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SECURITIES AND EXCHANGE COMMISSION
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File Number 0-20995
EXSTAR FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0321240
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
</TABLE>
2029 Village Lane, Solvang, California 93463-2275
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (805) 688-8013
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
The aggregate number of shares of the Registrant's common stock outstanding,
all of which constitute a single class, was 4,961,500 as of March 31, 1998.
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<PAGE>
EXSTAR FINANCIAL CORPORATION
QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and December 31, 1997 ............................... 3
Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 1998 and 1997............... 5
Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) for the three
months ended March 31, 1998...................................... 6
Consolidated Statements of Cash Flows
(Unaudited) for the three months ended March 31, 1998 and 1997... 7
Notes to the Consolidated Financial Statements .................. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk........ 19
PART II - OTHER INFORMATION
Item 5 Other Information................................................ 20
Item 6 Exhibits......................................................... 22
SIGNATURE ................................................................. 23
</TABLE>
<PAGE>
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXSTAR FINANCIAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited) (Audited)
(Dollars in thousands)
<S> <C> <C>
ASSETS
Fixed maturities available for sale,
at market
(amortized cost: 1998 - $11,908; $11,927 $13,375
1997 - $13,375)
Equity securities, at market (cost:
1998 - $1,000;
1997 - $1,250) 984 1,541
Mortgage loans - unaffiliated 2,917 3,057
Mortgage loans - affiliated 894 896
Real estate held for investment 4,514 4,555
Real estate held for sale 5,139 5,241
Real estate acquired through 239 239
foreclosure
Short-term investments 1,829 4,384
Total investments 28,443 33,288
Cash and cash equivalents - 1,623 4,925
restricted
Cash and cash equivalents - 4,291 3,488
unrestricted
Accounts receivable 3,330 4,415
Funds held by reinsured companies 8,642 7,438
Reinsurance recoverable
Paid losses and loss adjustment 3,901 2,382
expenses
Unpaid losses and loss adjustment 8,620 13,363
expenses
Accrued investment income 384 527
Deferred acquisition costs 1,906 1,657
Property and equipment, net 388 400
Other assets 5,421 4,911
Total assets $66,949 $76,794
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
EXSTAR FINANCIAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited) (Audited)
(Dollars in thousands)
<S> <C> <C>
LIABILITIES
Unpaid loss and loss adjustment ................ $ 35,627 $ 43,413
expenses
Unearned premiums .............................. 6,063 5,396
Reinsurance balances payable ................... 660 1,256
Total policy liabilities and ............... 42,350 50,065
accruals
Premiums payable ............................... 4,233 5,620
Notes payable .................................. 1,025 1,130
Current income taxes ........................... 0 66
Accumulated equity in losses of ................ 2,629 2,926
affiliates
Other liabilities .............................. 3,978 3,472
Total liabilities ......................... 54,215 63,279
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
30,000,000 shares
authorized; 5,497,500 shares
issued; 5,497,500
shares outstanding in 1998 and .............. 55 55
1997
Paid in capital ................................ 16,812 16,812
Other comprehensive income:
Net unrealized investment gains ............ 2 291
Retained deficit ........................... (4,130) (3,638)
Treasury shares at cost (536,000
shares
in 1998 and 1997) .......................... (5) (5)
Total equity .............................. 12,734 13,515
Total liabilities and ..................... $ 66,949 $ 76,794
stockholders' equity
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
(Dollars in thousands
except per share data)
<S> <C> <C>
REVENUES
Premiums earned .................................. $ 2,737 $ 2,090
Premiums ceded ................................... 0 (748)
Net premiums earned .................... 2,737 1,342
Net commission income - unaffiliated ............. 432 0
Net investment income - unaffiliated ............. 539 719
Net investment income - affiliated ............... 22 25
Net realized investment gains .................... 315 8
Other income ..................................... 118 3,264
Total revenue .......................... 4,163 5,358
EXPENSES
Loss and loss adjustment expenses ................ 1,593 1,267
Reinsurance ceded ................................ 0 (449)
Net loss and loss ...................... 1,593 818
adjustment expenses
Policy acquisition costs amortized ............... 821 469
Interest expense ................................. 49 61
Other expenses ................................... 2,301 1,428
Total expenses ......................... 4,764 2,776
(Loss) income before equity in income
of affiliates and Federal income taxes......... (601) 2,582
Equity in income of affiliates ................... 109 247
Federal income taxes ............................. 0 0
Net (loss) income ...................... $ (492) $ 2,829
Net (loss) income per share - basic .............. $ (0.10) $ 0.51
and diluted
Shares used in computation of net
(loss) income
per share (in thousands) ...................... 4,962 5,498
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS'EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized Treasury Net
Common Paid in Investment Retained Shares Stockholders'
Stock Capital Gains Deficit at Cost Equity
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, $55 $16,812 $291 $(3,638) $(5) $13,515
1997
Change in net unrealized
investment losses
Fixed maturities 18 18
Equity securities (307) (307)
Net loss (492) (492)
Balance at March 31, 1998 $55 $16,812 $2 $(4,130) $(5) $12,734
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Cash flows (applied to) provided by operating activities:
Premiums collected ........................................... $ 1,246 $ 713
Investment income received ................................... 779 1,079
Commission income received ................................... 755 0
Loss and loss adjustment expense paid, net ................... (4,636) (8,657)
Interest paid ................................................ (49) (61)
Policy acquisition and other expenses paid ................... (3,567) (2,313)
Taxes paid ................................................... (59) 0
Other ........................................................ (1,401) 2,979
Cash flows applied to operating activities ................ (6,932) (6,260)
Cash flows provided by (applied to) investment activities:
Purchase of marketable securities ............................ (101) 0
Purchase of property, equipment and real estate .............. (57) (52)
Sale or maturity of marketable securities .................... 2,095 6,383
Sale of property, equipment and real estate .................. 105 140
Short-term investments, net .................................. 2,555 2,212
Repayment of mortgage loans .................................. 142 207
Net cash provided by investing activities ................. 4,739 8,890
Cash flows provided by (applied to)financing activities
Repayment of notes payable ................................... (105) (43)
Transfers (to) from affiliates ............................... (188) 703
Other ........................................................ (13) (312)
Transfers from (to) restricted cash and cash equivalents...... 3,302 (46)
Net cash provided by financing activities ................. 2,996 302
Net increase in unrestricted cash and cash equivalent ........ 803 2,932
Unrestricted cash and cash equivalents - beginning of period .... 3,488 1,390
Unrestricted cash and cash equivalents - end of period .......... $ 4,291 $ 4,322
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.Basis of Presentation
The consolidated financial statements of Exstar Financial Corporation and
subsidiaries ("Exstar" if referring to the parent company only, or the
"Company" if referring to Exstar and its direct and indirect subsidiaries)
include the financial statements of Exstar, its direct subsidiaries, Alpine
Holdings, Inc., WESTCAP Insurance Services, Inc. ("WESTCAP") and Claims
Control Corporation ("Claims Control"), Exstar's indirect subsidiaries, Alpine
Insurance Company ("Alpine"), a direct subsidiary of Alpine Holdings, Inc.,
Alpine Premium Finance Co., Inc. and Transco Premium Finance Co., Inc., both
of which are direct subsidiaries of Alpine, and the equity in the income and
losses of TCO Holdings, Inc. ("TCO Holdings") and subsidiaries (collectively
"TCO"), a group of companies affiliated with Exstar through common majority
ownership.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and accordingly include all
normal recurring adjustments management considers necessary for fair
presentation. These consolidated financial statements should be read in
conjunction with audited financial statements included in Exstar's Form 10-K
for the year ended December 31, 1997 ("1997 Form 10-K").
The results of operations for the three months ended March 31, 1998, are not
necessarily indicative of the results to be expected for the full year.
2.Comprehensive Income
Comprehensive (loss) income consists of the following:
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Net (loss) income ...................................... $ (492) $ 2,829
Other comprehensive income:
Change in net unrealized investment
gains, net of taxes............................... (289) (343)
Comprehensive (loss) income ............................ $ (781) $ 2,486
</TABLE>
3.Equity in Income of Affiliates
Although TCO is not a direct or indirect subsidiary of Exstar, its income or
loss is included in the Company's consolidated GAAP financial statements in
accordance with a form of equity accounting.
