for the taxable year of the Participant and the allocable gain
or loss for the period between the end of the taxable year of the
Participant and the date of distribution ("gap period"). The income
or loss allocable to each such period is calculated separately and is
determined by multiplying the income or loss allocable to the
Participant's Deferred Compensation for the respective period by a
fraction. The numerator of the fraction is the Participant's Excess
Deferred Compensation for the taxable year of the Participant. The
denominator is the balance, as of the last day of the respective
period, of the Participant's Elective Account that is attributable To
the Participant's Deferred Compensation reduced by the gain allocable
to such total amount for the respective period and increased by the
loss allocable to such total amount for the respective period.
In lieu of the "fractional method" described above, a "safe
harbor method" may be used to calculate the allocable income or loss
for the "gap period." Under such "safe harbor method," allocable
income or loss for the "gap period" shall be deemed to equal ten
percent (10%) of the income or loss allocable to a Participant's
Excess Deferred Compensation for the taxable year of the
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Participant multiplied by the number of calendar months in the "gap
period." For purposes of determining the number of calendar months in
the "gap period," a distribution occurring on or before the fifteenth
day of the month shall be treated as having been made on the last day
of the preceding month and a distribution occurring after such
fifteenth day shall be treated as having been made on the first day
of the next subsequent month.
Income or loss allocable to any distribution of Excess
Deferred Compensation on or before the last day of the taxable year
of the Participant shall be calculated from the first day of the
taxable year of the Participant to the date on which the distribution
is made pursuant to either the "fractional method" or the "safe
harbor method."
Notwithstanding the above, for any distribution under this
Section which is made after August 15, 1991, such distribution shall
not include any income for the "gap period". Further provided, for
any distribution under this Section which is made after August 15,
1991, the amount of Income may be computed using a reasonable method
that is consistent with Section 4.3(c), provided such method is used
consistently for all Participants and for all such distributions for
the Plan Year.
Notwithstanding the above, for the 1987 calendar year, Income
during the "gap period" shall not be taken into account.
(g) Notwithstanding the above, a Participant's Excess Deferred
Compensation shall be reduced, but not below zero, by any
distribution and/or recharacterization of Excess Contributions
pursuant to Section 11.5(a) for the Plan Year beginning with or
within the taxable year of the Participant.
(h) At Normal Retirement Date, or such other date when the
Participant shall be entitled to receive benefits, the fair market
value of the Participant's Elective Account shall be used w provide
benefits to the Participant or his Beneficiary.
(i) Employer Elective Contributions made pursuant to this Section
may be segregated into a separate account for each Participant in a
federally insured savings account, certificate of deposit in a bank
or savings and loan association, money market certificate, or other
short-term debt security acceptable to the Trustee until such time as
the allocations pursuant to Section 11.3 have been made.
(j) The Employer and the Administrator shall adopt a procedure
necessary to implement the salary reduction elections provided for
herein.
11.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS
(a) The Administrator shall establish and maintain an account in
the name of each Participant to which the Administrator shall credit
as of each Anniversary Date, or other valuation date, all amounts
allocated to each such Participant as set forth herein.
(b) The Employer shall provide the Administrator with all
information required by the Administrator to make a proper allocation
of the Employer's contributions for each Plan Year. Within a
reasonable period of time after the date of receipt by the
Administrator of such information, the Administrator shall allocate
such contribution as follows:
(1) With respect to the Employer's Elective Contribution made
pursuant to Section 11.1(a), to each Participant's Elective
Account in an amount equal to each such Participant's Deferred
Compensation for the year.
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(2) With respect tO the Employer's Matching Contribution made
pursuant to Section 11.1(b), to each Participant's Account, or
Participant's Elective Account as selected in E3 of the Adoption
Agreement, in accordance with Section 11.1(b).
Except, however, a Participant who is not credited with a Year of
Service during any Plan Year shall or shall not share in the
Employer's Matching Contribution for that year as provided in E3
of the Adoption Agreement. However, for Plan Years beginning
after 1989, if this is a standardized Plan, a Participant shall
share in the Employer's Matching Contribution regardless of Hours
of Service.
(3) With respect to the Employer's Non-Elective Contribution made
pursuant to Section 11.1(c), to each Participant's Account in
accordance with the provisions of Sections 4.3(b)(2) or
4.3(b)(3), whichever is applicable, 4.3(k) and 4.3(l).
(4) With respect to the Employer's Qualified Non-Elective
Contribution made pursuant to Section 11.1(d), to each
Participant's Qualified Non-Elective Contribution Account in the
same proportion that each such Participant's Compensation for the
year bears to the total Compensation of all Participants for such
year. However, for any Plan Year beginning prior to January 1,
1990, and if elected in the non-standardized Adoption Agreement
for any Plan Year beginning on or after January 1, 1990, a
Participant who is not credited with a Year of Service during any
Plan Year shall not share in the Employer's Qualified
Non-Elective Contribution for that year, unless required pursuant
to Section 4.3(h). In addition, the provisions of Sections 4.3(k)
and 4.3(l) shall apply with respect to the allocation of the
Employer's Qualified Non-Elective contribution.
(c) Notwithstanding anything in the Plan to the contrary, for
Plan Years beginning after December 31, 1988, in determining whether
a Non-Key Employee has received the required minimum allocation
pursuant to Section 4.3(f) such Non-Key Employee's Deferred
Compensation and matching contributions used to satisfy the "Actual
Deferral Percentage" test pursuant to Section 11.4(a) or the "Actual
Contribution Percentage" test of Section 11.6(a) shall not be taken
into account.
(d) Notwithstanding anything herein to the contrary, participants
who terminated employment during the Plan Year shall share in the
salary reduction contributions made by the Employer for the year of
termination without regard to the Hours of Service credited.
(e) Notwithstanding anything herein to the contrary (other than
Sections 11.3(d) and 11.3(g)), any Participant who terminated
employment during the Plan Year for reasons other than death, Total
and Permanent Disability, or retirement shall or shall not share in
the allocations of the Employer's Matching Contribution made pursuant
to Section 11.1(b), the Employer's Non-Elective Contributions made
pursuant to Section 11.1(c), the Employer's Qualified Non-Elective
Contribution made pursuant to Section 11.1(d), and Forfeitures as
provided in the Adoption Agreement. Notwithstanding the foregoing,
for Plan Years beginning after 1989, if this is a standardized Plan,
any such terminated Participant shall share in such allocations
provided the terminated Participant completed more than 500 Hours of
Service.
(f) Notwithstanding anything herein to the contrary, Participants
terminating for reasons of death, Total and Permanent Disability, or
retirement shall share in the allocation of the Employer's Matching
Contribution made pursuant to Section 11.1(b), the Employer's
Non-Elective Contributions made pursuant to Section 11.1(c), the
Employer's Qualified Non-Elective Contribution made pursuant to
Section 11.1(d), and Forfeitures as provided in this Section
regardless of whether they completed a Year of Service during the
Plan Year.
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(g) Notwithstanding any election in the Adoption Agreement to the
contrary, if this is a non-standardized Plan that would otherwise
fail to meet the requirements of Code Sections 401(a)(26),410(b)(1),
or 410(b)(2)(A)(i) and the Regulations thereunder because Employer
matching Contributions made pursuant to Section 11.1(b), Employer
Non-Elective Contributions made pursuant to Section 11.1(c) or
Employer Qualified Non-Elective Contributions made pursuant to
Section 11.1 (d) have not been allocated to a sufficient number or
percentage of Participants for a Plan Year, then the following rules
shall apply:
(1) The group of Participants eligible to share in the respective
contributions for the Plan Year shall be expanded to include the
minimum number of Participants who would not otherwise be
eligible as are necessary to satisfy the applicable test
specified above. The specific participants who shall become
eligible under the terms of this paragraph shall be those who are
actively employed on the last day of the Plan Year and, when
compared to similarly situated Participants, have completed the
greatest number of Hours of Service in the Plan Year.
(2) If after application of paragraph (1) above, the applicable
test is still not satisfied, then the group of Participants
eligible to share for the Plan Year shall be further expanded to
include the minimum number of Participants who are not actively
employed on the last day of the Plan Year as are necessary to
satisfy the applicable test. The specific Participants who shall
become eligible to share shall be those Participants, when
compared to similarly situated Participants, who have completed
the greatest number of Hours of Service in the Plan Year before
terminating employment.
11.4 ACTUAL DEFERRAL PERCENTAGE TESTS
(a) Maximum Annual Allocation: For each Plan Year beginning after
December 31, 1986, the annual allocation derived from Employer
Elective Contributions and Qualified Non-Elective Contributions to a
Participant's Elective Account and Qualified Non-Elective Account
shall satisfy one of the following tests:
(1) The "Actual Deferral Percentage" for the Highly Compensated
Participant group shall not be more than the "Actual Deferral
Percentage" of the Non-Highly Compensated Participant group
multiplied by 1.25, or
(2) The excess of the "Actual Deferral Percentage" for the Highly
Compensated Participant group over the "Actual Deferral
Percentage" for the Non-Highly Compensated Participant group
shall not be more than two percentage points. Additionally, the
"Actual Deferral Percentage" for the Highly Compensated
Participant group shall not exceed the "Actual Deferral
Percentage" for the Non-Highly Compensated Participant group
multiplied by 2. The provisions of Code Section 401(k)(3) and
Regulation 1.401(k)-1(b) are incorporated herein by reference.
However, for Plan Years beginning after December 31, 1988, to
prevent the multiple use of the alternative method described in
(2) above and Code Section 401(m)(9)(A), any Highly Compensated
Participant eligible to make elective deferrals pursuant to
Section 11.2 and to make Employee contributions or to receive
matching contributions under this Plan or under any other plan
maintained by the Employer or an Affiliated Employer shall have
his actual contribution ratio reduced pursuant to Regulation
1.401(m)-2, the provisions of which are incorporated herein by
reference.
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(b) For the purposes of this Section "Actual Deferral Percentage"
means, with respect to the Highly Compensated Participant group and
Non-Highly Compensated Participant group for a Plan Year, the average
of the ratios, calculated separately for each Participant in such
group, of the amount of Employer Elective Contributions and Qualified
Non-Elective Contributions allocated to each Participant's Elective
Account and Qualified Non-Elective Account for such Plan Year, to
such Participant's "414(s) Compensation" for such Plan Year. The
actual deferral ratio for each Participant and the "Actual Deferral
Percentage" for each group, for Plan Years beginning after December
31, 1988, shall be calculated to the nearest one-hundredth of one
percent of the Participant's "414(s) Compensation." Employer Elective
Contributions allocated to each Non-Highly Compensated Participant's
Elective Account shall be reduced by Excess Deferred Compensation to
the extent such excess amounts are made under this Plan or any other
plan maintained by the Employer.
(c) For the purpose of determining the actual deferral ratio of a
Highly Compensated Participant who is subject to the Family Member
aggregation rules of Code Section 414(q)(6) because such Participant
is either a "five percent owner" of the Employer or one of the ten
(10) Highly Compensated Employees paid the greatest "415
Compensation" during the year, the following shall apply:
(1) The combined actual deferral ratio for the family group
(which shall be treated as one Highly Compensated Participant)
shall be the greater of: (i) the ratio determined by aggregating
Employer Elective Contributions and "414(s) Compensation" of all
eligible Family Members who are Highly Compensated Participants
without regard to family aggregation; and (ii) the ratio
determined by aggregating Employer Elective Contributions and
"414(s) Compensation" of all eligible Family Members (including
Highly Compensated Participants). However, in applying the
$200,000 limit to "414(s) Compensation" for Plan Years beginning
after December 31, 1988, Family Members shall include only the
affected Employee's spouse and any lineal descendants who have
not attained age 19 before the close of the Plan Year.
(2) The Employer Elective Contributions and "414(s) Compensation"
of all Family Members shall be disregarded for purposes of
determining the "Actual Deferral Percentage" of the Non-Highly
Compensated Participant group except to the extent taken into
account in paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of
more than one family group in a plan, all Participants who are
members of those family groups that include the Participant are
aggregated as one family group in accordance with paragraphs (1)
and (2) above.
(d) For the purposes of this Section and Code Sections 401(a)(4),
410(b) and 401(k), if two or more plans which include cash or
deferred arrangement are considered one plan for the purposes of Code
Section 401(a)(4) or 410(b) (other than Code Section 401(b)(2)(A)(ii)
as in effect for Plan Years beginning after December 31, 1988), the
cash or deferred arrangements included in such plans shall be treated
as one arrangement. In addition, two or more cash or deferred
arrangements may be considered as a single arrangement for purposes
of determining whether or not such arrangements satisfy Code Sections
401(a)(4), 410(b) and 401(k). In such a case, the cash or deferred
arrangements included in such plans and the plans including such
arrangements shall be treated as one arrangement and as one plan for
purposes of this Section and Code Sections 401(a)(4), 410(b) and
401(k). For plan years beginning after December 31, 1989, plans may
be aggregated under this paragraph (e) only if they have the same
plan year.
Notwithstanding the above, for Plan Years beginning after
December 31, 1988, an employee stock ownership plan described in Code
Section 4975(e)(7) may not be combined with this
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Plan for purposes of determining whether the employee stock ownership
plan or this Plan satisfies this Section and Code Sections 401(a)(4),
410(b) and 401(k).
(e) For the purposes of this Section, if a Highly Compensated
Participant is a Participant under two (2) or more cash or deferred
arrangements (other than a cash or deferred arrangement which is part
of an employee stock ownership plan as defined in Code Section
4975(e)(7) for Plan Years beginning after December 31, 1988) of the
Employer or an Affiliated Employer, all such cash or deferred
arrangements shall be treated as one cash or deferred arrangement for
the purpose of determining the actual deferral ratio with respect to
such Highly Compensated Participant. However, for Plan Years
beginning after December 31, 1988, if the cash or deferred
arrangements have different Plan Years, this paragraph shall be
applied by treating all cash or deferred arrangements ending with or
within the same calendar year as a single arrangement.
11.5 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS
In the event that the initial allocations of the Employer's Elective
Contributions and Qualified Non-Elective Contributions do not satisfy one of the
tests set forth in Section 11.4, for Plan Years beginning after December 31,
1986, the Administrator shall adjust Excess Contributions pursuant to the
options set forth below:
(a) On or before the fifteenth day of the third month following
the end of each Plan Year, the Highly Compensated Participant having
the highest actual deferral ratio shall have his portion of Excess
Contributions distributed to him and/or at his election
recharacterized as a voluntary Employee contribution pursuant to
Section 4.7 until one of the tests set forth in Section 11.4 is
satisfied, or until his actual deferral ratio equals the actual
deferral ratio of the Highly Compensated Participant having the
second highest actual deferral ratio. This process shall continue
until one of the tests set forth in Section 11.4 is satisfied. For
each Highly Compensated Participant, the amount of Excess
Contributions is equal to the Elective Contributions and Qualified
Non-Elective Contributions made on behalf of such Highly Compensated
Participant (determined prior to the application of this paragraph)
minus the amount determined by multiplying the Highly Compensated
Participant's actual deferral ratio (determined after application of
this paragraph) by his "414(s) Compensation." However, in determining
the amount of Excess Contributions to be distributed and/or
recharacterized with respect to an affected Highly Compensated
Participant as determined herein, such amount shall be reduced by any
Excess Deferred Compensation previously distributed to such affected
Highly Compensated Participant for his taxable year ending with or
within such Plan Year. Any distribution and/or recharacterization of
Excess Contributions shall be made in accordance with the following:
(1) With respect to the distribution of Excess Contributions
pursuant to (a) above, such distribution:
(i) may be postponed but not later than the close of the Plan
Year following the Plan Year to which they are allocable;
(ii) shall be made first from unmatched Deferred Compensation
and, thereafter, simultaneously from Deferred Compensation
which is matched and matching contributions which relate to
such Deferred Compensation. However, any such matching
contributions which are not Vested shall be forfeited in lieu
of being distributed;
(iii) shall be made from Qualified Non-Elective Contributions
only to the extent that Excess Contributions exceed the
balance in the Participant's Elective Account attributable to
Deferred Compensation and Employer matching contributions.