<PAGE>
EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following sets forth the financial position and results of operations of
TCO:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Assets:
Cash and investments ............... $ 519 $ 465
Accounts receivable ................ 102 264
Other assets ....................... 775 770
Total assets .................... 1,396 1,499
Liabilities:
Premiums payable ................... 10,881 11,318
Notes payable - affiliated ......... 2,404 2,404
Notes payable - unaffiliated ....... 2,329 2,518
Due to affiliates .................. 1,264 1,020
Other liabilities .................. 2,067 2,029
Total liabilities ............... 18,945 19,289
Stockholder's Equity:
Stockholder's accumulated deficiency (17,549) (17,790)
Total liabilities and stockholder's
accumulated deficiency.............. $ 1,396 $ 1,499
</TABLE>
<PAGE>
EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the three months ended
March 31,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Revenues:
Net commissions earned ..................... $ 132 $ 333
Other revenues ............................. 124 153
Total revenues .......................... 256 486
Expenses:
Personnel costs ............................ 0 43
Office and selling expenses ................ (27) 48
Depreciation ............................... 0 19
Interest ................................... 40 132
Other expenses ............................. (127) (7)
Total expenses .......................... (114) 235
Income before Federal income taxes .... 370 251
Federal income tax expense .............. 0 0
Net income ............................ 370 251
Beginning stockholder's accumulated deficiency 17,790 30,188
Net income ................................. (370) (251)
Increase in subscription note receivable ... 129 118
Net change ............................ (241) (133)
Ending stockholder's accumulated deficiency .. $ 17,549 $ 30,055
</TABLE>
<PAGE>
EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following sets forth the computation of the equity in income of affiliates
included in the Statement of Operations:
<TABLE>
<CAPTION>
For the three months ended
March 31,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Increase in net equity of TCO ................. $(241) $(133)
Reclassifications:
Reinsurance commissions - affiliated......... 132 0
Interest on advances ........................ 0 (114)
Equity in income of affiliates ............ $(109) $(247)
</TABLE>
Accumulated equity in losses of affiliates comprises:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Cumulative adjusted losses .......................... $17,944 $18,185
Amounts advanced by and other amounts due to
the Company from TCO................................ 15,315 15,259
Accumulated equity in losses of affiliates........ $ 2,629 $ 2,926
</TABLE>
<PAGE>
EXSTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4.Net (Loss) Income per Share
Basic net (loss) income per share is determined by dividing net (loss) income
by the weighted average number of shares of common stock outstanding, while
diluted net (loss) income per share is determined by dividing the weighted
average number of common shares outstanding adjusted for the dilutive effect
of common stock equivalents. The Company's common stock equivalents are stock
options and warrants which had no dilutive effect on net (loss) income per
share. The weighted average numbers of shares of common stock outstanding for
the three months ended March 31, 1998 and 1997 were 4,962,000 and 5,498,000,
respectively.
5.Statutory Information
The surplus as regards policyholders of Alpine determined in accordance with
statutory accounting practices as of March 31, 1998 and 1997, was $5,145,000
and $13,367,000, respectively. The net loss of Alpine determined in accordance
with statutory accounting practices for the three months ended March 31, 1998,
was $172,000. The net income of Alpine determined in accordance with statutory
accounting practices for the three months ended March 31, 1997, was $36,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
This discussion should be read in conjunction with management's discussion
and analysis included in Exstar's 1997 Form 10-K.
Forward-looking Statements. This Form 10-Q contains certain "forward-
looking statements" (within the meaning of the Private Securities Litigation
Reform Act of 1995) that involve substantial risks and uncertainties. When used
in this Form 10-Q, the words "anticipate," "believe," "estimate" and "expect"
and similar expressions as they relate to the Company and its management are
intended to identify such forward-looking statements. A number of important
factors could cause the actual results, performance or achievements of the
Company for 1998 and beyond to differ materially from those expressed in such
forward-looking statements. These factors include, without limitation, the
potential sale of Alpine and other transactions relating thereto (see "Other
Information" - Item 5); the discontinuation or a material adverse change in the
terms and conditions of a quota share reinsurance treaty ("Quota Share
Arrangement") currently in force between Alpine and certain insurance company
subsidiaries of Frontier Insurance Group, Inc. ("Frontier") (such insurance
company subsidiaries being hereinafter referred to as "Frontier Companies")
under which Alpine assumes business from the Frontier Companies, or a potential
replacement reinsurance agreement with a Cayman Islands insurance company
proposed to be formed by the Company ("Cayman Company"); a material increase in
competition; material changes to the Frontier Companies' financial conditions or
regulatory authorities; and material adverse changes in the oversight of Alpine
by the Illinois Department of Insurance ("Illinois DOI"). In light of the
Company's current financial and insurance regulatory circumstances, relatively
small changes from the expected results, performance and achievements of the
Company could materially adversely impact the Company's financial condition and
prospects as anticipated in this Form 10-Q.
Certain Risk Factors. The Company's ability to continue to operate as it
currently is operating depends to a significant degree on Alpine's continuing to
participate as it currently does in the Company's business. Most of the
Company's cash flow to fund operations currently derives from Alpine's existing
assets, investment income on such assets and premium assumed pursuant to the
Quota Share Arrangement. Alpine, however, is relatively close to several
regulatory thresholds that, if crossed, could reduce Alpine's role in the
Company's operations. Alpine's statutory policyholders' surplus of $5.1 million
at March 31, 1998, was $140,000 above the minimum statutory policyholders'
surplus required of an Illinois reinsurer, was $3.6 million above the minimum
statutory policyholders' surplus required of an Illinois insurer that would
directly write the lines of insurance produced by WESTCAP and reinsured by
Alpine, and subjected Alpine to certain regulatory reporting requirements and,
potentially, regulatorily required corrective actions. Additionally, Alpine's
liquid assets at March 31, 1998, may have been insufficient (depending on
interpretation of the relevant statutory provision) to satisfy a "reserve
requirement" adopted by Illinois in 1997 and applicable in 1998, and in any
event a significant amount of Alpine's assets is restricted for specific
purposes.
Alpine's ability to continue to satisfy applicable regulatory requirements
to the extent necessary to enable Alpine to continue to operate as it currently
operates is difficult to predict. Alpine's crossing of the thresholds could lead
to a reduction or cessation of Alpine's activities. This could result in
increased oversight by the Illinois DOI, regulatorily required termination of
some or all of Alpine's current business operations and relationships,
termination of the Quota Share Arrangement by the Frontier Companies and
potentially Alpine's ultimately being placed in receivership. While the Company
expects Alpine to be able to avoid crossing such thresholds, the expectations
are based on a number of assumptions, including, among others, assumptions about
cash flows, investment yields, asset values, ultimate loss and loss adjustment
expenses and payout patterns, competition, the Illinois DOI's expected
regulatory responses and Frontier's A.M. Best Company ("Best") ratings. Because
Alpine is relatively close to certain of the thresholds, there is little room
for adverse fluctuations in the foregoing assumptions.
Management anticipates that the sale of Alpine to Frontier (see "Other
Information" - Item 5), assuming it occurs as currently contemplated, will
resolve the significant regulatory issues. Even if the sale of Alpine is not
consummated, however, management believes the Company has the ability to
continue to operate Alpine generally as Alpine currently is operating through
1998. Notwithstanding that Alpine is close to certain of the regulatory
thresholds, it does currently exceed them; and while interpretation of the
"reserve requirement" is currently unresolved, management believes, based on
discussions with the Illinois DOI, that Alpine may be able to comply
sufficiently with the requirement during 1998 to avoid any increase in the
Illinois DOI's current level of oversight. The Company additionally, currently
has the ability to contribute certain real estate assets with a statutory net
asset value of up to $1.7 million at March 31, 1998, to Alpine if necessary to
increase Alpine's statutory policyholders' surplus.
Alpine's statutory policyholders' surplus, liquidity and financial
condition generally also are expected to benefit from continuation of the Quota
Share Arrangement, including Frontier's potential willingness to release
additional portions of the funds held it otherwise would be entitled to retain
under the Quota Share Arrangement ($3.0 million of which was released during
March - May, 1998). While Alpine's surplus currently is less than a minimum
amount that would allow Frontier to terminate the Quota Share Arrangement,
Frontier has waived the right to terminate on such basis, and management
believes, based on the generally positive relationship the Company has with
Frontier and the profitability of the business the Company has produced and in
the future has the potential to produce for Frontier, that the Quota Share
Arrangement will continue generally on its current terms for the foreseeable
future, (unless Alpine is sold to Frontier).
Should Alpine's operations be curtailed significantly otherwise than in
connection with the proposed sale of Alpine to Frontier, the Company would be
forced to rely more on its existing cash and on its WESTCAP and Claims Control
operations to generate revenues and cash flows. A portion of the Company's cash
needs also would be able to be met out of Exstar's cash on hand, which was $1.3
million at March 31, 1998.
Should these efforts prove insufficient, the Company would have to seek
alternative solutions. Among those would be a capital contribution from, joint
venture with, or sale of assets to, Frontier or another insurance operation. The
Company has made no specific plans to achieve any of these solutions, though the
Company has been approached from time to time by insurance operations seeking to
establish relationships with the Company, and believes it could take advantage
of one of these or a similar opportunity relatively quickly. The Company
believes, though there can be no assurances, that Frontier and potentially other
insurance operations would favor such a capital contribution, joint venture,
sale or similar arrangement because of the Company's historically profitable
underwriting results and its potential ability to generate similar results in
the future.
The Company's future financial condition and prospects are heavily
dependent on the Company's maintaining or improving its relationships with
Frontier. WESTCAP generates commission revenues from producing insurance
business on behalf of the Frontier Companies; Claims Control generates a small
but increasing amount of the revenue from handling claims on behalf of the
Frontier Companies; and Alpine generates underwriting revenue, if the
underwriting results are profitable, and investment income from assuming
premiums pursuant to the Quota Share Arrangement. These relationships also
generate most of the Company's cash flows from operations.
The Company believes based on progress in the potential sale of Alpine to
Frontier, the generally positive relationship the Company has with Frontier and
the profitability of the business the Company produces for Frontier, that the
current relationships or alternative arrangements equally or more beneficial to
the Company will continue in effect for the reasonably foreseeable future. There
can be no assurance, however, that the limited agency agreements currently in
effect between WESTCAP and the Frontier Companies ("Limited Agency Agreements"),
the claim service agreements currently in effect between Claims Control and the
Frontier Companies ("Claim Service Agreements") or the Quota Share Arrangement
will in fact remain in effect under their current terms or at all, or that the
potential sale of Alpine to Frontier or other alternative arrangements will be
consummated, either on terms at least as favorable to the Company as the current
relationships or at all. Should the Company's relationships with the Frontier
Companies be discontinued, or their terms and conditions be changed in a manner
materially adverse to the Company, the Company could experience significant
losses.