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(iv) shall be adjusted for Income; and
(v) shall be designated by the Employer as a distribution of
Excess Contributions (and Income).
(2) With respect to the recharacterization of Excess Contributions
pursuant to (a) above, such recharacterized amounts:
(i) shall be deemed to have occurred on the date on which the
last of those Highly Compensated Participants with Excess
Contributions to be recharacterized is notified of the
recharacterization and the tax consequences of such
recharacterization;
(ii)for Plan Years ending on or before August 8, 1988, may be
postponed but not later than October 24, 1988;
(iii) shall not exceed the amount of Deferred Compensation on
behalf of any Highly Compensated Participant for any Plan
Year;
(iv)shall be treated as voluntary Employee contributions for
purposes of Code Section 401(a)(4) and Regulation
1.401(k)-1(b). However, for purposes of Sections 2.2 and
4.3(f), recharacterized Excess Contributions continue to be
treated as Employer contributions that are Deferred
Compensation. For Plan Years beginning after December 31,
1988, Excess Contributions recharacterized as voluntary
Employee contributions shall continue to be nonforfeitable and
subject to the same distribution rules provided for in Section
11.2(c);
(v) which relate to Plan Years ending on or before October 24,
1988, may be treated as either Employer contributions or
voluntary Employee contributions and therefore shall not be
subject to the restrictions of Section 11.2(c);
(vi)are not permitted if the amount recharacterized plus
voluntary Employee contributions actually made by such Highly
Compensated Participant, exceed the maximum amount of
voluntary Employee contributions (determined prior to
application of Section 11.6) that such Highly Compensated
Participant is permitted to make under the Plan in the absence
of recharacterization;
(vii) shall be adjusted for Income.
(3) Any distribution and/or recharacterization of less than the
entire amount of Excess Contributions shall be treated as a pro
rata distribution and/or recharacterization of Excess
Contributions and Income.
(4) The determination and correction of Excess Contributions of a
Highly Compensated Participant whose actual deferral ratio is
determined under the family aggregation rules shall be
accomplished as follows:
(i) If the actual deferral ratio for the Highly Compensated
Participant is determined in accordance with Section
11.4(c)(1)(ii), then the actual deferral ratio shall be
reduced as required herein and the Excess Contributions for
the family unit shall be allocated among the Family Members in
proportion to the Elective Contributions of each Family Member
that were combined to determine the group actual deferral
ratio.
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(ii)If the actual deferral ratio for the Highly Compensated
Participant is determined under Section 11.4(c)(1)(i), then
the actual deferral ratio shall first be reduced as required
herein, but not below the actual deferral ratio of the group
of Family Members who are not Highly Compensated Participants
without regard to family aggregation. The Excess Contributions
resulting from this initial reduction shall be allocated (in
proportion to Elective Contributions) among the Highly
Compensated Participants whose Elective Contributions were
combined to determine the actual deferral ratio. If further
reduction is still required, then Excess Contributions
resulting from this further reduction shall be determined by
taking into account the contributions of all Family Members
and shall be allocated among them in proportion to their
respective Elective Contributions.
(b) Within twelve (12) months after the end of the Plan Year, the
Employer shall make a special Qualified Non-Elective Contribution on
behalf of Non-Highly Compensated Participants in an amount sufficient
to satisfy one of the tests set forth in Section 11.4(a). Such
contribution shall be allocated to the Participant's Qualified
Non-Elective Account of each Non-Highly Compensated Participant in
the same proportion that each Non-Highly Compensated Participant's
Compensation for the year bears to the total Compensation of all
Non-Highly Compensated Participants.
(c) For purposes of this Section, "Income" means the income or
loss allocable to Excess Contributions which shall equal the sum of
the allocable gain or loss for the Plan Year and the allocable gain
or loss for the period between the end of the Plan Year and the date
of distribution ("gap period"). The income or loss allocable to
Excess Contributions for the Plan Year and the "gap period" is
calculated separately and is determined by multiplying the income or
loss for the Plan Year or the "gap period" by a fraction. The
numerator of the fraction is the Excess Contributions for the Plan
Year. The denominator of the fraction is the total of the
Participant's Elective Account attributable to Elective Contributions
and the Participant's Qualified Non-Elective Account as of the end of
the Plan Year or the "gap period," reduced by the gain allocable to
such total amount for the Plan Year or the "gap period" and increased
by the loss allocable to such total amount for the Plan Year or the
"gap period."
In lieu of the "fractional method" described above, a "safe
harbor method" may be used to calculate the allocable Income for the
"gap period." Under such "safe harbor method," allocable Income for
the "gap period" shall be deemed to equal ten percent (10%) of the
Income allocable to Excess Contributions for the Plan Year of the
Participant multiplied by the number of calendar months in the "gap
period." For purposes of determining the number of calendar months in
the "gap period," a distribution occurring on or before the fifteenth
day of the month shall be treated as having been made on the last day
of the preceding month and a distribution occurring after such
fifteenth day shall be treated as having been made on the first day
of the next subsequent month.
Notwithstanding the above, for Plan Years which began in
1987, Income during the "gap period" shall not be taken into account.
Notwithstanding the above, for any distribution under this
Section which is made after August 15, 1991, such distribution shall
not include any Income for the "gap period". Further provided, for
any distribution under this Section which is made after August 15,
1991, the amount of Income may be computed using a reasonable method
that is consistent with. Section 43(c), provided such method is used
consistently for all Participants and for all such distributions for
the Plan Year.
(d) Any amounts not distributed or recharacterized within 2 1/2
months after the end of the Plan Year shall be subject to the 10%
Employer excise tax imposed by Code Section 4979.
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11.6 ACTUAL CONTRIBUTION PERCENTAGE TESTS
(a) The "Actual Contribution Percentage," for Plan Years
beginning after the later of the Effective Date of this Plan or
December 31, 1986, for the Highly Compensated Participant group shall
not exceed the greater of:
(1) 125 percent of such percentage for the Non-Highly Compensated
Participant group; or
(2) the lesser of 200 percent of such percentage for the
Non-Highly Compensated Participant group, or such percentage for
the Non-Highly Compensated Participant group plus 2 percentage
points. However, for Plan Years beginning after December 31,
1988, to prevent the multiple use of the alternative method
described in this paragraph and Code Section 401(m)(9)(A), any
Highly Compensated Participant eligible to make elective
deferrals pursuant to Section 11.2 or any other cash or deferred
arrangement maintained by the Employer or an Affiliated Employer
and to make Employee contributions or to receive matching
contributions under any plan maintained by the Employer or an
Affiliated Employer shall have his actual contribution ratio
reduced pursuant to Regulation 1.401(m)-2. The provisions of Code
Section 401 (m) and Regulations 1.401(m)-1(b) and 1.401(m)-2 are
incorporated herein by reference.
(b) For the purposes of this Section and Section 11.7, "Actual
Contribution Percentage" for a Plan Year means, with respect to the
Highly Compensated Participant group and Non-Highly Compensated
Participant group, the average of the ratios (calculated separately
for each Participant in each group) of-
(1) the sum of Employer matching contributions made pursuant to
Section 11.1(b) (to the extent such matching contributions are
not used to satisfy the tests set forth in Section 11.4),
voluntary Employee contributions made pursuant to Section 4.7 and
Excess Contributions recharacterized as voluntary Employee
contributions pursuant to Section 11.5 on behalf of each such
Participant for such Plan Year; to
(2) the Participant's "414(s) Compensation" for such Plan Year.
(c) For purposes of determining the "Actual Contribution
Percentage" and the amount of Excess Aggregate Contributions pursuant
to Section 11.7(d), only Employer matching contributions (excluding
matching contributions forfeited or distributed pursuant to Section
11.2(f), 11.5(a), or 11.7(a)) contributed to the Plan prior to the
end of the succeeding Plan Year shall be considered. In addition, the
Administrator may elect to take into account, with respect to
Employees eligible to have Employer matching contributions made
pursuant to Section 11.1(b) or voluntary Employee contributions made
pursuant to Section 4.7 allocated to their accounts, elective
deferrals (as defined in Regulation 1.402(g)-1(b)) and qualified
non-elective contributions (as defined in Code Section 401(m)(4)(C))
contributed to any plan maintained by the Employer. Such elective
deferrals and qualified non-elective contributions shall be treated
as Employer matching contributions subject to Regulation
1.401(m)-1(b)(2) which is incorporated herein by reference. However,
for Plan Years beginning after December 31, 1988, the Plan Year must
be the same as the plan year of the plan to which the elective
deferrals and the qualified non-elective contributions are made.
(d) For the purpose of determining the actual contribution ratio
of a Highly Compensated Employee who is subject to the Family Member
aggregation rules of Code Section 414(q)(6) because such Employee is
either a "five percent owner" of the Employer or one of the ten (10)
Highly Compensated Employees paid the greatest "415 Compensation"
during the year, the following shall apply:
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<PAGE> 84
(1) The combined actual contribution ratio for the family group
(which shall be treated as one Highly Compensated Participant)
shall be the greater of: (i) the ratio determined by aggregating
Employer matching contributions made pursuant to Section 11.1(b)
(to the extent such matching contributions are not used to
satisfy the tests set forth in Section 11.4), voluntary Employee
contributions made pursuant to Section 4.7, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to
Section 11.5 and "414(s) Compensation" of all eligible Family
Members who are Highly Compensated Participants without regard to
family aggregation; and (ii) the ratio determined by aggregating
Employer matching contributions made pursuant to Section 11.1(b)
(to the extent such matching contributions are not used to
satisfy the tests set forth in Section 11.4), voluntary Employee
contributions made pursuant to Section 4.7, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to
Section 11.5 and "414(s) Compensation" of all eligible Family
Members (including Highly Compensated Participants). However, in
applying the $200,000 limit to "414(s) Compensation" for Plan
Years beginning after December 31, 1988, Family Members shall
include only the affected Employee's spouse and any lineal
descendants who have not attained age 19 before the close of the
Plan Year.
(2) The Employer matching contributions made pursuant to Section
11.1(b) (to the extent such matching contributions are not used
to satisfy the tests set forth in Section 11.4), voluntary
Employee contributions made pursuant to Section 4.7, Excess
Contributions recharacterized as voluntary Employee contributions
pursuant to Section 11.5 and "414(s) Compensation" of all Family
Members shall be disregarded for purposes of determining the
"Actual Contribution Percentage" of the Non-Highly Compensated
Participant group except to the extent taken into account in
paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of
more than one family group in a plan, all Participants who are
members of those family groups that include the Participant are
aggregated as one family group in accordance with paragraphs (1)
and (2) above.
(e) For purposes of this Section and Code Sections 40 1 (a)(4),
410(b) and 401(m), i f two or more plans of the Employer to which
matching contributions, Employee contributions, or both, are made are
treated as one plan for purposes of Code Sections 401(a)(4) or 410(b)
(other than the average benefits test under Code Section
410(b)(2)(A)(ii) as in effect for Plan Years beginning after December
31, 1988), such plans shall be treated as one plan. In addition, two
or more plans of the Employer to which matching contributions,
Employee contributions, or both, are made may be considered as a
single plan for purposes of determining whether or not such plans
satisfy Code Sections 401(a)(4), 410(b) and 401(m). In such a case,
the aggregated plans must satisfy this Section and Code Sections
401(a)(4), 410(b) and 401(m) as though such aggregated plans were a
single plan. For plan years beginning after December 31, 1989, plans
may be aggregated under this paragraph only if they have the same
plan year.
Notwithstanding the above, for Plan Years beginning after
December 31, 1988, an employee stock ownership plan described in Code
Section 4975(c)(7) may not be aggregated with this Plan for purposes
of' determining whether the employee stock ownership plan or this
Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and
401(m).
(f) If a Highly Compensated Participant is a Participant under
two or more plans (other than an employee stock ownership plan as
defined in Code Section 4975(c)(7) for Plan Years beginning after
December 31, 1988) which are maintained by the Employer or an
Affiliated Employer to which matching contributions, Employee
contributions, or both, are made, all such contributions on behalf of
such Highly Compensated Participant shall be aggregated for purposes
of determining such Highly Compensated Participant's actual
contribution ratio. However, for Plan Years beginning after
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December 31, 1988, if the plans have different plan years, this
paragraph shall be applied by treating all plans ending with or
within the same calendar year as a single plan.
(g) For purposes of Section 11.6(a) and 11.7, a Highly
Compensated Participant and a Non-Highly Compensated Participant
shall include any Employee eligible to have matching contributions
made pursuant to Section 11.1(b) (whether or not a deferred election
was made or suspended pursuant to Section 11.2(e)) allocated to his
account for the Plan Year or to make salary deferrals pursuant to
Section 11.2 (if the Employer uses salary deferrals to satisfy the
provisions of this Section) or voluntary Employee contributions
pursuant to Section 4.7 (whether or not voluntary Employee
contributions are made) allocated to his account for the Plan Year.
(h) For purposes of this Section, "Matching Contribution" shall
mean an Employer contribution made to the Plan, or to a contract
described in Code Section 403(b), on behalf of a Participant on
account of an Employee contribution made by such Participant, or on
account of a participant's deferred compensation, under a plan
maintained by the Employer.
11.7 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS
(a) In the event that for Plan Years beginning after December 31,
1986, the "Actual Contribution Percentage" for the Highly Compensated
Participant group exceeds the "Actual Contribution Percentage" for
the Non-Highly Compensated Participant group pursuant to Section
11.6(a), the Administrator (on or before the fifteenth day of the
third month following the end of the Plan Year, but in no event later
than the close of the following Plan Year) shall direct the Trustee
to distribute to the Highly Compensated Participant having the
highest actual contribution ratio, his portion of Excess Aggregate
Contributions (and Income allocable to such contributions) or, if
forfeitable, forfeit such non-Vested Excess Aggregate Contributions
attributable to Employer matching contributions (and Income allocable
to such Forfeitures) until either one of the tests set forth in
Section 11.6(a) is satisfied, or until his actual contribution ratio
equals the actual contribution ratio of the Highly Compensated
Participant having the second highest actual contribution ratio. This
process shall continue until one of the tests set forth in Section
11.6(a) is satisfied. The distribution and/or Forfeiture of Excess
Aggregate Contributions shall be made in the following order:
(1) Employer matching contributions distributed and/or forfeited
pursuant to Section 11.5(a)(1);
(2) Voluntary Employee contributions including Excess
Contributions recharacterized as voluntary Employee contributions
pursuant to Section 11.5(a)(2);
(3) Remaining Employer matching contributions.
(b) Any distribution or Forfeiture of less than the entire amount
of Excess Aggregate Contributions (and Income) shall be treated as a
pro rata distribution of Excess Aggregate Contributions and Income.
Distribution of Excess Aggregate Contributions shall be designated by
the Employer as a distribution of Excess Aggregate Contributions (and
Income). Forfeitures of Excess Aggregate Contributions shall be
treated in accordance with Section 4.3. However, no such Forfeiture
may be allocated to a Highly Compensated Participant whose
contributions are reduced pursuant to this Section.
(c) Excess Aggregate Contributions attributable to amounts other
than voluntary Employee contributions, including forfeited matching
contributions, shall be treated as Employer contributions for
purposes of Code Sections 404 and 415 even if distributed from the
Plan.
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(d) For the purposes of this Section and Section 11.6, "Excess
Aggregate Contributions" means, with respect to any Plan Year, the
excess of.