Changes in Business Operations. The Company's business and operations have
undergone fundamental changes over the last few years and additional changes are
anticipated during the remainder of 1998. These changes make it difficult to
predict the Company's results going forward. Differences in the Company's
results of operations between 1997 and 1998 are not necessarily indicative of
trends or likely results of operations for 1998 or future periods.
The Company's principal sources of revenue historically have been net
premiums earned on insurance policies issued by the Company's insurance company
subsidiaries, income derived from the Company's invested assets and
miscellaneous other income. The Company's principal costs historically have
consisted of reserves for loss and loss adjustment expenses, commissions and
other amounts paid by the Company's insurance company subsidiaries in connection
with its producing and underwriting insurance policies issued by the Company's
insurance company subsidiaries, and miscellaneous other expenses. The Company's
net income historically derived from the difference between these net revenues
and net expenses, after adjustment for taxes and minority interests. In
addition, due to the Company's adoption of a form of equity accounting in 1995,
the Company's net income also has included its equity in gains and losses of its
affiliates.
The Company, because of Best rating downgrades, regulatory restrictions and
other matters affecting its insurance company subsidiaries, ceased issuing
direct insurance in August 1996. The Company, however, began earning premium
revenue through the Quota Share Arrangement effective April 1, 1997. The Company
also earns investment income on the funds held by the Frontier Companies under
the Quota Share Arrangement. Because most of the premium funds are being held by
the Frontier Companies, however, the Quota Share Arrangement does not benefit
the Company's cash flow to the same extent it benefits the Company's net income
(assuming the Quota Share Arrangement underwriting results are as profitable as
or more profitable than the Company's underwriting results historically were).
The Quota Share Arrangement was amended to increase Alpine's participation
generally from 30% to 50% effective October 1, 1997.
Management has determined that, in view of the obstacles faced by the
Company, it is unlikely that the Company will be able to write profitable direct
business in the foreseeable future. As a result, management has decided to shift
the Company's business focus from risk-bearing operations (i.e. the issuance of
insurance policies) to the production and underwriting of insurance coverage to
be issued by other insurers (principally the Frontier Companies), from which
activities the Company expects to derive increased commission revenues. Through
its role as a reinsurer under the Quota Share Arrangement, or a similar
reinsurance arrangement with the Cayman Company if the sale of Alpine to
Frontier is consummated (see "Other Information" - Item 5), however, the Company
expects to continue to derive significant portions of its revenues, including
underwriting profits and investment income, and cash flow from risk- bearing
operations. In conjunction with the shift, Exstar acquired WESTCAP and Claims
Control effective October 1, 1997.
For more complete descriptions of these and other changes, see the 1997
Form 10-K.
Results of Operations
Gross written premiums were $3.4 million for the first quarter of 1998, an
increase of 279% from $900,000 for the first quarter of 1997. All of the gross
written premiums for the 1998 quarter were premiums assumed by Alpine as a
reinsurer of the Frontier Companies pursuant to the Quota Share Arrangement
which became effective April 1, 1997. The gross written premiums for the first
quarter of 1997 represented principally residual audit premiums on direct
insurance issued prior to the Company's ceasing to issue direct insurance in
August 1996.
Management expects gross written premiums to increase in 1998 because (i)
the portion of net insurance premium assumed by Alpine in connection with the
Quota Share Arrangement, which increased from 30% to 50% effective October 1,
1997, or any similar replacement reinsurance arrangement with the Cayman
Company, is expected to be 50% for all of 1998 and (ii) the Company anticipates
hiring additional underwriting staff, making acquisitions and obtaining
authority from Frontier to produce certain program business, all of which should
enable the Company to expand into additional lines of business and generate
additional premiums during 1998. The Company anticipates this increase to be
offset to some extent by reduced business in the Company's traditional lines of
business as a consequence of increased competition.
Net premiums earned, consisting of premiums earned less premiums ceded
(generally earned ratably over individual policy periods), were $2.7 million for
the first quarter of 1998, a 104% increase from $1.3 million in the first
quarter of 1997. The increase directly resulted from the increase in gross
written premiums since April 1997, when the Quota Share Arrangement incepted.
Net premiums earned are expected to increase during 1998 as a consequence of the
expected increase in written premiums, but at a slower rate because the premiums
are earned over individual policy periods.
Net commission income for the first quarter of 1998 was $432,000 compared
to no commission income in the first quarter of 1997. Commission income of
WESTCAP generally is earned ratably, similarly to net premiums. The 1998 amount
represented commission income earned by WESTCAP following WESTCAP's acquisition
by Exstar on October 1, 1997, net of commissions due to WESTCAP's subproducers.
Net commission income is expected to increase in 1998 because (i) the
commissions earned will include commissions on new as well as previously written
insurance policies and (ii) the commissions should increase proportionately with
the anticipated increase in premiums. Net commission income also may increase
disproportionately faster than the anticipated increase in premiums if the
Company is successful in acquiring brokerage operations, some of which could
produce business for entities other than the Frontier Companies, or writing
lines of business for the Frontier Companies that are not reinsured by the
Company.
Net investment income for the first quarter of 1998 was $561,000, a
decrease of $183,000, or 24.6% from $744,000 for the first quarter of 1997. The
decrease between the periods was caused principally by a 28.4% decrease in
average investable assets from $53.1 million as of December 31, 1997, to $38.0
million as of March 31, 1998, resulting from the Company's need to make loss and
expense payments and pay other expenses. Management generally anticipates
investment income will decline during the remainder of 1998 as a consequence of
(i) loss payments and expenses reducing the Company's investable assets more
quickly than investable assets increase under the Quota Share Arrangement or any
similar replacement reinsurance arrangement with the Cayman Company, and (ii)
expected relatively steady investment yields.
Other income was $118,000 for the first quarter of 1998, compared to $3.3
million for the first quarter of 1997. The other income for the 1997 quarter,
reflecting proceeds less certain related expenses, was principally a consequence
of a one-time settlement of a lawsuit against the Company's former independent
auditors. Management expects minimal other income for the foreseeable future.
Net loss and loss adjustment expense incurred during the first quarter of
1998 totaled $1.6 million, up 94.7% from $818,000 in the first quarter of 1997.
Net loss and loss adjustment expenses as a portion of net premiums earned was
58.2% for the first quarter of 1998 compared to 61.0% for the first quarter of
1997. The increase in net loss and loss adjustment expense incurred between the
periods resulted principally from the increase in net premiums earned.
Management expects the Company's loss ratio on insurance assumed by Alpine
pursuant to the Quota Share Arrangement or any similar replacement reinsurance
arrangement will be substantially lower than the Company's historical loss
ratios as a consequence of higher pricing in 1996 and 1997 and more restrictive
policy forms used in underwriting the insurance assumed from the Frontier
Companies, though continuing competition in 1998 is expected to result in
gradually reduced pricing on the business assumed by the Company from the
Frontier Companies.
Other underwriting expenses consist of policy acquisition costs less
reinsurance commissions. The Company's other underwriting expenses for the first
quarter of 1998 were $821,000, compared to $469,000 for the first quarter of
1997. The increase in other underwriting expenses between periods was
principally attributable to the increase in net premiums earned between the
periods. The ratio of the Company's other underwriting expenses to net premiums
earned was 30.0% in the first quarter of 1998 compared to 35.0% in the first
quarter of 1997. Management anticipates the ratio of other underwriting expenses
to premiums earned for 1998 will be about the same as or somewhat in excess of
the 1997 ratio, because of the approximately 33-34% aggregate commissions
payable by the Company in connection with the Quota Share Arrangement or any
similar replacement reinsurance arrangement.
Interest expense for the first quarter of 1998 was $49,000, compared to
$61,000 for the first quarter of 1997. Interest expense in 1998 is expected to
continue at approximately the same or at a slightly reduced level. Continued
payment on such indebtedness, would, however, ultimately reduce the purchase
price paid by Frontier for Alpine.
Other expenses, consisting of professional fees, personnel costs and other
costs, were $2.3 million for the first quarter of 1998, compared to $1.4 million
for the first quarter of 1997. The increase was due principally to WESTCAP's and
Claims Control's expenses being included in the Company's consolidated results
in the first quarter of 1998. (The Company anticipates an increase in other
expenses during 1998 as a consequence of incurring continuing operation expenses
for WESTCAP and Claims Control (they were acquired effective October 1, 1997),
and additional costs estimated at up to approximately $1 million per year to
fund hiring of additional employees and other expansion of the Company's
insurance production efforts. This increase could be potentially offset in part
by settlement of the 311 South Wacker, Chicago, Illinois office lease which
could result in reduced rent expense.
Income tax expense was $0 for the first quarter of 1998 and 1997.
Management anticipates no significant income tax expense from the potential sale
of Alpine to Frontier because of significant capital loss carryforwards.
However, the sale, if it is consummated as currently contemplated, would
transfer to Frontier $6.5 million of operating loss carryforwards which
otherwise would have been available to offset income taxes on the Company's
operating income (the Company expects ultimately to recoup certain tax benefits
recognized by Frontier from the acquisition of Alpine, as and to the extent
actually realized by Frontier). If the sale of Alpine is not consummated, and
absent other changes in circumstances, management anticipates no income tax
expense in 1998.
Equity in income or losses of affiliates, included in the Company's results
due to the Company's adoption of a form of equity accounting in 1995, generally
reflects TCO's net income or loss for the period after certain adjustments.
Equity in income of affiliates was $109,000 for the first quarter of 1998
compared to $247,000 for the first quarter of 1997. The smaller amount in the
1998 quarter reflects the significantly reduced revenues generated by TCO after
Exstar's insurance company subsidiaries ceased issuing direct insurance in
August 1996 and the management agreements with TCO were terminated. The Company
anticipates that equity in income or losses of affiliates during 1998 will
continue at a low level, as TCO is in complete run-off and consequently is
expected to have virtually no revenues or expenses relating to operations. The
Company believes, however, that additional equity in income of affiliates could
be generated if TCO is successful in settling certain of its existing
liabilities (other than liabilities to the Company) at less than their book
values including TCO's obligations under the lease relating to office facilities
at 311 South Wacker, Chicago, Illinois, which could generate income to the
Company of as much as $600,000.
Net (loss) income per share - basic and diluted was a loss of $0.10 for the
first quarter of 1998, compared to income of $0.51 for the first quarter of
1997. The decrease was principally the result of the $3.5 million ($0.64 per
share) of other income in the first quarter of 1997 generated principally by the
settlement of the lawsuit against the Company's former independent auditors and
the lag in earning premium and commissions. Had the increase in Alpine's Quota
Share Arrangement participation to 50% and WESTCAP's generation of commission
revenue been in place for a full year (thus offsetting the lag in premiums
earned and net commissions), management believes the Company would have
experienced net loss per share for the first quarter of 1998 in the range of a
loss of approximately $0.05 to $0.02.
Liquidity and Capital Resources
At March 31, 1998, cash and investments totaled $34.4 million, compared to
$41.7 million at December 31, 1997. The decrease in cash and invested assets
resulted principally from cash applied to operations. Cash applied to operations
during the first quarter of 1998 was $6.9 million compared to $6.3 million for
the first quarter of 1997. The continued high level of cash applied to
operations in 1998 resulted principally from a continuing high level of payments
of loss and loss adjustment expenses and policy acquisition and other expenses,
and continued low premium revenues.
Because substantial portions of Alpine's assets are restricted for specific
purposes, they may not be available to satisfy other obligations of Alpine. This
greatly reduces Alpine's liquidity and, in the event cash is required to meet
current liabilities beyond those currently projected by management (e.g., as a
consequence of increased or more rapid payouts of losses or expenses), could
lead to significant losses.
At March 31, 1998, $13.7 million, or 20.5% of the Company's total assets,
consisted of real estate mortgages and real estate investments. This compared to
$14.0 million of such investments, comprising 18.2% of the Company's total
assets at December 31, 1997. The Company's intent is to transfer most of such
assets to Frontier if the sale of Alpine is consummated as currently
contemplated, and if not to reduce the real estate mortgages and real estate
owned investments in an aggressive but orderly manner.
In order to fund the cash applied to operations during the first quarter of
1998 and during 1997, the Company liquidated investments at more accelerated
rates than historically had been necessary. Net cash inflow from investing
activities was $4.7 million for the first quarter of 1998 compared to $8.9
million for the first quarter of 1997.
The total debt obligation of the Company as of March 31, 1998, was $1.0
million compared to $1.0 million as of December 31, 1997. Of this amount, less
than $100,000 is due during 1998.
Exstar, as a parent company, has historically relied on advances and tax
agreement payments from its subsidiaries to fund its cash requirements.
Management anticipates Exstar will receive small, if any, dividends from its
subsidiaries for 1998, but that Exstar's cash needs, as a parent company, may be
satisfied during the year out of its own resources. Exstar does not plan to pay
cash dividends in the foreseeable future.
The Company currently does not anticipate that it will issue direct
insurance in the foreseeable future. Additionally, under the Quota Share
Arrangement or any similar replacement reinsurance arrangement, including such
an arrangement involving the Cayman Company, most of the premiums ultimately due
to Alpine may be withheld by the Frontier Companies, reducing Alpine's cash
available to satisfy current obligations. In March 1998, however, an
understanding was reached between the Company and the Frontier Companies whereby
some of the funds held by the Frontier Companies would be released to Alpine. By
early May 1998, $3.0 million of such funds held had been released to Alpine.
Management expects (but has no understanding with Frontier) that if the sale of
Alpine should not be consummated, the Company may be able to obtain the
accelerated release of some additional funds held over time. Investment income
on the funds held by the Frontier Companies, although relatively insignificant,
is being and will continue to be paid to Alpine. Should the Company not be able
to obtain the release of additional funds held, or be obligated to replenish the
funds previously released during 1998, the Company's liquidity would be
adversely affected.
Management anticipates that during 1998 the need to continue to liquidate
investments as the Company's principal source of cash to fund its operations
will be significantly diminished as a consequence of anticipated reduced net
loss and loss adjustment expenses. Management believes that cash from (i) the
release of funds held by the Frontier Companies, (ii) liquidation of real estate
mortgages and real estate owned investments, (iii) reinsurance recoveries, (iv)
investment income, (v) net premium collections and deductible and subrogation
recoveries and (vi) reductions in the amounts of restricted cash and investments
generally will be sufficient to fund payment of loss and loss adjustment
expenses and other expenses. Cash received by the Company upon consummation of
the sale of Alpine, should it occur as currently contemplated, also would be
available for obligations of the Company. Such sale, additionally, would
terminate the Company's obligation to fund Alpine's payment of losses.
The Company's future financial condition and prospects are heavily
dependent on the Company's maintaining or improving its relationships with
Frontier. Should the Company's relationships with the Frontier Companies be
discontinued, or their terms and conditions be changed in a manner materially
adverse to the Company, the Company could experience significant losses.
As of March 31, 1998, the Company had no off-balance sheet obligations or
capital commitments that were not reflected in the Company's financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
As disclosed in the Company's 1997 Form 10-K, in view of Alpine's current
financial condition and prospects, management has determined to seek to improve
the Company's prospects by a transaction which would include a sale of Alpine to
Frontier ("Potential Frontier Deal"). The Company has reached a general
understanding with Frontier as to the general terms and conditions of the
Potential Frontier Deal, and is in the process of negotiating binding agreements
to accomplish the Potential Frontier Deal. Management believes, based on
progress to date, that the Potential Frontier Deal is likely to be consummated
during the second quarter of 1998, but there can be no assurance that the
Potential Frontier Deal will be consummated as described in this Form 10-Q or at
all.
As the Potential Frontier Deal currently is contemplated, the initial
purchase price paid by Frontier for Alpine would be approximately $8.9 million,
consisting of the sum of (i) Alpine's statutory policyholders' surplus at
December 31, 1997 ($5.3 million), (ii) the portion of the "Schedule P penalty"
(the excess of regulatorily required loss and loss adjustment expense reserves
over the reserves for such items reflected in Alpine's statutory financial
statements) booked as a liability in Alpine's 1997 statutory financial
statements attributable to insured events occurring in the 1995 accident year
($2.5 million), and (iii) an amount equal to 20% of Alpine's unearned premium
reserve booked as a liability in its 1997 statutory financial statements ($1.1
million). A further purchase price payment is expected to be made in July 1999,
based on further reductions in the Schedule P penalty, earned premium, certain
potential subrogation recoveries and loss development, with a final purchase
price calculation and payment to be made in July 2000, based principally on the
estimated or actual statutory values of the Alpine assets and liabilities
transferred in the sale.
In addition, as the Potential Frontier Deal is currently contemplated: (i)
the purchase price would be paid in cash, (ii) one-third of the purchase price
initially would be withheld by Frontier as security for the Company's
obligations, if any, to return any previously paid portions of the purchase
price based on required purchase price adjustments, and (iii) the withheld
portion of the purchase price would be released to the Company over a two year
period, to the extent warranted based on purchase price adjustments.
Additionally, under the Potential Frontier Deal as currently contemplated, the
purchase price would be increased by up to $4.6 million with respect to certain
net operating loss carryforwards transferred to Frontier with Alpine, as and to
the extent Frontier actually recognizes the benefit of such loss carryforwards.
For services proposed to be rendered by the Company in managing certain
assets of Alpine transferred to Frontier pursuant to the proposed sale
(principally mortgages, real estate and premium receivables), the Potential
Frontier Deal currently contemplates that the Company would receive from
Frontier, on a quarterly basis, all investment income earned on the Alpine
assets transferred, reduced by an amount of investment income deemed earned by
the Company on a portion of the purchase price paid by Frontier (calculated at
an annual rate to be mutually agreed by the parties). The Potential Frontier
Deal as currently contemplated also would require the Company, concurrently with
the consummation of the sale, to purchase certain preferred stock currently
owned by Alpine at a price of approximately $1 million (the current statutory
book value of the preferred stock), and, at the request of Frontier at any time
three years or more following the closing of the sale, to purchase from Frontier
the two office buildings currently serving as the Company's headquarters in
Solvang, California, at a price equal to their statutory book values as used in
calculating the final purchase price. The Company would also have the right to
acquire such office buildings from Frontier at any time following the sale of
Alpine, at their most recently determined statutory book values.
Additional terms and conditions of the Potential Frontier Deal currently
would provide that pursuant to agreements to be entered into by the parties (i)
the Company would, at the Company's cost, manage certain assets of Alpine
transferred to Frontier pursuant to the sale (principally mortgages, real estate
and premium receivables), (ii) the Company would handle claims incurred under
policies written or reinsured by Alpine prior to the effective date of the sale,
for compensation anticipated to be approximately the Company's cost, and (iii)
the parties would enter into a new six-year production agreement (similar to the
Limited Agency Agreements) under which the Company would produce certain
insurance business for Frontier and under which the Frontier Companies would be
granted a right of first refusal on certain business produced by the Company
(subject to Frontier's agreement not to accept directly from the Company's
production sources insurance business similar to that produced by the Company
for the Frontier Companies). It is also currently contemplated that Frontier
would give the Company the right to produce for the Frontier Companies any
insurance programs written by them, provided that other entities have not
previously been given the "exclusive" right to produce such programs.