(1) the aggregate amount of Employer matching contributions made
pursuant to Section 11.1(b) (to the extent such contributions are
taken into account pursuant to Section 11.6(a)), voluntary
Employee contributions made pursuant to Section 4.7, Excess
Contributions recharacterized as voluntary Employee contributions
pursuant to Section 11.5 and any Qualified Non-Elective
Contributions or elective deferrals taken into account pursuant
to Section 11.6(c) actually made on behalf of the Highly
Compensated Participant group for such Plan Year, over
(2) the maximum amount of such contributions permitted under the
limitations of Section 11.6(a).
(e) For each Highly Compensated Participant, the amount of Excess
Aggregate Contributions is equal to the total Employer matching
contributions made pursuant to Section 11.6 (b) (to the extent taken
into account pursuant to Section 11.6(a)), voluntary Employee
contributions made pursuant to Section 4.7, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to
Section 11.5 and any Qualified Non-Elective Contributions or elective
deferrals taken into account pursuant to Section I 1.6(c) on behalf
of the Highly Compensated Participant (determined prior to the
application of this paragraph) minus the amount determined by
multiplying the Highly Compensated Participant's actual contribution
ratio (determined after application of this paragraph) by his "414(s)
Compensation." The actual contribution ratio must be rounded to the
nearest one-hundredth of one percent for Plan Years beginning after
December 31, 1988. In no case shall the amount of Excess Aggregate
Contribution with respect to any Highly Compensated Participant
exceed the amount of Employer matching contributions made pursuant to
Section 11.1(b) (to the extent taken into account pursuant to Section
11.6(a)), voluntary Employee contributions made pursuant to Section
4.7, Excess Contributions recharacterized as voluntary Employee
contributions pursuant to Section 11.5 and any Qualified Non-Elective
Contributions or elective deferrals taken into account pursuant to
Section 11.6(c) on behalf of such Highly Compensated Participant for
such Plan Year.
(f) The determination of the amount of Excess Aggregate
Contributions with respect to any Plan Year shall be made after first
determining the Excess Contributions, if any, to be treated as
voluntary Employee contributions due to recharacterization for the
plan year of any other qualified cash or deferred arrangement (as
defined in Code Section 401(k)) maintained by the Employer that ends
with or within the Plan Year or which are treated as voluntary
Employee contributions due to recharacterization pursuant to Section
11.5.
(g) The determination and correction of Excess Aggregate
Contributions of a Highly Compensated Participant whose actual
contribution ratio is determined under the family aggregation rules
shall be accomplished as follows:
(1) If the actual contribution ratio for the Highly Compensated
Participant is determined in accordance with Section 11.6(d)(1),
then the actual contribution ratio shall be reduced and the
Excess Aggregate Contributions for the family unit shall be
allocated among the Family Members in proportion to the sum of
Employer matching contributions made pursuant to Section 11.1(b)
(to the extent taken into account pursuant to Section 11.6(a)),
voluntary Employee contributions made pursuant to Section 4.7,
Excess Contributions recharacterized as voluntary Employee
contributions pursuant to Section 11.5 and any Qualified
Non-Elective Contributions or elective deferrals taken into
account pursuant to Section 11.6(c) of each Family Member that
were combined to determine the group actual contribution ratio.
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(2) If the actual contribution ratio for the Highly Compensated
Participant is determined under Section 11.6(d)(2), then the
actual contribution ratio shall first be reduced, as required
herein, but not below the actual contribution ratio of the group
of Family Members who are not Highly Compensated Participants
without regard to family aggregation. The Excess Aggregate
Contributions resulting from this initial reduction shall be
allocated among the Highly Compensated Participants whose
Employer matching contributions made pursuant to Section IL I (b)
(to the extent taken into account pursuant to Section 11.6(a)),
voluntary Employee contributions made pursuant to Section 4.7,
Excess Contributions recharacterized as voluntary Employee
contributions pursuant to Section 11.5 and any Qualified
Non-Elective Contributions or elective deferrals taken into
account pursuant to Section 11.6(c) were combined to determine
the actual contribution ratio. If further reduction is still
required, then Excess Aggregate Contributions resulting from this
further reduction shall be determined by taking into account the
contributions of all Family Members and shall be allocated among
them in proportion to their respective Employer matching
contributions made pursuant to Section 11.1(b) (to the extent
taken into account pursuant to Section 11.6(a)), voluntary
Employee contributions made pursuant to Section 4.7, Excess
Contributions recharacterized as voluntary Employee contributions
pursuant to Section 11.5 and any Qualified Non-Elective
Contributions or elective deferrals taken into account pursuant
to Section 11.6(c).
(h) Notwithstanding the above, within twelve (12) months after
the end of the Plan Year, the Employer may make a special Qualified
Non-Elective Contribution on behalf of Non-Highly Compensated
Participants in an amount sufficient to satisfy one of the tests set
forth in Section 11.6. Such contribution shall be allocated to the
Participant's Qualified Non-Elective Account of each Non-Highly
Compensated Participant in the same proportion that each Non-Highly
Compensated Participant's Compensation for the year bears to the
total Compensation of all Non-Highly Compensated Participants. A
separate accounting shall be maintained for the purpose of excluding
such contributions from the "Actual Deferral Percentage" tests
pursuant to Section 11.4.
(i) For purposes of this Section, "Income" means the income or
loss allocable to Excess Aggregate Contributions which shall equal
the sum of the allocable gain or loss for the Plan Year and the
allocable gain or loss for the period between the end of the Plan
Year and the date of distribution ("gap period"). The income or loss
allocable to Excess Aggregate Contributions for the Plan Year and the
"gap period" is calculated separately and is determined by
multiplying the income or loss for the Plan Year or the "gap period"
by a fraction. The numerator of the fraction is the Excess Aggregate
Contributions for the Plan Year. The denominator of the fraction is
the total Participant's Account and Voluntary Contribution Account
attributable to Employer matching contributions subject to Section
11.6, voluntary Employee contributions made pursuant to Section 4.7,
and any Qualified Non-Elective Contributions and elective deferrals
taken into account pursuant to Section 11.6(c) as of the end of the
Plan Year or the "gap period," reduced by the gain allocable to such
total amount for the Plan Year or the "gap period" and increased by
the loss allocable to such total amount for the Plan Year or the "gap
period."
In lieu of the "fractional method" described above, a "safe
harbor method" may be used to calculate the allocable Income for the
"gap period." Under such "safe harbor method," allocable Income for
the "gap period" shall be deemed to equal ten percent (10%) of the
Income allocable To Excess Aggregate Contributions for the Plan Year
of the Participant multiplied by the number of calendar months in the
"gap period." For purposes of determining the number of calendar
months in the "gap period," a distribution occurring on or before the
fifteenth day of the month shall be treated as having been made on
the last day of the preceding month and a distribution occurring
after such fifteenth day shall be treated as having been made on the
first day of the next subsequent month.
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The Income allocable to Excess Aggregate Contributions
resulting from recharacterization of Elective Contributions shall be
determined and distributed as if such recharacterized Elective
Contributions had been distributed as Excess Contributions.
Notwithstanding the above, for any distribution under this
Section which is made after August 15, 1991, such distribution shall
not include any Income for the "gap period". Further provided, for
any distribution under this Section which is made after August 15,
1991, the amount of Income may be computed using a reasonable method
that is consistent with Section 4.3(c), provided such method is used
consistently for all Participants and for all such distributions for
the Plan Year.
Notwithstanding the above, for Plan Years which began in
1987, Income during the "gap period" shall not be taken into
account.
Notwithstanding the above, for any distribution under this
Section which is made after August 15, 1991, such distribution shall
not include any Income for the "gap period". Further provided, for
any distribution under this Section which is made after August 15,
1991, the amount of Income may be computed using a reasonable method
that is consistent with Section 43(c), provided such method is used
consistently for all Participants and for all such distributions for
the Plan Year.
11.8 ADVANCE DISTRIBUTION FOR HARDSHIP
(a) The Administrator, at the election of the Participant, shall
direct the Trustee to distribute to any Participant in any one Plan
Year up to the lesser of (1) 100% of his accounts as specified in the
Adoption Agreement valued as of the last Anniversary Date or other
valuation date or (2) the amount necessary to satisfy the immediate
and heavy financial need of the Participant. Any distribution made
pursuant to this Section shall be deemed to be made as of the first
day of the Plan Year or, if later, the valuation date immediately
preceding the date of distribution, and the account from which the
distribution is made shall be reduced accordingly. Withdrawal under
this Section shall be authorized only if the distribution is on
account of one of the following or any other items permitted by the
Internal Revenue Service:
(1) Medical expenses described in Code Section 213(d) incurred by
the Participant, his spouse, or any of his dependents (as defined
in code Section 152) or expenses necessary for these persons to
obtain medical care;
(2) The purchase (excluding mortgage payments) of a principal
residence for the Participant;
(3) Payment of tuition and related educational fees for the next
12 months of post-secondary education for the Participant, his
spouse, children, or dependents; or
(4) The need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the
Participant's principal residence.
(b) No such distribution shall be made from the Participant's
Account until such Account has become fully Vested.
(c) No distribution shall be made pursuant to this Section unless
the Administrator, based upon the Participant's representation and
such other facts as are known to the Administrator, determines that
all of the following conditions are satisfied:
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(1) The distribution is not in excess of the amount of the
immediate and heavy financial need of the Participant (including
any amounts necessary to pay any federal, state, or local taxes
or penalties reasonably anticipated to result from the
distribution);
(2) The Participant has obtained all distributions, other than
hardship distributions, and all nontaxable loans currently
available under all plans maintained by the Employer;
(3) The Plan, and all other plans maintained by the Employer,
provide that the Participant's elective deferrals and voluntary
Employee contributions will be suspended for at least twelve (12)
months after receipt of the hardship distribution; and
(4) The Plan, and all other plans maintained by the Employer,
provide that the Participant may not make elective deferrals for
the Participant's taxable year immediately following the taxable
year of the hardship distribution in excess of the applicable
limit under Code Section 402(g) for such next taxable year less
the amount of such Participant's elective deferrals for the
taxable year of the hardship distribution.
(d) Notwithstanding the above, distributions from the
Participant's Elective Account and Qualified Non-Elective Account
pursuant to this Section shall be limited solely to the Participant's
Deferred Compensation and any income attributable thereto credited to
the Participant's Elective Account as of December 31, 1988.
(e) Any distribution made pursuant to this Section shall be made
in a manner which is consistent with and satisfies the provisions of
Section 6.5, including, but not limited to, all notice and consent
requirements of Code Sections 411(a)(11) and 417 and the Regulations
thereunder.
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VALUSELECT(R) TRUST AGREEMENT
This Trust Agreement ("Trust Agreement" or "Agreement") entered into
this 31st day of December, 1997, between National Insurance Group , (the
"Company") a corporation organized under the laws of the State of California,
and FRANKLIN TEMPLETON TRUST COMPANY, a trust company chartered under California
law (the "Trustee").
PURPOSE
The Company has adopted a plan called National Insurance Group 401(k)
Plan (the "Plan") for the exclusive purpose of providing benefits to certain of
its employees and their beneficiaries and defraying reasonable expenses of
administering the Plan. The Plan provides that, from time to time, cash and
other acceptable property may be paid to the Trustee by the Company to be held
and administered as a trust (the "Trust Fund" or "Trust") for the uses and
purposes of the Plan. The Company intends that the Plan shall qualify under
section 401 of the Internal Revenue Code of 1986, as amended (the "Code"), and
that the Trust shall constitute a part of the Plan, as a tax-exempt entity
within the meaning of Code section 501(a).
Subject to specific conditions set forth in this Agreement, the Trustee
agrees that it will hold in Trust and invest cash and other acceptable property
received pursuant to this Agreement and received as contributions from the
Company or transfers from another plan qualified under section 401(a) of the
Code upon the terms and conditions stated below.
ARTICLE I. TRUST FUND.
1.1 The Company's President, Secretary or other duly authorized
official shall certify in writing to the Trustee the names and specimen
signatures of all those persons who are authorized to act as or on behalf of the
Plan's named fiduciary, which term shall include the administrator of the Plan,
another trustee or other person who under the Plan's provisions is authorized to
make administrative decisions for the Plan, Plan participants and beneficiaries,
including an appointed investment manager (collectively referred to as the
"Administrator"), and these names and specimen signatures shall be updated as
necessary by the President, Secretary or other duly authorized official.
1.2 All contributions or transfers shall be received by the Trustee in
cash or other property acceptable to the Plan and acceptable to the Trustee and
under the Plan's investment guidelines ("Investment Guidelines"), which are
incorporated herein and made part of the Agreement as amended from time to time,
provided that the contributions or transfers are not impermissible investments
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The Trust Fund shall consist of the contributions and transfers received by the
Trustee, together with the income and earnings from them and any increments to
them. The Trustee shall manage and administer the Trust Fund without distinction
between principal and income and without liability for the payment of interest
thereon. The Trustee shall have no duty or authority to (i) compute any amount
required to be transferred or paid to the Trust Fund by the Company, (ii)
collect any contributions or transfers to the Trust Fund, or (iii) determine
whether any contribution or transfer complies with the terms of the Plan.
If the Company creates or maintains one or more employee benefit
plans qualified under Code section 401(a) in addition to the Plan, the Company
may request the Trustee to hold the assets of the additional plan or plans in a
separate trust fund. The Administrator shall keep separate records or enter into
an agreement with the Trustee or another party to keep separate records for each
such plan and trust fund. The Company or Administrator as the case may be shall
not permit or cause the assets of one plan and trust fund to be used to pay
benefits or the administrative expenses of any other plan and trust fund.
1.3 The Trustee shall accept a contribution of cash or other acceptable
property that has been distributed to a participant (or an eligible employee who
is about to become a participant) from another employee
Franklin Templeton ValuSelect(R)
All Rights Reserved
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benefit plan qualified under Code section 401(a), or from an individual
retirement account or annuity described in Code section 408, at the direction of
the Administrator. The Administrator shall be solely responsible for determining
that such assets represent an eligible rollover contribution within the meaning
of Code sections 402(c) or 408(d)(3). The Trustee shall accept a transfer of
cash or other acceptable property on behalf of a participant (or an employee who
is about to become a participant) directly from the trustee of an employee
benefit plan qualified under Code section 401(a) at the direction of the
Administrator.
ARTICLE II. INVESTMENTS AND DISTRIBUTIONS.
2.1
(a) Except as provided below, the Administrator shall have all
power over and responsibility for the management, disposition, and investment of
the Trust assets, and the Trustee shall comply with proper written directions of
the Administrator concerning those assets. The Administrator shall not issue
directions in violation of the terms of the Plan and Trust or prohibited by the
fiduciary responsibility rules of ERISA. The Trustee shall have no duty or
responsibility to review, initiate action, or make recommendations regarding
Trust assets and shall retain assets until directed in writing by the
Administrator to dispose of them.
The Administrator may delegate to any other person or
persons any of the Administrator's rights, powers or responsibilities with
respect to the operation and administration of the Trust Fund. Any such
delegation shall be made in writing and certified to the Trustee.
(b) If permissible under the Plan, each participant and/or
beneficiary may have investment power over the account maintained for him or her
and may direct the investment and reinvestment of assets of his or her account
among the options authorized by the Plan and Administrator. Such direction shall
be furnished to the Trustee, in writing, through an automatic voice system, or
other similar direction, under procedures agreed to by the Trustee and the
Administrator. The Trustee shall not be liable for any loss which results from
such participant's or beneficiary's exercise of control. The Administrator shall
maintain records or enter into an agreement with another party to keep separate
accounts showing the interest of each participant and/or beneficiary in the
Trust Fund. The Trustee shall have no duty or responsibility to review or make
recommendations regarding investments made at the direction of the Administrator
or a participant/beneficiary, and the Trustee shall be required to act only upon
receipt of directions. A participant or beneficiary shall not have authority to
direct the investment of assets in his or her account in "collectibles" within
the meaning of Code section 408(m)(2).