If the Potential Frontier Deal is consummated, the Company expects, subject
to the approval of the Illinois DOI, that all debts owed to Alpine by the
Company and any of its affiliates would be cancelled, including all debts owed
to Alpine by Exstar and Claims Control, and all debts owed to Alpine by
subsidiaries of TCO.
If the Potential Frontier Deal is consummated as currently contemplated,
individuals employed by Alpine prior to the sale would become employees of
Exstar, WESTCAP or Claims Control following the sale. In addition, the portion
of the Company's salary and overhead expenses previously borne by Alpine would
be reallocated among Exstar and/or its remaining subsidiaries, including the
Cayman Company discussed below, following the sale.
In connection with consummation of the sale of Alpine, Exstar would expect
to form the Cayman Company, and to capitalize such company initially with
approximately $3.0 million (a portion of which may be comprised of the preferred
stock required to be purchased by the Company from Alpine at the closing). As
currently contemplated, a reinsurance agreement similar to the Quota Share
Arrangement would be entered into between the Frontier Companies and the Cayman
Company. As such agreement is currently contemplated, and subject to the Cayman
Company's not assuming more premium than permitted by Cayman Islands insurance
regulations, the Frontier Companies generally would cede to the Cayman Company a
50% quota share of lines of business deemed appropriate by the Company and
produced by WESTCAP for the Frontier Companies. Because of restrictions on the
Frontier Companies' abilities to reduce liabilities in their statutory financial
statements with respect to losses ceded to the Cayman Company, the new
reinsurance agreement likely would be structured on a funds held basis similar
to the Quota Share Arrangement. It is further contemplated that the new
reinsurance agreement would remain in effect during the term of the new
production agreement between the Company and Frontier, and pursuant to the
reinsurance agreement the Cayman Company would assume Alpine's obligation to
make payments to TCO Holdings under the Service Agreement currently in force
between Alpine and TCO Holdings.
The Company has preliminarily investigated formation of the Cayman Company,
and based on such investigation anticipates the Cayman Company could be formed
and operated as currently contemplated by the Potential Frontier Deal. The
Company has not yet taken any substantial steps to form the Cayman Company,
however, and its formation and operation would be subject to Cayman Islands
regulation. There can be, consequently, no assurance that the Cayman Company can
be formed and operated as currently contemplated.
Consummation of the Potential Frontier Deal would be subject to receipt of
regulatory approvals, including approval of the Illinois DOI. Although, based on
informal discussions with the Illinois DOI, management believes that necessary
regulatory approvals would be obtained, there can be no assurance that they will
be obtained or that the Potential Frontier Deal will be consummated as
contemplated or at all. Management believes the proposed sale of Alpine, the
formation of the Cayman Company and the other transactions contemplated as the
Potential Frontier Deal would be beneficial to the Company, for reasons
described in Exstar's 1997 Form 10-K.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<S> <C>
10.126 Limited Agency Agreement dated as of April 21,
1998 between United Capitol Insurance Company and
WESTCAP Insurance Services.
10.127 Residential Lease dated as of October 1, 1997 between Exstar
Financial Corporation and Peter J.
O'Shaughnessy.
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized to sign on behalf of the Registrant as
well as in his capacity as Chief Financial Officer.
EXSTAR FINANCIAL CORPORATION
<TABLE>
<S> <C>
Date: May 15, 1998 By /S/ Mark Rosenberg
-----------------------
Mark Rosenberg
Chief Financial Officer
</TABLE>
<PAGE>
LIMITED AGENCY AGREEMENT
This limited agency agreement ("Agreement") is entered into by and
between United Capitol Insurance Company, a Wisconsin insurance company
("UCIC"), and WESTCAP Insurance Services, Inc., a California corporation
("WESTCAP").
UCIC AND WESTCAP HEREBY AGREE AS FOLLOWS:
ARTICLE 1 - APPOINTMENT
1.1 UCIC hereby retains WESTCAP to act on behalf of UCIC with the authority and
subject to the terms and conditions hereinafter set forth, and WESTCAP hereby
accepts such retention.
1.2 UCIC's retention of WESTCAP hereby shall not restrict in any manner the
right of UCIC to retain other producers.
ARTICLE 2 - DEFINITIONS
2.1 "Sub-producer" shall mean any insurance broker, insurance agent or other
person or entity properly licensed to produce insurance and through which
Policies may be produced.
2.2 "Effective Date" shall mean 12:01 a.m. (local Eastern time), October
1, 1997.
2.3 "Policy" shall mean any policy, contract, coverage slip, endorsement,
binder, certificate, proposal for insurance or other document which binds UCIC
to insurance or assumed facultative reinsurance coverage issued or renewed by
UCIC on or after the Effective Date through WESTCAP or prior thereto through E&S
(as hereinafter defined) and shall also include any rewrite, renewal or
extension (whether before or after termination of this Agreement) through
WESTCAP required by law.
ARTICLE 3 - AUTHORITY OF WESTCAP
3.1 WESTCAP is hereby authorized and assumes the duty to act on behalf of UCIC
in the manner described herein. All actions and inactions of WESTCAP under this
authorization shall be subject to the ultimate authority of UCIC, and UCIC from
time to time shall be entitled to place reasonable restrictions on WESTCAP's
authority; provided such restrictions are in writing.
3.2 WESTCAP is hereby authorized, subject to Article 11 requiring prior written
permission and applicable law, to advertise and solicit with respect to UCIC and
the business to be produced through WESTCAP hereunder.
3.3 WESTCAP is hereby authorized, subject to underwriting guidelines established
and rates set by UCIC from time to time and applicable law, to accept
applications, to quote, bind and decline coverages and to conduct audits
("underwrite") on behalf of UCIC for all classes or lines of insurance set forth
in the Schedule of Business prepared by UCIC and attached hereto ("Schedule of
Business"); provided WESTCAP shall use applications and quote, bind and decline
forms approved by UCIC, and provided additionally WESTCAP shall have no
authority to bind reinsurance or retrocessions on behalf of UCIC. The Schedule
of Business shall provide the authority of WESTCAP with regard to, but not
limited to, underwriting guidelines, the types of risks which may be written,
the basis of the rates to be charged, maximum limits of liability, applicable
exclusions territorial limitations, Policy cancellation provisions, maximum
Policy periods and maximum annual premium volume . The Schedule of Business may
be amended from time to time as deemed appropriate by UCIC, provided such
amendments are in writing.
3.4 WESTCAP is hereby authorized, subject to applicable law, to print, maintain,
execute and issue surplus line broker's certificates, and to assemble,
countersign and deliver Policies.
3.5 WESTCAP is hereby authorized, subject to applicable law, Policy provisions
and UCIC's ultimate authority, to cancel and renew Policies underwritten or
delivered by WESTCAP hereunder.
3.6 WESTCAP shall be responsible to the insured while this Agreement continues
in effect for the delivery to insureds of notices of renewal or non-renewal of
any Policy underwritten or delivered by WESTCAP hereunder and shall timely
communicate any renewal quote or notice of non-renewal to the insured to
preclude the extension of coverage beyond the expiration date of the Policy.
3.7 WESTCAP is hereby authorized, subject to applicable law and the applicable
provisions of this Agreement, to receive and receipt for premiums and fees, to
pay return premiums, to pay adjustments and to retain and pay commissions out of
such collected premiums, subject to the provisions of this Agreement.
3.8 WESTCAP shall not authorize any Sub-producer or other person or entity to
quote, bind, or decline coverages or otherwise underwrite on behalf of UCIC
without the prior written consent of UCIC.
3.9 The original sources of some or all business under this Agreement shall be
Sub-producers retained by WESTCAP. WESTCAP is hereby authorized to retain and to
enter into agreements with such Sub-producers with respect to the business
hereunder; provided WESTCAP shall have no authority to obligate UCIC in any
manner to such Sub-producers and all agreements with such Sub-producers shall
provide that the Sub-producers shall have no claims or causes of action against
UCIC except for reckless conduct or willful misconduct of UCIC. Additionally,
WESTCAP shall be responsible for verifying the proper licensing of such
Sub-producers, and if any liabilities are incurred by UCIC as the result of
WESTCAP's accepting business from unlicensed or improperly licensed Sub-
producers, WESTCAP shall indemnify and hold UCIC harmless from, and reimburse
UCIC for, any and all such liabilities, including but not limited to fines,
court costs and expenses, legal fees and travel expenses.
3.10 WESTCAP may accept premium financed by premium finance companies, upon
terms and conditions approved in writing by UCIC.
3.11 WESTCAP shall not process, adjust, settle or pay any claims under Policies
underwritten or delivered by WESTCAP pursuant to this Agreement, nor shall
WESTCAP commit UCIC to pay any Policy claim. Should WESTCAP become aware, or
have delivered to WESTCAP, any notice of claim or claim, WESTCAP promptly shall
forward such notice or claim to UCIC or its designee.
3.12 WESTCAP shall perform the duties and have the rights described herein with
respect to all policies written through WESTCAP hereunder on or after the
Effective Date, and all Policies written through Transre Insurance Services and
Exstar E&S Insurance Services (collectively, "E&S") prior to October 1, 1997,
pursuant to that certain Limited Agency Agreement between Olympic Underwriting
Managers, Inc. and E&S dated October 9, 1996.
ARTICLE 4 - COMPENSATION
4.1 Except as otherwise specified on the Schedule of Business, UCIC shall allow
WESTCAP a gross commission of 27.5% of all gross written premium derived from
Policies underwritten or delivered by WESTCAP hereunder. The commission
arrangement shall be reviewed semiannually as of January 1 and July 1 of each
year and shall be subject to adjustment as agreed by the parties.
4.2 Out of such gross commission, WESTCAP shall allow for all commissions due to
Sub-producers and others with respect to Policies underwritten or delivered by
WESTCAP hereunder.
4.3 If there is not a Sub-producer to receive the designated commission on a
Policy, WESTCAP shall be entitled retain the commission.
4.4 WESTCAP also shall be entitled to retain all policy and other fees charged
by WESTCAP with respect to business produced hereunder to the extent such fees
are permitted WESTCAP by law.
ARTICLE 5 - ACCOUNTING, RECORDS AND EDP
5.1 WESTCAP shall provide and maintain in forms reasonably acceptable to UCIC
all books, records, dailies and correspondence with policyholders necessary to
determine the amount of liability of UCIC and the amount of premium relating
thereto.
5.2 The omission of any item from any statement or report applicable to the
business hereunder shall not affect the responsibility of either party to
account for and pay all amounts due the other party hereunder, nor shall it
prejudice the rights of either party to collect all such amounts due from the
other party.
5.3 WESTCAP shall prepare separate, itemized, invoices and/or monthly statements
for each Sub-producer on the business produced by the Sub-producers hereunder,
and furnish the Sub-producers IRS Forms 1099 each year if and when required.
5.4 All of WESTCAP records applicable to the business hereunder shall be kept in
such manner and form as are generally recognized as acceptable in the insurance
industry or as reasonably may be required by UCIC. Such records shall be
maintained for five years or for any longer retention period required by law or
UCIC.
5.5 All records in WESTCAP's possession or control and applicable to the
business hereunder shall be made available upon prior written request for
inspection, copying and/or audit at reasonable times by UCIC or its agents.
5.6 All records in WESTCAP's possession or control and applicable to the
business hereunder shall be made available, upon prior written request and at
UCIC's cost, for inspection at any office of UCIC, should such inspection be
requested by insurance department or other governmental authorities.
5.7 WESTCAP shall immediately forward upon request to UCIC or UCIC's agents
exact, as written, copies of all applications, Policies and reports underwritten
or delivered by WESTCAP or used by WESTCAP hereunder, including all other
evidence of insurance written, modified or terminated.
5.8 WESTCAP shall be solely responsible for and shall keep accurate records of
all policy supplies assigned to WESTCAP and shall account to UCIC, upon UCIC's
request, for all outstanding and unused policy supplies. If canceled or
terminated policy supplies are unavailable, WESTCAP shall forward or cause to be
forwarded to UCIC properly executed lost policy receipts therefor.
5.9 UCIC shall be entitled to conduct semi-annually examinations of WESTCAP's
operations. Such examinations shall be conducted in reasonable manners and may
cover such matters as required or permitted by law.
<PAGE>
ARTICLE 6 - WESTCAP's REPORTS
6.1 WESTCAP shall provide to UCIC weekly and monthly electronic data transfer
and bordereaux providing such policy information in such format as reasonably
requested by UCIC, and shall provide to UCIC monthly by the eighth business day
of the following month accounting bordereaux providing such information in such
format as reasonably requested by UCIC, in respect of Policies issued or
delivered by WESTCAP hereunder. UCIC may alter the information required to be
included in and the formats of such reports from time to time; provided any such
alteration does not unreasonably burden WESTCAP.
6.2 WESTCAP shall furnish UCIC with any additional information and reports as
reasonably requested by UCIC and necessary to complete UCIC's quarterly and
annual statements filed with regulatory authorities or otherwise satisfy
regulatory requirements.
6.3 WESTCAP shall annually furnish UCIC, within 90 days following the end of
WESTCAP's fiscal year, current (audited, if available) financial statements of
WESTCAP. These financial statements shall include, but not be limited to, profit
and loss, balance sheet and cash flow statements.
ARTICLE 7 - EXPENSES
7.1 WESTCAP shall be responsible for and promptly pay all expenses attributable
to producing and servicing business under this Agreement, except as specified in
Section 7.2. This responsibility shall not be altered whether the expenses are
billed to WESTCAP or UCIC. These expenses shall include, but not be limited to:
(a) Salaries, related taxes and benefits of all employees of WESTCAP;
(b) Transportation, lodging and meals of employees of WESTCAP;
(c) Postage and other delivery charges;
(d) Advertising not specifically agreed to by UCIC;
(e) EDP hardware, software and programming, except as provided in Section
5.9;
(f) Countersignature fees or commissions;
(g) License and appointment fees for agents, brokers and others;
(h) Income and state and local sales taxes, if any, directly applicable to
WESTCAP's business;
(i) Taxes on surplus lines premium, and policy fees if necessary, in
respect of Policies underwritten or delivered by WESTCAP hereunder;
(j) Costs of office space, facilities, equipment and occupancy used by
WESTCAP;
(k) Legal and auditing expenses incurred by WESTCAP in the normal conduct
of its business; and
(l) Such other expenses as are customarily borne by insurance producers.
7.2 UCIC shall be responsible for and promptly pay all expenses incurred by UCIC
under this Agreement. This responsibility shall not be altered whether the
expenses are billed to UCIC or WESTCAP. These expenses shall include but not be
limited to:
(a) Salaries, related taxes and benefits of all employees of UCIC;
(b) Transportation, lodging and meals of employees of UCIC;
(c) Board and bureau fees;
(d) Income and state and local sales taxes, if any, directly applicable to
UCIC's business:
(e) State or guaranty fund assessments;
(f) Losses and loss adjustment expenses incurred by or at the direction of
UCIC;
(g) Reinsurance costs;
(h) Legal and auditing expenses incurred by, on behalf of or at the
direction of UCIC; and
(i) Such other expenses as are customarily borne by insurance companies.
ARTICLE 8 - HANDLING OF FUNDS
8.1 WESTCAP shall accept and maintain at all times all premium collected and
other funds relating to the business underwritten by WESTCAP under this
Agreement in the capacity of a fiduciary and trustee for UCIC. The privilege of
retaining commissions shall not be construed as changing the fiduciary capacity.
8.2 WESTCAP shall establish and maintain a premium trust account designated
"WESTCAP Insurance Services or United Capitol Insurance Company Premium Trust
Account" in a bank mutually agreed by WESTCAP and UCIC and shall deposit into
such premium trust account all premiums collected by WESTCAP hereunder. WESTCAP
shall have the right to transfer funds held in such premium trust account to
successor banks with the prior written consent of UCIC. Such banks shall be
members of the Federal Reserve System whose deposits are insured by the Federal
Deposit Insurance Corporation. WESTCAP shall be entitled to retain any interest
earned on funds deposited in such premium trust accounts.
8.3 WESTCAP shall maintain signature authority on such premium trust accounts
and may use any and all premium and other funds collected by WESTCAP under this
Agreement for the following purposes:
(a) Payments of amounts due UCIC pursuant to this Agreement;
(b) Return of unearned premiums arising due to cancellation or endorsement
of Policies underwritten or delivered by WESTCAP;
(c) Payment of WESTCAP's, Sub-producers' and others' compensations as
described in Article 4;
(d) Return of money deposited in error;
(e) Withdrawal of interest due WESTCAP hereunder;
(f) Payments with respect to audits; and
(g) Making of investments authorized by law.
8.4 WESTCAP shall not commingle any funds in such premium trust accounts with
funds in WESTCAP's corporate accounts or other funds held by WESTCAP in any
other capacity.
8.5 WESTCAP shall render accounts to UCIC detailing all premium trust account
transactions, and remit to UCIC all funds due under this Agreement by the end of
the month following the month during which WESTCAP collected such funds for the
account of UCIC.
8.6 Neither party shall be liable for any loss which occurs by reason of the
default or failure of the bank in which an account is carried.
8.7 WESTCAP shall refund commissions on Policy cancellations, reductions in
premiums or any other return premiums at the same rate at which such commissions
were originally retained.
8.8 Neither UCIC nor WESTCAP shall offset any balances due under this Agreement
with any amounts due under any other agreement between UCIC and/or its
affiliates and WESTCAP and/or its affiliates.
ARTICLE 9 - OWNERSHIP OF BOOKS AND RECORDS
9.1 Upon termination of this Agreement, WESTCAP's records and the exclusive use
and control of expirations of business produced by Sub-producers retained by
WESTCAP and contracts with such Sub-producers shall remain the sole property of
WESTCAP and be left in WESTCAP's undisputed possession, provided WESTCAP is not
then in default of any payment obligation to UCIC hereunder. If WESTCAP is then
in default of any such payment obligation and has not cured such default within
15 days of UCIC's notice to WESTCAP thereof, ownership of the records, use and
control of expirations and contracts with Sub-producers shall become and remain
vested in UCIC until such time as such payment has been made.
9.2 WESTCAP hereby assigns to UCIC as security for the payment obligations of
WESTCAP under this Agreement all sums due or to become due to WESTCAP from any
insureds whose Policies were underwritten by WESTCAP hereunder. UCIC shall have
full authority to demand and collect such sums if WESTCAP is then in default of
any payment obligation to UCIC hereunder and has not cured such default within
15 days of UCIC's notice to WESTCAP thereof.
9.3 WESTCAP pledges and grants to UCIC to further secure the payment obligations
of WESTCAP hereunder all of WESTCAP's records of expirations of Policies,
including, but not limited to, the ownership and use of such expirations. UCIC
shall have the rights of the holder of a security interest granted by law,
including, but not limited to, the rights of foreclosure to effectuate such
security interest, and WESTCAP hereby agrees peaceably to surrender possession
of such records to UCIC upon demand.