(c) The Company or Administrator as the case may be may
appoint an investment manager or managers within the meaning of section 3(38) of
ERISA to direct, control or manage the investment of all or a portion of the
Trust assets, as provided in sections 3(38) and 403(a)(2) of ERISA. The Company
or Administrator shall notify the Trustee in writing of (i) the appointment of
each investment manager and (ii) the assets over which each manager shall
exercise control. The Company or Administrator shall also cause the investment
manager to acknowledge to the Trustee in writing that the investment manager is
a fiduciary with respect to the Plan. If the foregoing conditions are met, the
investment manager shall have the power to manage, acquire, or dispose of any
Trust assets so identified as under such manager's control, and the Trustee
shall not be liable for acts or omissions of the investment manager or be under
an obligation to invest or otherwise manage any asset of the Trust that is
subject to the management of such investment manager. The Trustee shall act only
upon receipt of proper written directions from a duly appointed investment
manager, and shall have no responsibility or authority to review or question
instructions from any such investment manager.
(d) If the Plan authorizes loans to Plan participants, the
duties of the Trustee and Administrator may be covered by a separate agreement
to be incorporated as part of this Agreement.
2.2
(a) Subject to the investment being acceptable to the Trustee
and the Investment Guidelines of the Plan and subject to the provisions of
Section 2.1 above, the person with investment responsibility ("Authorized
Person") may cause the Trust Fund to be invested and reinvested in every kind of
investment including, without limitation, publicly traded equity and debt
interests of all kinds issued by domestic or foreign governments, business
organizations, limited partnerships, investment companies and trusts or other
entities,
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convertible securities of all kinds, interest-bearing deposits in any depository
institution, domestic or foreign, (including the Trustee or any affiliate of the
Trustee), money market securities of all kinds, collective investments as
described in subsection (b) below, and insurance contracts as described in
subsection (c) below. Notwithstanding anything in the Trust Agreement to the
contrary, the Trustee may hold uninvested and without liability for interest
such part of the Trust Fund as may be reasonably necessary for the orderly
administration of the Trust Fund.
(b) Subject to the following provisions, all or a portion of
the assets of the Trust Fund may be invested and reinvested in any collective
investment fund (referred to as a "pooled fund") maintained by the Trustee or by
any other entity authorized to maintain such a fund in which the Plan and this
Trust Fund is eligible to participate. Notwithstanding any other provision of
this Agreement, to the extent Trust Fund assets are invested in any such pooled
fund, the terms of the pooled fund's governing instrument shall govern the
operation of the pooled fund and the investment responsibilities and powers of
the entity responsible for management of the pooled fund (referred to as "fund
manager"), and, to the extent required by law, the terms of such governing
instrument shall be incorporated into the Trust Agreement. The value of any
interest in a pooled fund held by the Trust Fund shall be the fair market value
of the interest as determined by the fund manager in accordance with the pooled
fund's governing instrument. For purposes of valuation of the Trust Fund assets,
the Trustee shall be entitled to rely conclusively on the value reported by the
fund manager.
(c) At the direction of the Authorized Person, the Trustee may
purchase shares of registered or unregistered investment companies (or other
investment vehicles), which may include such companies advised by the Trustee or
any affiliated entity ("Franklin Templeton Funds").
(d) Subject to being acceptable to the Trustee, the Trust Fund
may be invested in a pooled investment vehicle funded by contracts issued by an
insurance company qualified to do business under a state's law (within the
meaning of ERISA section 3(10)) including, without limitation, group annuity and
guaranteed investment contracts. Any such contract may provide for the
allocation of amounts received by the insurance company to its general account,
one or more of its separate accounts (including pooled separate accounts), or
both. To the extent Trust Fund assets are allocated to a separate account of an
insurance company, the Administrator shall appoint the insurance company as an
investment manager as provided above. Notwithstanding any other provision of the
Trust Agreement, the terms of the contract(s) governing the separate accounts(s)
in which the Trust Fund is invested shall govern the investment responsibilities
and powers of the insurance company and, to the extent required by law, the
terms of such contract(s) shall be incorporated into the Trust Agreement.
(e) To the extent permitted by the Plan and acceptable to the
Trustee, the Authorized Person may direct the Trustee to apply for and purchase
life insurance or annuity contracts (referred to as "contracts") from an
insurance company, subject to the following provisions:
(i) The Authorized Person shall be responsible for
ensuring that the purchases conform with the requirements of the Plan and any
rules and policies established by the Administrator regarding the form, value,
optional settlement methods and other provisions of the contracts. The Trustee
shall not be responsible for the validity or proper execution of any contract
delivered to it or for any act of any person which renders the contract void or
voidable. The Trustee shall not be responsible if the contract held in the Trust
Fund fails to meet the requirements of the Plan, and the Trustee shall have no
duty to inform participants of the terms and conditions of any such contract.
(ii) The Administrator shall instruct the insurance
company to notify the Administrator of all premiums becoming due under the
contracts. The Administrator shall deliver all premium notices to the Trustee,
together with a direction to the Trustee to pay the premiums out of the Trust
Fund. The Trustee shall have no responsibility for paying the premium unless
sufficient assets of the Trust Fund are available for that purpose.
(iii) The Administrator shall cause the Trustee to be
designated as the sole owner of any such contract, with sole power to exercise
all rights, privileges, options and other incidents of ownership at the
Administrator's direction. The Administrator from time to time shall direct the
Trustee regarding the designation of
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a beneficiary of the death benefit payable under any such contract in accordance
with the applicable provisions of the Plan.
(f) To the extent permitted by the Plan and ERISA, and to the
extent acceptable to the Trustee, and subject to the applicable federal and
state securities laws, the Authorized Person may direct the Trustee to invest in
qualifying employer securities within the meaning of ERISA section 407(d)(5)
("Employer Securities"). The Company or Administrator as the case may be shall
have full responsibility for determining that any such investment and the voting
rights attributable to such investment comply with applicable law.
Notwithstanding any other provision of the Plan or this Trust Agreement, the
Company or Administrator shall have the responsibility for voting any shares or
directing that such shares shall be sold, exchanged or otherwise disposed of
except to the extent that such duties are made the responsibility of another
person or persons under the terms of the Plan or other governing document, and
such person performs according to such terms. The Trustee shall have no duty or
responsibility for voting any such shares or directing that such shares be sold,
exchanged or otherwise disposed of except upon the express written instructions
of the Company or Administrator.
2.3 In its administration of the Trust Fund, the Trustee shall have and
exercise whatever powers are necessary to discharge its obligations and exercise
its rights under the Trust Agreement. Subject to the direction of the
Administrator, participants or beneficiaries, or an investment manager as
provided in Section 2.1, the Trustee shall have full power and authority with
respect to property held in the Trust Fund to do all such acts, take all
proceedings, and exercise all such rights and privileges, whether specifically
referred to or not in this document, as could be done, taken, or exercised by
the absolute owner, including, without limitation, the following:
(a) To collect income generated by the Trust Fund investments and
proceeds realized on the sale or disposition of assets and to hold the same
pending reinvestment or distribution in accordance with this Agreement;
(b) To register Trust Fund property in the Trustee's own name, in
the name of a nominee or in bearer form, provided the Trustee's records and
accounts show that such property is an asset of the Trust Fund;
(c) To appoint sub-custodians to hold title to, or other indicia of
ownership of, property of the Trust Fund in those jurisdictions, domestic or
foreign, in which the Trustee is not authorized to do business and to define the
scope of the responsibilities of each such ancillary or subordinate custodian,
or to deposit such securities with a domestic or foreign securities depository
or bank regulated by a government agency or regulatory authority in the domestic
or foreign jurisdiction, and to permit the securities so deposited to be held in
the nominee name of the depository or bank, provided that the Trustee's records
and accounts show that such securities belong to the Trust Fund;
(d) To hold securities issued by a foreign government or business
entity at a foreign office of the Trustee or any of its affiliates, or to
deposit such securities with a foreign securities depository or bank regulated
by a government agency or regulatory authority in the foreign jurisdiction, and
to permit the securities so deposited to be held in the nominee name of the
depository or bank, provided that the Trustee's records and accounts show that
such securities belong to the Trust Fund;
(e) To retain the property in the Trust;
(f) To sell Trust assets, at either public or private sale, at such
time or times and on such terms and conditions as it may deem appropriate;
(g) To consent to or participate in any plan for the
reorganization, consolidation, or merger of any business unit, any security of
which is held in the Trust Fund, to pay calls and assessments imposed upon the
owners of such securities as condition of their participating therein, and to
consent to any contact, lease, mortgage, purchase or sale of property, by or
between such business unit and any other party;
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(h) To exercise or dispose of any right it may have as the holder
of any security, to convert the same into another security, to acquire any
additional security or securities, to make any payments, to exchange any
security, or to do any other act with reference thereto;
(i) To renew or extend the time of payment of any obligation due or
becoming due;
(j) To grant options to purchase property held in the Trust;
(k) To compromise, arbitrate, or otherwise adjust or settle claims
in favor of or against the Trust and to deliver or accept consideration in
either total or partial satisfaction of any indebtedness or other obligation,
and to continue to hold property so received for the period of time that the
Trustee deems appropriate;
(l) To exchange any property for other property upon such terms and
conditions as the Trustee may deem proper, and to give or receive money to
effect equality in price;
(m) To foreclose any obligation by judicial proceeding or
otherwise;
(n) To sue or defend in connection with any and all securities or
property at any time received or held in the Trust Fund;
(o) To borrow money from any person other than a party in interest
of the Plan with or without giving security;
(p) To deposit any security with any protective or reorganization
committee, and to delegate to that committee such power and authority as the
Trustee may deem proper;
(q) To deliver to the Company or Administrator as the case may be,
or the person or persons identified by the Company or Administrator, proxies and
powers of attorney and related informational material, for any shares or other
property held in the Trust. The Company or Administrator shall have
responsibility for voting such shares, by proxy or in person, except to the
extent such responsibility is delegated to another person, under the terms of
the Plan or to any investment manager under an agreement between the named
fiduciary of the Plan and an investment manager, in which case such persons
shall have such responsibility. The Trustee may use agents to effect such
delivery to the Company or Administrator or the person or persons identified by
the Administrator. In no event shall the Trustee be responsible for the voting
of shares of securities held in the Trust or for ascertaining or monitoring
whether, or how, proxies are voted or whether the proper number of proxies is
received;
(r) To appoint agents as necessary or desirable, including legal
counsel who may be counsel for the company;
(s) To hold that portion of the Trust Fund as the Trustee may deem
necessary for ordinary administration and for the disbursement of funds in cash,
without liability for interest, by depositing the same in any bank (including
deposits which bear a reasonable rate of interest in a bank or similar financial
institution supervised by the United States or a State, even where a bank or
financial institution is the Trustee, or otherwise is a fiduciary of the Plan,
including Franklin Templeton Trust Company), subject to the rules and
regulations governing such deposits, and without regard to the amount of any
such deposit;
(t) To retain group or individual insurance contracts of all kinds
authorized under the Plan;
(u) If directed by the Administrator, participant, or investment
manager, to acquire and hold limited partnership interests or interests in other
specialized investment vehicles, provided that such Authorized Person signs any
agreement or other necessary documents requested by the Trustee prior to
entering into the transaction;
(v) To lend securities from the Trust on a secured basis in
accordance with a separate written agreement between the Administrator and the
Trustee; and
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(w) To pay out of the Trust Fund, in accordance with the provisions
of Article V, any expense incurred by the Trustee in administering the Trust
(including attorneys' fees, appraisal fees and other service provider fees and
compensation and its own fees and compensation hereunder.
2.4 The Trustee is authorized to contract or make other arrangements
with affiliates of the Trustee (the "Franklin Templeton Affiliates") or their
successors and assigns and any other organizations affiliated with the Trustee
or related entities, for the provision of necessary, non-discretionary services
to the Trust or Plan, except where such arrangements are prohibited by law or
regulation.
2.5 The Trustee is authorized to disclose such information as is
necessary to the operation and administration of the Trust to Franklin Templeton
Affiliates, and to such other persons or organizations that the Trustee
determines have a legitimate business purpose for obtaining such information.
2.6 Uninvested cash of the Trust may be invested in one or more of the
Franklin Templeton Funds which is a money market fund designated by the
Authorized Person for that purpose, unless the Authorized Person specifically
instructs the use of another fund or account, except to the extent prohibited by
law or regulation.
2.7 The Administrator shall have responsibility for establishing and
carrying out funding policy and method, as specified in section 402(b)(1) of
ERISA, consistent with the objectives of the Plan and requirements of ERISA,
taking into consideration the Plan's short-term financial needs. As a
non-discretionary trustee, the Trustee shall not be responsible for proper
diversification of the assets of the Trust Fund. The Administrator or any person
to whom such responsibility has been properly delegated under the requirements
of ERISA, shall be responsible for the funding policy, for diversification of
assets held in trust for the Plan, and for compliance of the Trust Fund with
statutory limitations on the amount of investment in securities or other
property of the Company or its affiliates.
2.8 No assets of the Trust Fund shall be invested in the securities of
the Company or its affiliates unless the Administrator determines that the
securities are exempt from registration under the federal Securities Act of
1933, as amended, and are exempt from registration or qualification under the
applicable state law, and of any other applicable blue sky law, or in the
alternative, that the securities have been so registered and/or qualified. The
Administrator shall also specify what restrictive legend on transfer, if any, is
required to be set forth on the certificates for the securities and the
procedure to be followed by the Trustee to effectuate a resale of such
securities. The Administrator shall not direct the investment in "employer
securities" within the meaning of section 407 of ERISA if such investment would
be prohibited by ERISA. The Administrator shall only direct the investment of
Trust Funds into securities of the Company or an affiliate (i) if those
securities are traded on an exchange permitting a readily ascertainable fair
market value or (ii) if the Administrator shall have obtained a current
valuation by a qualified independent appraiser.
2.9 At the written direction of the Administrator, the Trustee shall
make distributions or transfers from the Trust. The Trustee shall be responsible
for reporting withdrawals to the Internal Revenue Service (IRS) in accordance
with IRS rules and regulations. The Trustee is authorized, to the extent
required under applicable law, to withhold from distributions to any payee an
amount that the Trustee determines is necessary to cover federal taxes, and the
Trustee is required to withhold such amounts if so directed by the
Administrator. The Trustee shall have no liability for making any distribution
or transfer pursuant to the direction of the Administrator (including amounts
withheld pursuant to the previous sentence) and shall be under no duty to make
inquiry whether any distribution or transfer directed by the Administrator is
made pursuant to the provisions of the Plan. The Administrator shall furnish to
the Trustee all information necessary to carry out such withholding, or, if such
information is not provided to the Trustee, the Administrator shall hold the
Trustee harmless from and indemnify it for any liability and related expenses
that arise in connection with improper withholding.
2.10 The Trustee shall not be liable for the proper application of any
part of the Plan or Trust if distributions or transfers are made in accordance
with the written directions of the Administrator, including any distribution
made pursuant to a domestic relations order which the Administrator has
determined to be qualified within the meaning of section 414(p) of the Code, nor
shall the Trustee be responsible for the adequacy of the Trust Fund to discharge
any and all payments and liabilities under the Plan.
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2.11 All persons dealing with the Trustee (other than the Company or
Administrator) are released from inquiring into the decisions or authority of
the Trustee and from seeing to the proper application of any monies paid or
securities or other property delivered to the Trustee.
2.12 The Trustee shall bear no liability for acting upon any
instruction or document reasonably believed by it to be genuine and to be
presented or signed by a party duly authorized to do so, and the Trustee shall
be under no duty to make any investigation or inquiry about the correctness of
such instruction or document.