9.4 WESTCAP agrees that this Agreement or a copy hereof may be filed as a
financing statement, if UCIC so elects. WESTCAP further agrees to sign a UCC-1
Form to secure UCIC's security interest in the expirations and renewals upon
reasonable request by UCIC; provided that upon termination of this Agreement and
WESTCAP not being in default of any payment obligation to UCIC hereunder, UCIC
immediately shall cancel or terminate such filing.
ARTICLE 10 - INDEPENDENT CONTRACTOR RELATIONSHIP
10.1 Nothing contained in this Agreement shall be construed to create the
relationship of employer and employee between UCIC and WESTCAP, or between UCIC
and any employees, representatives or Sub-producers retained by WESTCAP. WESTCAP
shall carry out its responsibilities hereunder subject to its own discretion and
not subject to time or manner directions of UCIC.
ARTICLE 11 - ADVERTISING
11.1 Before WESTCAP uses UCIC's name in any form of advertising, a copy of the
proposed advertisement shall be forwarded to UCIC. No such advertisement shall
be used without the prior written permission of UCIC. All agreements with
Sub-producers shall require that before they use UCIC's name in any advertising,
a copy of the proposed advertisements shall be forwarded to UCIC, and that no
such advertisements shall be used without the prior permission of UCIC.
11.2 If an advertisement containing UCIC's name is used by WESTCAP or Sub-
producers retained by WESTCAP, WESTCAP shall maintain a copy of the
advertisement and full details concerning where, when and how it was used, and
comply with all legal requirements regarding content, review and approval of
advertising and maintenance of records. WESTCAP, however, shall not be required
to maintain records of the names and addressees of recipients of any direct
mailing or advertising but shall only record the geographical area in which such
mailing or advertising was used except to the extent retention of such
information is required by law.
ARTICLE 12 - WESTCAP'S LICENSING
12.1 WESTCAP has and shall maintain current licenses and authorities as required
by law for the conduct of its business pursuant to this Agreement.
12.2 WESTCAP shall be responsible for verifying that all Sub-producers retained
by WESTCAP maintain appropriate licenses and authorities as required by law for
conduct of their businesses.
12.3 WESTCAP shall maintain in force agreements, in form reasonably satisfactory
to UCIC, with Sub-producers retained by WESTCAP hereunder.
ARTICLE 13 - WESTCAP'S SALE OR TRANSFER
13.1 In the event a majority interest in WESTCAP is to be sold or transferred or
WESTCAP is to merge or be consolidated with another firm not under common
control, controlling or controlled by WESTCAP or UCIC, WESTCAP shall give 30
days' advance written notice to UCIC, to allow UCIC, at its election:
(a) To consent to assignment of this Agreement to the successor;
(b) To enter into a new agreement with the successor; or
(c) To terminate this Agreement.
13.2 UCIC shall notify WESTCAP of its decision within 15 days of the
receipt of the notice.
13.3 WESTCAP shall notify UCIC in writing within 15 days if there is a
change in:
(a) Ownership of ten percent or more of the outstanding voting stock
of WESTCAP; or
(b) The president of WESTCAP.
ARTICLE 14 - INDEMNITY AGREEMENT
14.1 WESTCAP shall indemnify and hold UCIC harmless from any and all claims,
causes of action, damages, judgments, fines, penalties and expenses (including,
but not limited to, attorney's fees and costs of court) which may be made
against UCIC by anyone, including any governmental agency or regulatory
authority, and which arise, either directly or indirectly, principally out of
any negligent or grossly negligent actions or inactions or willful misconduct or
violation of any statute or regulation by WESTCAP, including, but not limited
to, any negligent or grossly negligent actions or inactions or willful
misconduct or violation of any statute or regulation by any Sub-producer
retained by WESTCAP or any of WESTCAP's or such Sub-producers' employees or
representatives arising under this Agreement.
14.2 UCIC shall indemnify and hold WESTCAP harmless from any and all claims,
causes of action, damages, judgments, fines, penalties and expenses (including,
but not limited to, attorney's fees and costs of court) which may be made
against WESTCAP and which arise, either directly or indirectly, principally out
of any negligent or grossly negligent actions or inactions or willful misconduct
or violation of any statute or regulation by UCIC, including, but not limited
to, any negligent or grossly negligent actions or inactions or willful
misconduct or violation of any statute or regulation by UCIC's employees or
representatives arising under this Agreement.
14.3 If any person seeks indemnity hereunder ("Indemnified Person"), the
Indemnified Person shall give the indemnifying party ("Indemnifying Party")
prompt written notice of the claim, cause of action, damage, judgment, fine,
penalty and expense against which indemnification is sought, including copies of
all documents and information reasonably relating thereto. The Indemnifying
Party promptly shall commence defending the Indemnified Person through competent
attorneys reasonably satisfactory to the Indemnified Person. The Indemnified
Person shall cooperate with the Indemnifying Party in such defense, but the
ultimate decision whether to defend or settle shall be made by the Indemnified
Person.
14.4 If either party shall institute any lawsuit to enforce the obligations
assumed by the other party under this Agreement, the prevailing party shall be
entitled to recover from the other party all costs, expenses, judgments and
attorney's fees incurred by the prevailing party in connection with the lawsuit.
14.5 WESTCAP has and shall maintain E&O insurance with an insurer reasonably
acceptable to UCIC and providing coverage of the greater of (i) the minimum
required by law or (ii) $1,000,000.
ARTICLE 15 - MEDIATION AND VENUE
15.1 If irreconcilable differences of opinion arise as to the interpretation of
this Agreement, either party may request, in writing, mediation of such
difference of opinion. Such mediation shall be conducted pursuant to Commercial
Mediation Rules of the American Arbitration Association. Such mediation shall be
conducted in Chicago, Illinois, and concluded within 30 days after notice of
mediation. The costs of the parties incurred in the mediation shall be allocated
by the mediator pursuant to the equities of the parties with respect to the
matters mediated.
15.2 If any dispute cannot be resolved by mediation, the parties agree that the
courts of Illinois shall have exclusive jurisdiction to resolve any such dispute
and that the internal law of Delaware will apply to the interpretation and
enforcement of the dispute.
ARTICLE 16 - TERMINATION
16.1 This Agreement shall be terminable by either party (i) upon 15 days' prior
written notice to the other party for "cause" (defined, as hereinafter used, as
the other party's permanent legal or physical inability to perform its
obligations hereunder, the other party's conviction of a felony or the other
party's "Material Breach" of this Agreement and failure to cure such Material
Breach within the applicable cure period); and (ii) upon 90 days' prior written
notice to the other party as of the end of any calendar quarter. A "Material
Breach" shall consist of (a) failure by a party to pay any amount due hereunder
when due, which is not paid within 15 days following the other party's written
demand for such payment, or (b) the failure to obtain or maintain, or the
termination or suspension of, a license, permit or other authority necessary for
a party to conduct its business as contemplated hereunder which is not cured
within 30 days.
16.2 Upon termination, WESTCAP promptly shall deliver or cause to be delivered
to UCIC, at UCIC's expense, all property of UCIC in WESTCAP's control or
possession, including but not limited to, Policies, manuals, forms, unused
drafts and all materials used in servicing of Policies, including computerized
and data processing records. If WESTCAP fails to deliver such property within 15
days after the termination of this Agreement, WESTCAP shall bear all reasonable
expenses which UCIC may expend or cause to be expended in obtaining such items.
If policy supplies cannot be accounted for by WESTCAP or have been destroyed,
lost or mislaid, WESTCAP agrees to protect, defend, and hold UCIC harmless from
all persons and claims whatsoever arising with respect to such policy supplies.
16.3 UCIC may, for "cause," in its sole discretion, suspend any and all of
WESTCAP's authority pursuant to this Agreement. Such suspension shall be
effective upon written notification to WESTCAP setting forth the nature of the
for "cause" determination in reasonable detail.
16.4 In the event of termination of this Agreement by UCIC for "cause," any
indebtedness of WESTCAP to UCIC and all premiums in the possession of WESTCAP,
or for the collection of which WESTCAP is responsible, shall become immediately
due to UCIC.
16.5 The failure of either party to declare promptly a default or breach of any
of the terms and conditions of this Agreement shall not be construed as a waiver
of any of such terms and conditions, nor stop either party from thereafter
demanding full and complete compliance herewith.
16.6 Notwithstanding the termination of this Agreement, the provisions of this
Agreement shall continue to apply to all unfinished business to the end that all
obligations and liabilities incurred by each party as a result of this Agreement
shall be fully performed and discharged.
ARTICLE 17 - MISCELLANEOUS
17.1 This Agreement supersedes all previous agreements, if any, whether written
or oral, between UCIC and WESTCAP relating specifically to the subject matter
hereof.
17.2 WESTCAP shall not assign its rights and obligations under this Agreement in
whole or in part without the prior written approval of UCIC.
17.3 Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and plural and any term
stated in either the masculine, the feminine or the neuter gender, shall include
the masculine, the feminine and the neuter gender. All captions and section
headings are intended to be for purposes of reference only and do not affect the
substance of the sections to which they refer.
17.4 Each party hereto agrees to perform any further acts and execute and
deliver any further documents which may be reasonably necessary to carry out the
provisions of this Agreement.
<PAGE>
17.5 In the event that any of the provisions, or portions thereof, of this
Agreement are held to be illegal, invalid or unenforceable by any court of
competent jurisdiction, the validity and enforceability of the remaining
provisions, or portions thereof, shall not be affected by the illegal, invalid
or unenforceable provision or by its severance herefrom.