2.13 The Trustee may consult with legal counsel of its choice,
including counsel for the Company, upon any question or matter arising
hereunder, and the opinion of such counsel when relied upon by the Trustee shall
be evidence the Trustee was acting in good faith.
2.14 Absent a separate agreement to the contrary, the Trustee under
this Agreement shall have no duties or responsibilities for Plan assets not held
in the Trust by the Trustee.
ARTICLE III. SETTLEMENT OF ACCOUNTS.
3.1 The Trustee shall maintain, or cause to be maintained, accurate
records and detailed accounts of all investments, receipts, disbursements, and
other transactions related to the Trust on an overall Plan basis, and those
records shall be available at all reasonable times to the Administrator, the
Company, or their authorized representatives.
3.2 The Trustee, at the direction of the Administrator, shall submit or
cause to be submitted to the Administrator such valuations, reports or other
information regarding aggregate Plan assets invested with the Trustee, as the
Administrator may reasonably require. In any case, the Trust Fund shall be
valued by the Trustee at least annually, at the fair market value as of the last
day of each Plan Year. The fair market value of assets in the Trust shall be
determined by the Trustee based upon such sources of information as it may deem
reliable, including, but not limited to, information reported in:
(a) newspapers of general circulation,
(b) standard financial periodicals or publications,
(c) statistical and valuation services,
(d) the records of securities exchanges or brokerage firms deemed
by the Trustee to be reliable,
(e) records of mutual fund transfer agents, or
(f) any combination thereof.
In the absence of negligence, fraud or bad faith, the valuation of the Trust by
the Trustee shall be conclusive. The Trustee may take whatever reasonable
action, including consultation with the Administrator, the employment of
attorneys, independent appraisers or other professionals, the reasonable expense
of which shall be an expense of the Trust, and the Trustee shall not incur any
liability for an inaccurate valuation based in good faith upon such information.
3.3 Notwithstanding any other provision of this Article 3, if the
Trustee shall determine that the Trust Fund consists in whole or in part of
property not traded freely on a recognized market, or that information necessary
to ascertain the fair market value is not readily available, the Trustee may
request instructions from the Administrator on the value of such property for
all purposes under the Plan and this Trust Agreement, and the Administrator
shall comply with that request. The Trustee shall be entitled to rely upon the
value placed upon such property by the Administrator. At the Trustee's option,
it may request that the Administrator hire an independent appraiser that meets
the requirements of Code section 401(a)(28)(c) to value the property.
Alternatively, if the Trustee chooses, or if the Administrator shall fail or
refuse to instruct the Trustee on the value of such property within a reasonable
time after receipt of the Trustee's request, the Trustee at its sole discretion
may engage an independent appraiser to determine the fair market value of such
property.
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3.4 Within sixty days following the last day of each Plan Year (or
following the close of any period as may be agreed upon by the Trustee and
Administrator), the Trustee shall file with the Administrator a written account
setting forth a description of Trust Fund transactions during such period, and
listing the assets held by the Trust Fund at the end of such period, together
with the then fair market value thereof. The Administrator may approve the
accounting by written approval delivered to the Trustee. Failure by the
Administrator to approve or disapprove an accounting within sixty days after
receipt of such accounting shall be deemed an approval of it.
3.5 The Trustee shall act as custodian for Trust Fund assets and may
perform any act, keep any records, or make any computations which are required
of it by the Company or Administrator as the case may be under this Trust
Agreement or under the Plan. The Trustee may also employ agents to act for it as
Custodian for Trust Fund assets. Such employment shall not be deemed to be
contrary to or inconsistent with the provisions of this Trust Agreement.
ARTICLE IV. INDEMNIFICATION.
4.1 Neither the Trust nor any fiduciary hereunder shall have any
liability for a breach of fiduciary or other responsibility of another party
providing services to this Plan unless it (1) participates knowingly in such
breach, (2) knowingly undertakes to conceal such breach, (3) has actual
knowledge of such breach and fails to take reasonable action to remedy said
breach, (4) through negligence in performing its specific responsibility, it has
enabled such other party to commit a breach of the latter's responsibilities, or
(5) such other circumstances exist as may give rise to co-fiduciary liability
under section 405 of ERISA.
4.2 The Trustee shall have no duty or responsibility to inquire into
the acts or omissions of any former trustee, if any, to the Trust, or of any
other fiduciary of the Trust, prior to receipt of the assets of the Trust.
4.3 All releases and indemnities provided herein shall survive
termination of this Agreement. The Company hereby indemnifies the Trustee
against, and agrees to hold the Trustee harmless from, all liabilities and
claims (including reasonable attorney's fees and expenses in defending against
such liabilities and claims) against the Trustee that arise in connection with
(i) any reasonable, good faith act taken in accordance with written directions
(or reasonable, good faith failure to act, in the absence of any required
direction) from the Company, Administrator, any investment manager properly
appointed, or any other person designated to act on their behalf, (ii) the
Trustee's reasonable, good faith execution of its duties under this Trust
Agreement, or (iii) any acts or omissions by any former Trustee or former
fiduciary of the Trust, or by any other party which formerly provided services
to the Trust, except that the Company shall not indemnify the Trustee in the
event of the Trustee's own misconduct or negligence. The Trustee shall be
entitled to collect on the Company's indemnity under this Section only from the
Company and shall not be entitled to payment directly or indirectly from Trust
Fund assets.
ARTICLE V. TAXES, EXPENSES AND COMPENSATION OF TRUSTEE.
5.1 The Trustee shall notify the Company or Administrator as the case
the may be of any tax levied upon or assessed against the Trust Fund of which
the Trustee has knowledge. Moreover, the Company or Administrator may direct the
Trustee to charge the taxes against the assets of the Trust Fund. If the Trustee
receives no instructions from the Administrator, the Trustee may pay the tax
from the Trust Fund. If the Plan Administrator wishes to contest the tax
assessment, it shall give appropriate written instructions to the Trustee. The
Trustee shall not be required to bring any legal actions or proceedings to
contest the validity of any tax assessments unless the Trustee has been
indemnified to its satisfaction against loss or expense related to such actions
or proceedings, including reasonable attorney's fees.
5.2 The Company shall quarterly pay the Trustee its expenses in
administering the Trust Fund (including attorneys' fees, appraisal fees and
other service-provider fees and compensation for services rendered pursuant to
this Agreement) and reasonable compensation for its services as Trustee at a
rate set forth in the Fee Schedule, which may be amended from time to time. The
Trustee reserves the right to alter this rate of compensation at any time by
providing the company with notice of such change at least sixty days prior to
its effective date. Reasonable compensation shall include compensation for any
extraordinary services or computations required, such as determination of the
value of assets when current market values are not published, and the
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covering of overdrafts. The fees and reasonable compensation herein discussed
may be withdrawn from the Trust Fund, if any such amount remains unpaid by the
Company thirty days after mailing of the written billing by the Trustee.
Moreover the Company may direct the Trustee to charge the fees and expenses
herein described against the assets of the Trust Fund.
ARTICLE VI. RESIGNATION OR REMOVAL OF TRUSTEE.
6.1 The Trustee may resign as Trustee or may be removed by the Company.
This resignation or removal may be accomplished at any time upon the giving of
sixty-days' written notice to the Trustee or Company, as applicable (or less
notice if the other party agrees to waive notice). Upon resignation or removal,
the Company shall appoint a successor trustee. Such successor trustee shall
thereupon succeed to all of the powers and duties of the predecessor trustee.
Should no successor trustee named by the Company accept such appointment within
thirty days after delivery of notice of resignation or removal, the Trustee may,
at the expense of the Trust (to the extent such expense is reasonable), apply to
a court of competent jurisdiction for the appointment of a successor trustee. In
the alternative, or upon the failure of the Company to timely appoint a
successor trustee, the individual members of the board of directors of the
Company shall become successor trustee until another successor trustee has
accepted its appointment.
6.2 Within sixty days following the transfer of the property in the
Trust to the successor trustee, the resigning or removed Trustee shall render to
the Company an account in the form and manner prescribed for the annual account
by Section 3 hereof. Unless the Company files with the resigning or removed
Trustee written objections within sixty days after such account has been mailed
or otherwise delivered, the account shall be deemed to have been approved.
ARTICLE VII. DURATION, AMENDMENT AND TERMINATION OF TRUST.
7.1 It is the intention of the Company that this Trust and the Plan of
which it is a part shall be permanently administered for the benefit of the
Plan's participants and their beneficiaries, and for the purpose of defraying
reasonable expenses of administering the Plan. This Trust is, accordingly,
irrevocable except to the extent described in Section 9.7; however, if changing
conditions require, this Trust may be terminated at any time by the Company, and
upon such termination, the Trust Fund shall be distributed by the Trustee as and
when directed by the Administrator in accordance with the provisions of Section
2.9 and the Plan document. From the date of termination of the Plan and until
the final distribution of the Trust assets, the Trustee shall continue to have
all the powers provided under this Agreement that are necessary or desirable for
the orderly liquidation and distribution of the Trust Fund. In no instance upon
any termination, or discontinuance, and subsequent distribution shall the Trust
Fund or any part or it be used for, or diverted to, purposes other than
providing benefits to participating employees and their beneficiaries, and
defraying the administrative expenses of the Plan until all Plan liabilities
have been satisfied, except in the instance of the failure of the Trust
initially to qualify for tax-exempt status as set forth in Section 9.7.
7.2 This Trust Agreement, other than Section 7.1 may be amended at any
time by written agreement of the Company and the Trustee, provided that such
amendment shall not operate to:
(a) cause the Trust or any part thereof to revert to the Company or
to be used for or diverted to purposes other than the exclusive benefit of
participants and their beneficiaries, except to the extent permitted by law and
the Plan; or
(b) reduce the then accrued benefits or the amounts then held for
the benefit of any participant or beneficiary in the Plan.
7.3 The Trustee may condition the transfer or distribution of any
assets of the Trust Fund upon termination of the Trust on receipt of a favorable
determination letter from the Internal Revenue Service confirming that the
termination of the Plan does not adversely affect the tax-exempt status of the
Trust Fund. Alternatively, the Trustee, in its sole discretion, may accept the
indemnification of the Company and Administrator against any liability arising
from such transfer or distribution that is directed by the Company or
Administrator or may require
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the Company and Administrator to post a bond sufficient to protect the Trustee
against such liability until such time as a favorable determination letter is
received.
ARTICLE VIII. APPROVAL OF USE OF FUNDS FOR PLAN.
The Company acknowledges that it is independent of and unrelated to the
Trustee, and that it has not received, directly or indirectly, any compensation
or other consideration for its own personal account from any party dealing with
the Plan in connection with this transaction. The Company understands that by
investing Plan assets in the [Franklin Templeton Funds (the "Funds")],
affiliates of the Trustee may receive fees for investment advisory, transfer
agency and other services provided to the Funds. The Company further
acknowledges receipt of a prospectus and, if applicable, a collective investment
disclosure statement for each of the Funds available as an investment under the
Plan, and a full and detailed written disclosure of the investment advisory and
other fees charged to or by the Plan and the Funds, including the nature and
extent of any differential between the rates of such fees. The Company hereby
approves investing Plan assets in the Funds, and approves the fee arrangements
that such Funds may charge against the Plan assets.
The Company understands that shares of the Funds and units of the
collective investment fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, that such shares or units are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other governmental agency, and that investing in shares or units of the Funds
involve investment risks including the possible loss of principal.
ARTICLE IX. MISCELLANEOUS.
9.1 The Trust will be administered according to the laws of the United
States and the State of California, and its validity, construction, and all
rights hereunder shall be governed by the laws of the State of California to the
extent that the latter are not preempted by the laws of the United States.
9.2 If any provisions of this Trust Agreement are invalid or
unenforceable, the remaining provisions thereof shall continue to be fully
effective.
9.3 The headings in this instrument have been inserted for convenience
of reference only, and are to be ignored in any construction of the provisions
thereof.
9.4 Except pursuant to a "qualified domestic relations order" as
defined at section 206(d)(3)(B)(i) of ERISA, no person entitled to any benefit
under this Trust Agreement shall have any right to assign, transfer,
hypothecate, encumber, commute or anticipate his interest in any benefits under
this Trust, except pursuant to the loan provisions of the Plan, and such benefit
shall not in any way be subject to any legal process or levy of execution upon,
or attachment or garnishment proceedings against the same for the payment of any
claim against such period.
9.5 This Trust Agreement is effective as of the date executed by the
Company and the Trustee.
9.6 This Trust Agreement and the Plan are both part of and constitute a
single, integrated employee benefit plan and trust and shall be construed
together. If there is a conflict between the provisions of the Plan and this
Trust Agreement, the provisions of this Trust Agreement (to the extent that such
provisions comply with applicable law) shall control with respect to all rights,
duties, responsibilities, obligations, powers and authorities of the Trustee,
and the Trustee shall have no duty to inquire into, nor shall it have any
obligation or liability with respect to, the provisions of the Plan.
9.7 It is intended that this Trust shall be tax exempt under section
501(a) of the Code and that the Plan referred to herein shall qualify under
section 401(a) of the Code. However, notwithstanding any other provisions of the
Trust, if the Internal Revenue Service is requested to issue to the Company a
favorable written determination or ruling with respect to the initial
qualification of the Plan and exemption of the Trust from tax and such request
is denied, the Trustee shall, after receiving a written direction from the
Administrator, pay to each participant that portion of the Trust Fund applicable
to said participant's voluntary contributions, if any, and provided the Plan so
Franklin Templeton ValuSelect(R)
All Rights Reserved
Page 10
<PAGE> 100
states, pay to the Company any part of the Trust Fund attributable to Company
contributions then remaining in the Trustee's possession. As a condition to such
repayment, the Company must execute, acknowledge, and deliver to the Trustee its
written undertaking, in form satisfactory to the Trustee, to indemnify, defend,
and hold the Trustee harmless from all claims, demands, or liabilities arising
in connection with such repayment, and provided, further, that such repayment
will occur within one year after the date the request for qualifications is
denied.
9.8 The duties and responsibilities of the Trustee shall be solely
those set forth in this document. The Trustee shall not be a named fiduciary
under the Plan and shall not have the authority to interpret the Plan.
9.9 To the extent permitted by statutory or administrative exemption,
the Trustee may engage in actions that otherwise would violate section 406 of
ERISA.
9.10 Each party providing services to the Plan shall be solely
responsible for its own acts or omissions under the Plan or the Trust. The
parties specifically intend that no party shall be liable for any breach of
responsibility of another party.
9.11 The Trustee is authorized to tape record conversations between the
Trustee and persons acting on behalf of the Plan, including but not limited to
the Company, the Administrator, or the Plan participants.
<PAGE> 101
EXECUTION OF TRUST AGREEMENT
IN WITNESS WHEREOF, National Insurance Group and Franklin Templeton Trust
Company have caused this Trust Agreement to be executed by its officer(s) duly
authorized, as of the 31st day of December, 1997.
FRANKLIN TEMPLETON TRUST COMPANY, TRUSTEE
/s/ JOHN G. HITCHCOCK
- -----------------------------------------
John G. Hitchcock
President
National Insurance Group
/s/ ROBERT P BARBAROWICZ
- -----------------------------------------
Signature
ROBERT P. BARBAROWICZ,
- -----------------------------------------
Title Executive Vice President
& General Counsel
<PAGE> 102
ADOPTION AGREEMENT FOR
FRANKLIN TEMPLETON VALUSELECT
STANDARDIZED 401(K) PROFIT SHARING
PLAN AND TRUST
(WITH PAIRING PROVISIONS)
The undersigned Employer adopts the Franklin Templeton ValuSelect
Standardized 401(k) Profit Sharing Plan and Trust for those Employees who shall
qualify as Participants hereunder, to be known as the
A1 National Insurance Group 401(k) Plan
- --------------------------------------------------------------------------------
(Enter Plan Name)
It shall be effective as of the date specified below. The Employer hereby
selects the following Plan specifications:
CAUTION: The failure to properly fill out this Adoption Agreement may result in
disqualification of the Plan.
EMPLOYER INFORMATION
B1 Name of Employer National Insurance Group
B1 Address 395 Oyster Point Boulevard, Suite 500
South San Francisco, CA 94080
City State Zip
Telephone 415-246-3318
B1 Employer Identification Number 94-3031790
B1 Date Business Commenced November 7, 1986
B1 TYPE OF ENTITY
a. ( ) S Corporation
b. ( ) Professional Service Corporation
c. (X) Corporation
d. ( ) Sole Proprietorship
e. ( ) Partnership
f. ( ) Other___________________________
AND, is the Employer a member of...
g. a controlled group? (X) Yes ( ) No
h. an affiliated service group? ( ) Yes (X) No
<PAGE> 103
B1 NAME(S) OF TRUSTEE(S)
a. Franklin Templeton Trust Company
b.____________________________________________________________________
c.____________________________________________________________________
d.____________________________________________________________________
e.____________________________________________________________________
AND, a separate Trust agreement
d. (X) shall be used with this Plan.
e. ( ) shall not be used with this Plan.
NOTE: If d is selected, an executed copy of the Trust agreement between the
Trustee named in item B6a and the Employer must be attached to the Plan. The
Plan and Trust agreement will be read and construed together. The
responsibilities, rights and powers of the Trustee are limited as specified
in the Trust agreement. All additional responsibilities, duties, rights and
powers of the Trustee in the Plan are to be allocated between the Record
Keeper and the Administrator as they shall agree in writing, or to the
Administrator if no Record Keeper has been appointed.
B1 TRUSTEES' ADDRESS
a. ( ) Use Employer Address
b. (X) 1800 Gateway Drive
Street
San Mateo, California 94404-9963
City State Zip
B1 LOCATION OF EMPLOYER'S PRINCIPAL OFFICE:
a. (X) State b. ( ) Commonwealth of c. California and this Plan and Trust
shall be governed under the same.
B1 EMPLOYER FISCAL YEAR means the 12 consecutive month period:
Commencing on a. January 1st (e.g., January 1st) and
month day
ending on b. December 31st.
month day
2
<PAGE> 104
PLAN INFORMATION
C1 EFFECTIVE DATE
This Adoption Agreement of the Franklin Templeton ValuSelect Standardized
401(k) Profit Sharing Plan and Trust shall:
a. ( ) establish a new Plan and Trust effective as of___ (hereinafter
called the "Effective Date").
b. (X) constitute an amendment and restatement in its entirety of a
previously established qualified Plan and Trust of the Employer which
was effective July 1, 1996 (hereinafter called the "Effective Date").
Except as specifically provided in the Plan, the effective date of this
amendment and restatement is October 1, 1997 (For TRA '86 amendments,
enter the first day of the first Plan Year beginning in 1989).
C1 PLAN YEAR means the 12 consecutive month period:
Commencing on a. January 1st (e.g., January 1st)
and ending on b. December 31st.
IS THERE A SHORT PLAN YEAR?
c. (X) No
d. ( ) Yes, beginning___________________
and ending_______________________.
C1 ANNIVERSARY DATE of Plan (Annual Valuation Date)
a. December 31st
month day
C1 PLAN NUMBER assigned by the Employer (select one)
a. (X) 001 b. ( ) 002 c. ( ) 003 d. ( ) Other_________________
3
<PAGE> 105
C1 NAME OF PLAN ADMINISTRATOR (Document provides for the Employer to appoint an
Administrator. If none is named, the Employer will become the
Administrator.)
a. (X) Employer (Use Employer Address)
b. ( ) Name __________________________________________
Address ( ) Use Employer Address
__________________________________________
Address ___________________________________________
__________________, ____________ ________
City State Zip
Telephone __________________________________________
Administrator's I.D. Number__________________________
C1 PLAN'S AGENT FOR SERVICE OF LEGAL PROCESS
a. (X) Employer (Use Employer Address)
b. ( ) Name ___________________________________________
Address ___________________________________________
___________________________________________
4
<PAGE> 106
ELIGIBILITY, VESTING AND RETIREMENT AGE
D1 ELIGIBLE EMPLOYEES (Plan Section 1.15) shall mean all Employees who have
satisfied the eligibility requirements except those checked below:
a. (X) N/A. No exclusions.
b. ( ) Employees whose employment is governed by a collective bargaining
agreement between the Employer and "employee representatives" under
which retirement benefits were the subject of good faith bargaining.
For this purpose, the term "employee representatives" does not
include any organization more than half of whose members are
employees who are owners, officers, or executives of the Employer.
c. ( ) Employees who are nonresident aliens who received no earned income
(within the meaning of Code Section 911(d)(2)) from the Employer
which constitutes income from sources within the United States
(within the meaning of Code Section 861(a)(3)).
NOTE: For purposes of this section, the term Employee shall include all
Employees of this Employer, any Affiliated Employer, and any leased
employees deemed to be Employees under Code Section 414(n) or
414(o).
D1 HOURS OF SERVICE (Plan Section 1.31) will be determined on the basis of the
method selected below. Only one method may be selected. The method selected
will be applied to all Employees covered under the Plan.
a. (X) On the basis of actual hours for which an Employee is paid or
entitled to payment.
b. ( ) On the basis of days worked. An Employee will be credited with ten
(10) Hours of Service if under the Plan such Employee would be
credited with at least one (1) Hour of Service during the day.
c. ( ) On the basis of weeks worked. An Employee will be credited
forty-five (45) Hours of Service if under the Plan such Employee
would be credited with at least one (1) Hour of Service during the
week.
d. ( ) On the basis of semi-monthly payroll periods. An Employee will be
credited with ninety-five (95) Hours of Service if under the Plan
such Employee would be credited with at least one (1) Hour of
Service during the semi-monthly payroll period.
e. ( ) On the basis of months worked. An Employee will be credited with one
hundred ninety (190) Hours of Service if under the Plan such
Employee would be credited with at least one (1) Hour of Service
during the month.
5
<PAGE> 107
D1 CONDITIONS OF ELIGIBILITY (Plan Section 3.1) (Check either a OR b and c, and
if applicable, d)
Any Eligible Employee will be eligible to participate in the Plan if such
Eligible Employee has satisfied the service and age requirements, if any,
specified below:
a. ( ) NO AGE OR SERVICE REQUIRED.
b. (X)SERVICE REQUIREMENT. (may not exceed 1 year)
1. ( ) None
2. ( ) 1/2 Year of Service
3. ( ) 1 Year of Service
4. (X) Other 3 consecutive months
NOTE: If the Year(s) of Service selected is or includes a fractional year,
an Employee will not be required to complete any specified number of
Hours of Service to receive credit for such fractional year. If
expressed in Months of Service, an Employee will not be required to
complete any specified number of Hours of Service in a particular
month.
c. (X)AGE REQUIREMENT (may not exceed 21)
1. ( ) N/A - No Age Requirement.
2. ( ) 20 1/2
3. (X) 21
4. ( ) Other
d. ( ) FOR NEW PLANS ONLY - Regardless of any of the above age or service
requirements, any Eligible Employee who was employed on the
Effective Date of the Plan shall be eligible to participate
hereunder and shall enter the Plan as of such date.
D1 EFFECTIVE DATE OF PARTICIPATION (Plan Section 3.2) An Eligible Employee
shall become a Participant as of:
a. ( ) the first day of the Plan Year in which he met the requirements.
b. ( ) the first day of the Plan Year in which he met the requirements, if
he met the requirements in the first 6 months of the Plan Year, or
as of the first day of the next succeeding Plan Year if he met the
requirements in the last 6 months of the Plan Year.
c. ( ) the earlier of the first day of the seventh month or the first day
of the Plan Year coinciding with or next following the date on which
he met the requirements.
d. ( ) the first day of the Plan Year next following the date on which he
met the requirements. (Eligibility must be 1/2 Year of Service or
less and age 20 1/2 or less.)
e. ( ) the first day of the month coinciding with or next following the
date on which he met the requirements.
f. (X) Other: January 1, April 1, July 1, and October 1, provided that an
Employee who has satisfied the maximum age and service requirements
that are permissible in Section D3 above and who is otherwise
entitled to participate, shall commence participation no later than
the earlier of (a) 6 months after such requirements are satisfied,
or (b) the first day of the first Plan Year after such requirements
are satisfied, unless the Employee separates from service before
such participation date.
6
<PAGE> 108
D1 VESTING OF PARTICIPANT'S INTEREST (Plan Section 6.4(b))
The vesting schedule, based on number of Years of Service, shall be as
follows:
a. ( ) 100% upon entering Plan. (Required if eligibility requirement is
greater than one (1) Year of Service.)
<TABLE>
<S> <C> <C> <C>
b. ( ) 0-2 years 0% c. ( ) 0-4 years 0%
3 years 100% 5 years 100%
d. ( ) 0-1 year 0% e. ( ) 1 year 25%
2 years 20% 2 years 50%
3 years 40% 3 years 75%
4 years 60% 4 years 100%
5 years 80%
6 years 100%
f. ( ) 1 year 20% g. ( ) 0-2 years 0%
2 years 40% 3 years 20%
3 years 60% 4 years 40%
4 years 80% 5 years 60%
5 years 100% 6 years 80%
7 years 100%
</TABLE>
h. (X)Other - Must be at least as liberal as either c or g above.
<TABLE>
<CAPTION>
Years of Service Percentage
Less than 4 0%
<S> <C>
4 or more 100%
</TABLE>
7
<PAGE> 109
D1 FOR AMENDED PLANS (Plan Section 6.4(f)) If the vesting schedule has been
amended to a less favorable schedule, enter the pre-amended schedule below:
a. (X) Vesting schedule has not been amended or amended schedule is more
favorable in all years.
b. ( ) Years of Service Percentage
D1 TOP HEAVY VESTING (Plan Section 6.4(c)) If this Plan becomes a Top Heavy
Plan, the following vesting schedule, based on number of Years of Service,
for such Plan Year and each succeeding Plan Year, whether or not the Plan is
a Top Heavy Plan, shall apply and shall be treated as a Plan amendment
pursuant to this Plan. Once effective, this schedule shall also apply to any
contributions made prior to the effective date of Code Section 416 and/or
before the Plan became a Top Heavy Plan.
a. ( ) N/A (D5a, b, d, e or f was selected)
<TABLE>
<S> <C> <C> <C>
b. ( ) 0-1 year 0% c. (X) 0-2 years 0%
2 years 20% 3 years 100%
3 years 40%
4 years 60%
5 years 80%
6 years 100%
</TABLE>
NOTE: This section does not apply to the Account balances of any
Participant who does not have an Hour of Service after the Plan has
initially become top heavy. Such Participant's Account balance
attributable to Employer contributions and Forfeitures will be
determined without regard to this section.
8
<PAGE> 110
D1 VESTING (Plan Section 6.4(h)) In determining Years of Service for vesting
purposes, Years of Service attributable to the following shall be EXCLUDED:
a. ( ) Service prior to the Effective Date of the Plan
or a predecessor plan. b. (X) N/A.
c. ( ) Service prior to the time an Employee attained age 18. d. (X) N/A.
D1 PLAN SHALL RECOGNIZE SERVICE WITH PREDECESSOR EMPLOYER
a. ( ) No.
b. (X) Yes: Years of Service with American Realty Tax Services, Inc. and
American Realty Tax Services of New York, Inc. shall be recognized
for the purpose of this Plan.
NOTE: If the predecessor Employer maintained this qualified Plan, then
Years of Service with such predecessor Employer shall be recognized
pursuant to Section 1.74, and b. must be marked.
D1 NORMAL RETIREMENT AGE ("NRA") (Plan Section 1.42) means:
a. (X) the date a Participant attains his 65th birthday. (not to exceed
65th)
b. ( ) the later of the date a Participant attains his __ birthday (not to
exceed 65th) or the c.___ (not to exceed 5th) anniversary of the
first day of the Plan Year in which participation in the Plan
commenced.
D1 NORMAL RETIREMENT DATE (Plan Section 1.43) shall commence:
a. ( ) as of the Participant's "NRA."
OR (must select b. or c. AND 1. or 2.)
b. (X) as of the first day of the month...
c. ( ) as of the Anniversary Date...
1. (X) coinciding with or next following the Participant's "NRA."
2. ( ) nearest the Participant's "NRA."
D1 EARLY RETIREMENT DATE (Plan Section 1.12) means the:
a. (X) No Early Retirement provision provided.
b. ( ) date on which a Participant...
c. ( ) first day of the month coinciding with or next following the date on
which a Participant...
d. ( ) Anniversary Date coinciding with or next following the date on which
a Participant...
AND, if b, c or d was selected...
1. ( ) attains his___birthday and has
2. ( ) completed at least___Years of Service.
9
<PAGE> 111
CONTRIBUTIONS, ALLOCATIONS AND DISTRIBUTIONS
E1 a. COMPENSATION (Plan Section 1.9) with respect to any Participant means:
1. (X) Wages, tips and other Compensation on Form W-2.
2. ( ) Section 3401(a) wages (wages for withholding purposes).
3. ( ) 415 safe-harbor compensation.
AND COMPENSATION
1. ( ) shall
2. (X) shall not
exclude (even if includible in gross income) reimbursements or other
expense allowances, fringe benefits (cash or noncash), moving expenses,
deferred compensation, and welfare benefits.
b. COMPENSATION shall be
1. (X) actually paid (must be selected if Plan is integrated)
2. ( ) accrued
c. FOR PURPOSES OF THIS SECTION E1, Compensation shall be based on:
1. (X) the Plan Year.
2. ( ) the Fiscal Year coinciding with or ending within the Plan Year.
3. ( ) the Calendar Year coinciding with or ending within the Plan Year.
NOTE: The Limitation Year shall be the same as the year on which
Compensation is based.
d. HOWEVER, for an Employee's first year of participation, Compensation
shall be recognized as of:
1. ( ) the first day of the Plan Year.
2. (X) the date the Participant entered the Plan.
e. IN ADDITION, COMPENSATION and "414(s) Compensation"
1. (X) shall 2. ( ) shall not include compensation which is not currently
includible in the Participant's gross income by reason of the application
of Code Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b).
E1 SALARY REDUCTION ARRANGEMENT - ELECTIVE CONTRIBUTION
(Plan Section 11.2) Each Employee may elect to have his Compensation reduced
by:
a. ( )___%
b. ( ) up to___%
c. (X)from 1% % to 15% %
d. ( ) up to the maximum percentage allowable not to exceed the limits of
Code Sections 401(k), 404 and 415.
AND...
e. (X)A Participant may elect to commence salary reductions as of January 1,
April 1, July 1, and October 1 (ENTER AT LEAST ONE DATE OR PERIOD).
A Participant may modify
10
<PAGE> 112
the amount of salary reductions as of the first day of any month
(ENTER AT LEAST ONE DATE OR PERIOD).
AND...
Shall cash bonuses paid within 2 1/2 months after the end of the Plan
Year be subject to the salary reduction election?
f. ( ) Yes
g. (X) No
11
<PAGE> 113
E1 FORMULA FOR DETERMINING EMPLOYER'S MATCHING CONTRIBUTION
(Plan Section 11.1(b))
a. ( ) N/A. There shall be no matching contributions.
b. ( ) The Employer shall make matching contributions equal to___% (e.g.
50%) of the Participant's salary reductions.
c. (X) The Employer may make matching contributions equal to a discretionary
percentage, to be determined by the Employer, of the Participant's
salary reductions.
d. ( ) The Employer shall make matching contributions equal to the sum
of___% of the portion of the Participant's salary reduction which
does not exceed___% of the Participant's Compensation plus % of the
portion of the Participant's salary reduction which exceeds ___% of
the Participant's Compensation, but does not exceed___% of the
Participant's Compensation.
e. ( ) The Employer shall make matching contributions equal to the
percentage determined under the following schedule:
<TABLE>
<CAPTION>
Participant's Total Matching Percentage
Years of Service
<S> <C> <C>
--------- ----------
--------- ----------
--------- ----------
</TABLE>
FOR PLANS WITH MATCHING CONTRIBUTIONS
f. (X) Matching contributions g. ( ) shall h. (X) shall not be used in
satisfying the deferral percentage tests. (If used, full vesting and
restrictions on withdrawals will apply and the match will be deemed
to be an Elective Contribution).
i. ( ) For Plan Years beginning prior to 1990, a Year of Service
( ) shall j. ( ) shall not be required in order to share in the
matching contributions. For Plan Years beginning after 1989, a Year
of Service shall not be required in order to share in the matching
contributions.
k. ( ) In determining matching contributions, only salary reductions up
to___ % of a Participant's Compensation will be matched. l. (X) N/A
m. ( ) The matching contribution made on behalf of a Participant for any
Plan Year shall not exceed $___. n. (X) N/A
o. (X) Matching contributions shall be made on behalf of
1. (X) all Participants.
2. ( ) only Non-Highly Compensated Employees.
p. (X) Notwithstanding anything in the Plan to the contrary, all matching
contributions which relate to distributions of Excess Deferred
Compensation, Excess Contributions, and Excess Aggregate
Contributions shall be Forfeited. (Select this option only if it is
applicable.)
12
<PAGE> 114
E1 WILL A DISCRETIONARY EMPLOYER CONTRIBUTION BE PROVIDED (OTHER THAN A
DISCRETIONARY MATCHING OR QUALIFIED NON-ELECTIVE CONTRIBUTION) (Plan
Section 11.1(c))?
a. (X) No.
b. ( ) Yes, the Employer may make a discretionary contribution out of its
current or accumulated Net Profit.
c. ( ) Yes, the Employer may make a discretionary contribution which is not
limited to its current or accumulated Net Profit.
IF YES (b. or c. is selected above), the Employer's discretionary
contribution shall be allocated as follows:
d. ( ) FOR A NON-INTEGRATED PLAN
The Employer discretionary contribution for the Plan Year shall be allocated
in the same ratio as each Participant's Compensation bears to the total of
such Compensation of all Participants.
e. ( ) FOR AN INTEGRATED PLAN
The Employer discretionary contribution for the Plan Year shall be allocated
in accordance with Plan Section 4.3(b)(2) based on a Participant's
Compensation in excess of:
f. ( ) The Taxable Wage Base.
g. ( ) The greater of $10,000 or 20% of the Taxable Wage Base.
h. ( ) ___% of the Taxable Wage Base. (See Note below)
i. ( ) $___. (see Note below)
NOTE: The integration percentage of 5.7% shall be reduced to:
1. 4.3% if h. or i. above is more than 20% and less than or equal to
80% of the Taxable Wage Base.
2. 5.4% if h. or i. above is less than 100% and more than 80% of the
Taxable Wage Base.
13
<PAGE> 115
E1 QUALIFIED NON-ELECTIVE CONTRIBUTIONS (Plan Section 11.1(d))
a (X) N/A. There shall be no Qualified Non-Elective Contributions except as
provided in Section 11.5(b) and 11.7(h).
b. ( ) The Employer shall make a Qualified Non-Elective Contribution equal
to___% of the total Compensation of all Participants eligible to
share in the allocations.
c. ( ) The Employer may make a Qualified Non-Elective Contribution in an
amount to be determined by the Employer.
E1 FORFEITURES (Plan Section 4.3(e))
a. Forfeitures of contributions other than matching contributions shall
be...
1. ( ) added to the Employer's contribution under the Plan.
2. ( ) allocated to all Participants eligible to share in the
allocations in the same proportion that each Participant's
Compensation for the year bears to the Compensation of all
Participants for such year.
b. Forfeitures of matching contributions shall be...
1. ( ) N/A. No matching contributions or match is fully vested.
2. (X) used to reduce the Employer's matching contribution.
3. ( ) allocated to all Participants eligible to share in the
allocations in proportion to each such Participant's
Compensation for the year.
4. ( ) allocated to all Non-Highly Compensated Employee's eligible to
share in the allocations in proportion to each such
Participant's Compensation for the year.
14
<PAGE> 116
E1 ALLOCATIONS TO TERMINATED PARTICIPANTS (Plan Section 4.3(k))
Any Participant who terminated employment during the Plan Year for reasons
other than death, Total and Permanent Disability or retirement:
a. With respect to the allocation of Employer Non-Elective Contributions
(other than matching), Qualified Non-Elective Contributions, and
Forfeitures for Plan Years beginning prior to 1990:
1. (X) N/A
2. ( ) shall share in such allocations provided such Participant
completed a Year of Service.
3. ( ) shall not share in such allocations regardless of Hours of
Service.
NOTE: The Plan provides that for Plan Years beginning after 1989, a
terminated Participant shall share in such allocations provided such
Participant completed more than 500 Hours of Service.
b. With respect to the allocation of Employer Matching Contributions, a
Participant:
1. For Plan Years beginning after 1989,
i. ( ) N/A, Plan does not provide for matching contributions.
ii. (X) shall share in the allocations, regardless of Hours of
Service.
iii. ( ) shall share in the allocations provided such Participant
completed more than 500 Hours of Service.
2. For Plan Years beginning before 1990,
i. (X) N/A, new Plan, or same as Plan Years beginning after 1989.
ii. ( ) shall share in the allocations, regardless of Hours of
Service.
iii. ( ) shall share in the allocations provided such Participant
completed a Year of Service.
E1 ALLOCATIONS OF EARNINGS (Plan Section 4.3(c))
Allocations of earnings with respect to amounts contributed to the Plan
after the previous Anniversary Date or other valuation date shall be
determined...
a. ( ) by using a weighted average.
b. ( ) by treating one-half of all such contributions as being a part
of the Participant's nonsegregated account balance as of the previous
Anniversary Date or valuation date.
c. (X) by using the method specified in Section 4.3(c).
d. ( ) other___
15
<PAGE> 117
E1 LIMITATIONS ON ALLOCATIONS (Plan Section 4.4)
a. If any Participant is or was covered under another qualified defined
contribution plan maintained by the Employer, other than a Master or
Prototype Plan, or if the Employer maintains a welfare benefit fund, as
defined in Code Section 419(e), or an individual medical account, as
defined in Code Section 415(l)(2), under which amounts are treated as
Annual Additions with respect to any Participant in this Plan:
1. (X) N/A.
2. ( ) The provisions of Section 4.4(b) of the Plan will apply as if the
other plan were a Master or Prototype Plan.
3. ( ) Provide the method under which the Plans will limit total Annual
Additions to the Maximum Permissible Amount, and will properly
reduce any Excess Amounts, in a manner that precludes Employer
discretion.
NOTE: If a.3 above is selected, an Employer may not rely on the opinion
letter issued by the Internal Revenue Service that this Plan is
qualified under Code Section 401.
b. If any Participant is or ever has been a Participant in a defined benefit
plan maintained by the Employer:
1. (X) N/A.
2. ( ) In any Limitation Year, the Annual Additions credited to the
Participant under this Plan may not cause the sum of the Defined
Benefit Plan Fraction and the Defined Contribution Fraction to
exceed 1.0. If the Employer's contribution that would otherwise
be made on the Participant's behalf during the limitation year
would cause the 1.0 limitation to be exceeded, the rate of
contribution under this Plan will be reduced so that the sum of
the fractions equals 1.0. If the 1.0 limitation is exceeded
because of an Excess Amount, such Excess Amount will be reduced
in accordance with Section 4.4(a)(4) of the Plan.
3. ( ) Provide the method under which the Plans involved will satisfy
the 1.0 limitation in a manner that precludes Employer
discretion.
16
<PAGE> 118
E1 DISTRIBUTIONS UPON DEATH (Plan Section 6.6(h))
Distributions upon the death of a Participant prior to receiving any
benefits shall...
a. (X) be made pursuant to the election of the Participant or beneficiary.
b. ( ) begin within 1 year of death for a designated beneficiary and be
payable over the life (or over a period not exceeding the life
expectancy) of such beneficiary, except that if the beneficiary is
the Participant's spouse, begin within the time the Participant would
have attained age 70 1/2.
c. ( ) be made within 5 years of death for all beneficiaries.
d. ( ) other
E1 LIFE EXPECTANCIES (Plan Section 6.5(f)) for minimum distributions required
pursuant to Code Section 401(a)(9) shall...
a. (X) be recalculated at the Participant's election.
b. ( ) be recalculated.
c. ( ) not be recalculated.
E1 CONDITIONS FOR DISTRIBUTIONS UPON TERMINATION
Distributions upon termination of employment pursuant to Section 6.4(a) of
the Plan shall not be made unless the following conditions have been
satisfied:
a. (X) N/A. Immediate distributions may be made at Participant's election.
b. ( ) The Participant has incurred___ 1-Year Break(s) in Service.
c. ( ) The Participant has reached his or her Early or Normal Retirement
Age.
d. ( ) Distributions may be made at the Participant's election on or after
the Anniversary Date following termination of employment.
e. ( ) Other
E1 FORM OF DISTRIBUTIONS (Plan Sections 6.5 and 6.6) Distributions under the
Plan may be made...
a. 1. ( ) in lump sums.
2. ( ) in lump sums or installments.
Please see addendum for E13a
b. AND, pursuant to Plan Section 6.13,
1. (X) no annuities are allowed (avoids Joint and Survivor rules).
2. ( ) annuities are allowed (Plan Section 6.13 shall not apply).
NOTE: b.1. above may not be elected if this is an amendment to a plan
which permitted annuities as a form of distribution or if this Plan
has accepted a plan to plan transfer of assets from a plan which
permitted annuities as a form of distribution.
c. AND may be made in...
1. (X) cash only (except for insurance or annuity contracts).
2. ( ) cash or property.
17
<PAGE> 119
TOP HEAVY REQUIREMENTS
F1 TOP HEAVY DUPLICATIONS (Plan Section 4.3(i)): When a Non-Key Employee is a
Participant in this Plan and a Defined Benefit Plan maintained by the
Employer, indicate which method shall be utilized to avoid duplication of
top heavy minimum benefits.
a. (X) The Employer does not maintain a Defined Benefit Plan.
b. ( ) A minimum, non-integrated contribution of 5% of each Non-Key
Employee's total Compensation shall be provided in this Plan, as
specified in Section 4.3(i). (The Defined Benefit and Defined
Contribution Fractions will be computed using 100% if this choice is
selected.)
c. ( ) A minimum, non-integrated contribution of 7 1/2% of each Non-Key
Employee's total Compensation shall be provided in this Plan, as
specified in Section 4.3(i). (If this choice is selected, the
Defined Benefit and Defined Contribution Fractions will be computed
using 125% for all Plan Years in which the Plan is Top Heavy, but
not Super Top Heavy.)
d. ( ) Specify the method under which the Plans will provide top heavy
minimum benefits for Non-Key Employees that will preclude Employer
discretion and avoid inadvertent omissions, including any
adjustments required under Code Section 415(e).
18
<PAGE> 120
F1 PRESENT VALUE OF ACCRUED BENEFIT (Plan Section 2.2) for Top Heavy purposes
where the Employer maintains a Defined Benefit Plan in addition to this
Plan, shall be based on...
a. (X) N/A. The Employer does not maintain a defined benefit plan.
b. ( ) Interest Rate:___
Mortality Table:___
F1 TOP HEAVY DUPLICATIONS: Employer maintaining two (2) or more Defined
Contribution Plans (other than paired plans).
a. (X) N/A.
b. ( ) A minimum, non-integrated contribution of 3% of each Non-Key
Employee's total Compensation shall be provided in the Money
Purchase Plan (or other plan subject to Code Section 412), where the
Employer maintains two (2) or more non-paired Defined Contribution
Plans.
c. ( ) Specify the method under which the Plans will provide top heavy
minimum benefits for Non-Key Employees that will preclude Employer
discretion and avoid inadvertent omissions, including any
adjustments required under Code Section 415(e).
F1 IS THIS A PAIRED PLAN?
a. ( ) Yes. Name the Plan(s) with which this is paired.
___________________________________________________________________
b. (X) No or N/A.
19
<PAGE> 121
MISCELLANEOUS
G1 LOANS TO PARTICIPANTS (Plan Section 7.4)
a. (X) Yes, loans may be made up to $50,000 or 1/2 Vested interest.
b. ( ) No, loans may not be made.
If YES, (check all that apply)...
c. (X) loans shall be treated as a Directed Investment.
d. ( ) loans shall only be made for hardship or financial necessity.
e. (X) the minimum loan shall be $1,000.
NOTE: Department of Labor Regulations require the adoption of a SEPARATE
written loan program setting forth the requirements outlined in Plan
Section 7.4.
G1 DIRECTED INVESTMENT ACCOUNTS (Plan Section 4.8) are permitted for the
interest in any one or more accounts.
a. (X) Yes, regardless of the Participant's Vested interest in the Plan.
b. ( ) Yes, but only with respect to the Participant's Vested interest in
the Plan.
c. ( ) Yes, but only with respect to those accounts which are 100% Vested.
d. ( ) No directed investments are permitted.
G1 TRANSFERS FROM QUALIFIED PLANS (Plan Section 4.6)
a. (X) Yes, transfers from qualified plans (and rollovers) will be allowed.
b. ( ) No, transfers from qualified plans (and rollovers) will not be
allowed.
AND, transfers shall be permitted...
c. (X) from any Employee, even if not a Participant.
d. ( ) from Participants only.
20
<PAGE> 122
G1 EMPLOYEES' VOLUNTARY CONTRIBUTIONS (Plan Section 4.7)
a. ( ) Yes, Voluntary Contributions are allowed subject to the limits of
Section 4.10.
b. (X) No, Voluntary Contributions will not be allowed.
NOTE: TRA '86 subjects voluntary contributions to strict discrimination
rules.
G1 HARDSHIP DISTRIBUTIONS (Plan Sections 6.11 and 11.8)
a. (X) Yes, from any accounts which are 100% Vested.
b. ( ) Yes, from Participant's Elective Account only.
c. ( ) Yes, but limited to the Participant's Account only.
d. ( ) No.
NOTE: Distributions from a Participant's Elective Account are limited to
the portion of such account attributable to such Participant's
Deferred Compensation and earnings attributable thereto up to
December 31, 1988. Also hardship distributions are not permitted
from a Participant's Qualified Non-Elective Account.
G1 PRE-RETIREMENT DISTRIBUTION (Plan Section 6.10)
a. (X) If a Participant has reached the age of 59 1/2, distributions may
be made, at the Participant's election, from any accounts which are
100% Vested without requiring the Participant to terminate
employment.
b. ( ) No pre-retirement distribution may be made.
NOTE: Distributions from a Participant's Elective Account and Qualified
Non-Elective Account are not permitted prior to age 59 1/2.
21
<PAGE> 123
An Employer who has ever maintained or who later adopts any plan in addition to
this Plan (including a welfare benefit fund, as defined in Code Section 419(e),
which provides post-retirement medical benefits allocated to separate accounts
for Key Employees, as defined in Code Section 419A(d)(3) or an individual
medical account, as defined in Code Section 415(l)(2)) (other than paired plan
#01-002, #01-004) may not rely on the opinion letter issued by the National
Office of the Internal Revenue Service as evidence that this Plan is qualified
under Code Section 401. If the Employer who adopts or maintains multiple plans
wishes to obtain reliance that the Employer's plan(s) are qualified, application
for a determination letter should be made to the appropriate key district
director of Internal Revenue.
This Adoption Agreement may be used only in conjunction with basic Plan document
#01. This Adoption Agreement and the basic Plan document shall together be known
as Franklin Templeton ValuSelect Standardized 401(k) Profit Sharing Plan and
Trust #01-006.
The adoption of this Plan, its qualification by the IRS, and the related tax
consequences are the responsibility of the Employer and its independent tax and
legal advisors.
Franklin Templeton ValuSelect will notify the Employer of any amendments made to
the Plan or of the discontinuance or abandonment of the Plan provided this Plan
has been acknowledged by Franklin Templeton ValuSelect or its authorized
representative. Furthermore, in order to be eligible to receive such
notification, we agree to notify Franklin Templeton ValuSelect of any change in
address.
22
<PAGE> 124
IN WITNESS WHEREOF, the Employer and Trustee hereby cause this Plan to be
executed on December 31, 1997. Furthermore, this Plan may not be
used unless acknowledged by Franklin Templeton ValuSelect or its authorized
representative.
EMPLOYER:
National Insurance Group
By: /s/ ROBERT P. BARBAROWICZ
-----------------------------------------
Executive Vice President
(X) The signature of the Trustee appears on Separate Trust Agreement attached to
the Plan pursuant to B6 of the Adoption
Agreement.
PARTICIPATING EMPLOYER:
Great Pacific Insurance Company Fastrac Systems Incorporated
By: /s/ ROBERT P. BARBAROWICZ By: /s/ ROBERT P. BARBAROWICZ
---------------------------------- --------------------------------
Pinnacle Data Corporation Fastrac Systems Incorporated
Insurance Agent & Broker
By: /s/ ROBERT P. BARBAROWICZ By: /s/ ROBERT P. BARBAROWICZ
---------------------------------- --------------------------------
Pinnacle Real Estate Tax Services, Inc. Pinnacle Real Estate Tax Services
of New York, Inc.
By: /s/ ROBERT P. BARBAROWICZ By: /s/ ROBERT P. BARBAROWICZ
---------------------------------- --------------------------------
This Plan may not be used, and shall not be deemed to be a Prototype Plan,
unless an authorized representative of Franklin Templeton ValuSelect has
acknowledged the use of the Plan. Such acknowledgment is for administerial
purposes only. It acknowledges that the Employer is using the Plan but does not
represent that this Plan, including the choices selected on the Adoption
Agreement, has been reviewed by a representative of the sponsor or constitutes a
qualified retirement plan.
Franklin Templeton ValuSelect
By: /s/ CHARLES DORR
----------------------------------
With regard to any questions regarding the provisions of the Plan, adoption of
the Plan, or the effect of an opinion letter from the IRS, call or write (this
information must be completed by the sponsor of this Plan or its designated
representative):
Name Laura D. Higbie, Vice President Human Resources
---------------------------------------------------------------------------
Address 395 Oyster Point Boulevard, Suite 500
-------------------------------------------------------------------------
South San Francisco, Ca 94080
-------------------------------------------------------------------------
Telephone (650) 246-3318
-----------------------------------------------------------------------
23
<PAGE> 1
EXHIBIT 11.1
NATIONAL INSURANCE GROUP AND SUBSIDIARIES
COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
AND EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
BASIC EPS UNDER SFAS NO. 128
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common shares ....................... 4,679,201 4,109,655 3,946,257
Net income (loss) (in thousands) ..................... $ (4,864) $ 1,274 $ 3,266
Per share results:
Net income (loss) ....................... $ (1.04) $ 0.31 $ 0.83
</TABLE>
DILUTED EPS UNDER SFAS NO. 128
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common shares ....................... 4,679,201 4,109,655 3,946,257
Common shares issuable under outstanding stock options -- 31,705 181,125
----------- ----------- -----------
Total ................................... 4,679,201 4,141,360 4,127,382
=========== =========== ===========
Net income (loss) (in thousands) ..................... $ (4,864) $ 1,274 $ 3,266
Per share results:
Net income (loss) ....................... $ (1.04) $ 0.31 $ 0.79
</TABLE>
Please refer to Note 11 of the Consolidated Financial Statements for a
description of the method used to calculate earnings per share.
<PAGE> 1
Exhibit 21.1
NATIONAL INSURANCE GROUP
SUBSIDIARIES OF COMPANY
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C>
Fastrac Systems, Inc. California
Great Pacific Insurance Company California
New Arts Acquisition, Inc. Delaware
Pinnacle Data Corporation California
Pinnacle Management Solutions Insurance Services California
Pinnacle Real Estate Tax Services, Inc. Delaware
Pinnacle Real Estate Tax Services of New York, Inc. Delaware
Pinnacle Tax Outsourcing Corporation California
</TABLE>
<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, 1997
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 26, 1998
- ------------------------------- and Chief Executive
Mark A. Speizer Officer and Director
(Principal Executive
Officer)
/s/ Bruce A. Cole President and Director March 26, 1998
- -------------------------------
Bruce A. Cole
/s/ Gregory S. Saunders Executive Vice President, March 26, 1998
- ------------------------------- Treasurer and Chief
Gregory S. Saunders Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Bard E. Bunaes Director March 26, 1998
- -------------------------------
Bard E. Bunaes
/s/ Saul B. Jodel Director March 26, 1998
- -------------------------------
Saul B. Jodel
/s/ Lawrence M. Goodman Director March 26, 1998
- --------------------------------
Lawrence M. Goodman
</TABLE>
1
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 15,359
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,200
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 26,623
<CASH> 3,339
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,704
<TOTAL-ASSETS> 66,742
<POLICY-LOSSES> 3,232
<UNEARNED-PREMIUMS> 6,217
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,601
0
0
<COMMON> 18,610
<OTHER-SE> 9,170
<TOTAL-LIABILITY-AND-EQUITY> 66,742
19,037
<INVESTMENT-INCOME> 1,839
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 32,201
<BENEFITS> 6,482
<UNDERWRITING-AMORTIZATION> 8,643
<UNDERWRITING-OTHER> 33,249
<INCOME-PRETAX> 4,702
<INCOME-TAX> 1,436
<INCOME-CONTINUING> 3,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,266
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.79
<RESERVE-OPEN> 2,198
<PROVISION-CURRENT> 6,364
<PROVISION-PRIOR> 119
<PAYMENTS-CURRENT> 3,292
<PAYMENTS-PRIOR> 2,157
<RESERVE-CLOSE> 3,232
<CUMULATIVE-DEFICIENCY> 119
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<CIK> 0000815555
<NAME> NATIONAL INSURANCE GROUP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 13,995
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,856
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 27,705
<CASH> 4,888
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,690
<TOTAL-ASSETS> 68,045
<POLICY-LOSSES> 2,803
<UNEARNED-PREMIUMS> 6,244
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,768
0
0
<COMMON> 18,256
<OTHER-SE> 8,862
<TOTAL-LIABILITY-AND-EQUITY> 68,045
13,364
<INVESTMENT-INCOME> 1,280
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 22,091
<BENEFITS> 4,491
<UNDERWRITING-AMORTIZATION> 6,127
<UNDERWRITING-OTHER> 22,242
<INCOME-PRETAX> 3,875
<INCOME-TAX> 1,358
<INCOME-CONTINUING> 2,517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,517
<EPS-PRIMARY> 0.64<F1>
<EPS-DILUTED> 0.62
<RESERVE-OPEN> 2,198
<PROVISION-CURRENT> 4,260
<PROVISION-PRIOR> 232
<PAYMENTS-CURRENT> 1,999
<PAYMENTS-PRIOR> 1,888
<RESERVE-CLOSE> 2,803
<CUMULATIVE-DEFICIENCY> 232
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<CIK> 0000815555
<NAME> NATIONAL INSURANCE GROUP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 13,972
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,159
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 25,165
<CASH> 4,955
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,492
<TOTAL-ASSETS> 47,976
<POLICY-LOSSES> 2,446
<UNEARNED-PREMIUMS> 5,819
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 833
0
0
<COMMON> 17,693
<OTHER-SE> 8,339
<TOTAL-LIABILITY-AND-EQUITY> 47,976
8,648
<INVESTMENT-INCOME> 899
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 13,961
<BENEFITS> 2,886
<UNDERWRITING-AMORTIZATION> 3,983
<UNDERWRITING-OTHER> 14,124
<INCOME-PRETAX> 2,515
<INCOME-TAX> 875
<INCOME-CONTINUING> 1,640
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,640
<EPS-PRIMARY> 0.42<F1>
<EPS-DILUTED> 0.41
<RESERVE-OPEN> 2,199
<PROVISION-CURRENT> 2,741
<PROVISION-PRIOR> 145
<PAYMENTS-CURRENT> 1,080
<PAYMENTS-PRIOR> 1,559
<RESERVE-CLOSE> 2,446
<CUMULATIVE-DEFICIENCY> 145
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<CIK> 0000815555
<NAME> NATIONAL INSURANCE GROUP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 14,842
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,196
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 31,501
<CASH> 3,255
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,403
<TOTAL-ASSETS> 49,045
<POLICY-LOSSES> 2,450
<UNEARNED-PREMIUMS> 5,223
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,083
0
0
<COMMON> 17,592
<OTHER-SE> 11,763
<TOTAL-LIABILITY-AND-EQUITY> 49,045
4,177
<INVESTMENT-INCOME> 454
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 6,283
<BENEFITS> 1,213
<UNDERWRITING-AMORTIZATION> 1,784
<UNDERWRITING-OTHER> 6,738
<INCOME-PRETAX> 1,179
<INCOME-TAX> 377
<INCOME-CONTINUING> 802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 802
<EPS-PRIMARY> 0.21<F1>
<EPS-DILUTED> 0.20
<RESERVE-OPEN> 2,198
<PROVISION-CURRENT> 1,248
<PROVISION-PRIOR> (34)
<PAYMENTS-CURRENT> 179
<PAYMENTS-PRIOR> 783
<RESERVE-CLOSE> 2,450
<CUMULATIVE-DEFICIENCY> (34)
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<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> 0.31<F1>
<EPS-DILUTED> 0.31
<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
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<CIK> 0000815555
<NAME> NATIONAL INSURANCE GROUP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 14,594
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,211
<MORTGAGE> 36
<REAL-ESTATE> 0
<TOTAL-INVEST> 31,575
<CASH> 914
<RECOVER-REINSURE> 11
<DEFERRED-ACQUISITION> 2,080
<TOTAL-ASSETS> 48,088
<POLICY-LOSSES> 2,800
<UNEARNED-PREMIUMS> 4,523
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 2,000
0
0
<COMMON> 18,287
<OTHER-SE> 9,798
<TOTAL-LIABILITY-AND-EQUITY> 48,088
9,888
<INVESTMENT-INCOME> 1,490
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 19,292
<BENEFITS> 3,647
<UNDERWRITING-AMORTIZATION> 4,781
<UNDERWRITING-OTHER> 21,987
<INCOME-PRETAX> 255
<INCOME-TAX> 93
<INCOME-CONTINUING> 162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 162
<EPS-PRIMARY> 0.04<F1>
<EPS-DILUTED> 0.04
<RESERVE-OPEN> 3,055
<PROVISION-CURRENT> 3,659
<PROVISION-PRIOR> (12)
<PAYMENTS-CURRENT> 1,740
<PAYMENTS-PRIOR> 2,161
<RESERVE-CLOSE> 2,801
<CUMULATIVE-DEFICIENCY> (12)
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<CIK> 0000815555
<NAME> NATIONAL INSURANCE GROUP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 15,843
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,190
<MORTGAGE> 36
<REAL-ESTATE> 0
<TOTAL-INVEST> 35,987
<CASH> 509
<RECOVER-REINSURE> 11
<DEFERRED-ACQUISITION> 2,239
<TOTAL-ASSETS> 51,814
<POLICY-LOSSES> 3,104
<UNEARNED-PREMIUMS> 4,867
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 23,259
<OTHER-SE> 9,046
<TOTAL-LIABILITY-AND-EQUITY> 51,814
6,841
<INVESTMENT-INCOME> 1,002
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 12,712
<BENEFITS> 2,672
<UNDERWRITING-AMORTIZATION> 3,278
<UNDERWRITING-OTHER> 15,722
<INCOME-PRETAX> (1,116)
<INCOME-TAX> (408)
<INCOME-CONTINUING> (708)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (708)
<EPS-PRIMARY> (0.15)<F1>
<EPS-DILUTED> (0.15)
<RESERVE-OPEN> 3,055
<PROVISION-CURRENT> 2,240
<PROVISION-PRIOR> 432
<PAYMENTS-CURRENT> 682
<PAYMENTS-PRIOR> 1,941
<RESERVE-CLOSE> 3,104
<CUMULATIVE-DEFICIENCY> 432
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<CIK> 0000815555
<NAME> NATIONAL INSURANCE GROUP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 16,545
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,225
<MORTGAGE> 36
<REAL-ESTATE> 0
<TOTAL-INVEST> 34,983
<CASH> 827
<RECOVER-REINSURE> 11
<DEFERRED-ACQUISITION> 2,156
<TOTAL-ASSETS> 50,104
<POLICY-LOSSES> 2,968
<UNEARNED-PREMIUMS> 4,687
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 23,071
<OTHER-SE> 9,927
<TOTAL-LIABILITY-AND-EQUITY> 50,104
3,786
<INVESTMENT-INCOME> 512
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 6,125
<BENEFITS> 1,107
<UNDERWRITING-AMORTIZATION> 1,921
<UNDERWRITING-OTHER> 7,161
<INCOME-PRETAX> 234
<INCOME-TAX> 85
<INCOME-CONTINUING> 149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149
<EPS-PRIMARY> 0.03<F1>
<EPS-DILUTED> 0.03
<RESERVE-OPEN> 3,055
<PROVISION-CURRENT> 1,390
<PROVISION-PRIOR> (283)
<PAYMENTS-CURRENT> 191
<PAYMENTS-PRIOR> 1,003
<RESERVE-CLOSE> 2,968
<CUMULATIVE-DEFICIENCY> (283)
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<CIK> 0000815555
<NAME> NATIONAL INSURANCE GROUP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 15,444
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,271
<MORTGAGE> 36
<REAL-ESTATE> 0
<TOTAL-INVEST> 37,202
<CASH> 133
<RECOVER-REINSURE> 11
<DEFERRED-ACQUISITION> 2,624
<TOTAL-ASSETS> 52,096
<POLICY-LOSSES> 3,055
<UNEARNED-PREMIUMS> 5,703
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 23,071
<OTHER-SE> 9,810
<TOTAL-LIABILITY-AND-EQUITY> 52,096
17,020
<INVESTMENT-INCOME> 2,042
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 16,881
<BENEFITS> 6,044
<UNDERWRITING-AMORTIZATION> 9,597
<UNDERWRITING-OTHER> 24,762
<INCOME-PRETAX> (7,423)
<INCOME-TAX> (2,559)
<INCOME-CONTINUING> (1,119)
<DISCONTINUED> 0
<EXTRAORDINARY> (6,304)
<CHANGES> 0
<NET-INCOME> (4,864)
<EPS-PRIMARY> (1.04)<F1>
<EPS-DILUTED> (1.04)
<RESERVE-OPEN> 3,360
<PROVISION-CURRENT> 6,378
<PROVISION-PRIOR> (334)
<PAYMENTS-CURRENT> 4,329
<PAYMENTS-PRIOR> 2,020
<RESERVE-CLOSE> 3,055
<CUMULATIVE-DEFICIENCY> (334)
<FN>
<F1>For purposes of this Exhibit, Primary means Basic.
</FN>
</TABLE>