17.6 Any and all notices required or permitted to be given under this Agreement
shall be in writing and shall be deemed given when deposited in the United
States Postal Service, Certified Mail, Return Receipt Requested, or faxed with
confirmation by phone to a vice president or more senior officer of the
recipient, to the parties' addresses as provided below or such other addresses
provided by the parties:
UCIC:
United Capitol Insurance Company
400 Perimeter Center Terrace - Suite 345
Atlanta, Georgia 30346
Attn: Jim Satterfield
WESTCAP:
WESTCAP Insurance Services, Inc.
2029 Village Lane
Solvang CA 93463
Attn: Peter J. O'Shaughnessy
17.7 This Agreement may be executed in multiple counterparts, each of which and
together shall constitute an original document.
UCIC: WESTCAP:
United Capitol Insurance WESTCAP Insurance Services,
Company . Inc.
By: /S/ J. W. Satterfield By: /S/ Steven C. Shinn
--------------------- -------------------
Date: April 2, 1998 Date: 4/21/98
----------------- --------------------
<PAGE>
================================================================================
RESIDENTIAL LEASE
1. PARTIES:
This Lease is made and entered into this 1st day of October, 1997 by and
between Exstar Financial Corporation (hereinafter referred to as "Landlord")and
Peter J. O'Shaughnessy (hereinafter referred to as "Tenant").
2. PREMISES:
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord,on
the terms and conditions hereinafter set forth, that certain real property and
the residence located thereon situated in the City of Bermuda Dunes, County of
Indio, State of CA, commonly known as 42-510 Caracas Place.
3. TERM:
The term of this Lease shall be for one year (months/years), commencing on
October 1st 1997 and ending on September 30, 1998.
4. RENT:
Tenant shall pay to Landlord as rent for the Premises, the sum of 0ne
Thousand Five Hundred ($1500.00) dollars per month, in advance on the first day
of each month during the term hereof. Rent shall be payable without notice or
demand and without any deduction, offset, or abatement in lawful money of the
United States to the Landlord at the address stated herein for notices or to
such other persons or such other places as the Landlord may designate to Tenant
in writing.
5. SECURITY DEPOSIT:
Tenant shall deposit with Landlord upon the execution of this Lease the sum
of N/A ($N/A) dollars as a security deposit for the Tenant's faithful
performance of the provisions of this Lease. If Tenant fails to pay rent or
other charges due hereunder, or otherwise defaults with respect to any provision
of this Lease, Landlord may use the security deposit, or any portion of it, to
cure the default or compensate Landlord for all damages sustained by Landlord
resulting from Tenant's default. Tenant shall immediately on demand pay to
Landlord the sum equal to that portion of the security deposit expended or
applied by Landlord which was provided for in this paragraph so as to maintain
the security deposit in the sum initially deposited with Landlord. Landlord
shall not be required to keep the security deposit separate from its general
account nor shall Landlord be required to pay Tenant any interest on the
security deposit. If Tenant performs all of Tenant's obligations under this
Lease, the security deposit or that portion thereof which has not previously
been applied by the Landlord, shall be returned to Tenant within three (3) weeks
after the expiration of the term of this Lease, or after Tenant has vacated the
premises, whichever is later.
6. POSSESSION:
If the Landlord for any reason cannot deliver possession of the Premises to
Tenant at the commencement of the term, the Landlord shall not be liable to
Tenant for any loss or damage resulting therefrom, but there shall be a
proportionate deduction of rent; nor shall this Lease be void or voidable for a
period of ten (10) days thereafter; and if for any reason the Premises cannot be
delivered within said ten (10) day period, the Tenant may, prior to Landlord's
delivery of the Premises, declare this Lease to be null and void and all money
paid to Landlord shall be refunded to Tenant.
7. USE:
It is agreed that the Premises shall be used only for residence purposes,
for one family consisting of two adults and one children, and no animals, and
for no other purposes whatsoever. Tenant in his possession, use and occupancy of
the Premises agrees to observe and comply with all restrictions, laws and
ordinances affecting said property or occupancy thereof; and Tenant further
agrees that no use shall be made of the Premises, nor acts done which will
increase the existing rate of insurance upon the Premises, or will cause a
cancellation of any insurance policy covering the Premises.
8. UTILITIES
The Tenant shall pay for all water supplied to the Premises and shall pay
for all gas, heat, light, power, telephone service, and other services supplied
to the Premises, except as herein provided. Expenses as per Exhibit A attached.
9. REPAIRS AND MAINTENANCE:
The Landlord shall at its sole cost and expense keep and maintain the
exterior walls, roof, electrical wiring, heating system, air conditioning system
(if any), water heater, built-in appliances, and water lines in good and
sanitary order, condition, and repair, except where damage (if any) has been
caused by the abuse or negligence of the Tenant, in which event Tenant shall
repair same at his sole cost and expense.
Except as herein provided, Tenant hereby agrees that the Premises are now
in a tenantable and good condition and shall at his sole cost and expense keep
and maintain the Premises, appurtenances and every part thereof, in the manner
in which they were received, reasonable wear and tear excepted, including
household furniture, fixtures, goods and chattels belonging to the Landlord, so
that they shall remain in good and satisfactory order, condition and repair. The
landlord agrees to maintain landscaping, swimming pool (if any) and Tenant
agrees to adequately water said landscaping.
10. ALTERATIONS AND ADDITIONS:
Tenant shall not, without the Landlord's prior written consent, make any
alterations, improvements or additions in or about the Premises and any
additions to or alterations of the Premises (with the exception of movable
furniture) shall at once become a part of the realty and belong to the Landlord.
The Tenant shall keep the premises free from any liens arising out of any work
performed, materials furnished or obligations incurred by the Tenant.
11. HOLD HARMLESS:
Tenant shall indemnify and hold Landlord harmless from and against any and
all claims arising from Tenant's use or occupancy of the Premises or from any
activity, work, or things which may be permitted or suffered by Tenant in or
about the Premises including all damages, costs, attorney's fees, expenses and
liabilities incurred in the defense of any claim, or action or proceeding
arising therefrom. Except for Landlord's willful or grossly negligent conduct,
Tenant hereby assumes all risk of damage to property, including household
furniture and goods, or injury to person in or about the Premises from any
cause, and Tenant hereby waives all claims in respect thereof against Landlord.
12. DAMAGE TO PREMISES:
(a) If the Premises are so damaged by fire or from any other cause as to
render it untenantable, then either party shall have the right to terminate this
Lease as of the date on which such damage occurs, through written notice to the
other party, to be given within fifteen (15) days after the occurrence of such
damage; except that should such damage or destruction occur as the result of the
abuse or negligence of Tenant, or its invitees, so as to render the Premises
untenantable, the Landlord only shall have this right of termination.
Page 1 of 2
<PAGE>
================================================================================
Should this right be exercised by either Landlord or Tenant, then rent for
the current month shall be prorated between the parties as of the date on which
such damage occurred and any prepaid rent and unused security deposit shall be
refunded to Tenant.
(b) If this Lease is not terminated as provided in this paragraph 12, the
Landlord shall promptly repair the Premises and there shall be a proportionate
reduction of rent until the Premises are repaired and ready for Tenant's
occupancy, such proportionate reduction to be based upon the extent to which the
making of repairs interferes with Tenant's reasonable use of the Premises.
13. ASSIGNMENT AND SUBLETTING:
Tenant shall not voluntarily or by operation of law assign, transfer,
sublet, mortgage, or otherwise transfer or encumber all or any part of Tenant's
interest in this Lease or in the Premises without Landlord's prior written
consent which consent shall not be unreasonably withheld. The consent to one
assignment or subletting shall not be construed as consent to any subsequent
assignment or subletting.
14. DEFAULT:
It is agreed between the parties hereto that if any rent shall be due
hereunder and unpaid, or if Tenant shall default and breach any other covenant
or provision of the Lease, then the Landlord, after giving the proper notice
required by law, may re-enter the Premises and remove any property and any and
all persons therefrom in the manner allowed by law. The Landlord may, at its
option, either maintain this Lease in full force and effect and recover the rent
and other charges as they become due or, in the alternative, terminate this
Lease. In addition, the Landlord may recover all rentals and any other damages
and pursue any other rights and remedies which the Landlord may have against the
Tenant by reason of such default as provided by law.
15. ABANDONMENT:
Tenant shall not vacate or abandon the Premises at any time during the term
of this Lease.
16. ENTRY BY LANDLORD:
The Tenant shall permit the Landlord and/or its agents to enter into and
upon the Premises at all reasonable times and upon reasonable notice for the
purpose of inspecting it or for the purpose of maintaining the Premises, or for
the purpose of exhibiting the Premises to prospective purchasers or tenants.
17. ATTORNEY'S FEES:
If either party commences an action against the other party arising out of
or in connection with this Lease, the prevailing party shall be entitled to have
and recover from the losing party reasonable attorney's fees and costs of suit.
18. SURRENDER:
On the last day of the term of this Lease, Tenant shall surrender the
Premises to Landlord in good condition, broom clean, ordinary wear and tear and
damage by fire and the elements excepted.
19. HOLDING OVER:
If Tenant, with the Landlord's consent, remains in possession of the
Premises after expiration or termination of the term of this Lease, such
possession by Tenant shall be deemed to be a tenancy from month-to-month at a
rental in the amount of the last monthly rental plus all other charges payable
hereunder, and upon all the provisions of this Lease applicable to such a
month-to-month tenancy.
2O. BINDING ON SUCCESSORS AND ASSIGNS:
Each provision of this Lease performable by Tenant shall be deemed both a
covenant and a condition. The terms, conditions and covenants of this Lease
shall be binding upon and shall inure to the benefit of each of the parties
hereto, their heirs, personal representatives, successors and assigns.
21. NOTICES:
Whenever under this Lease a provision is made for any demand, notice or
declaration of any kind, it shall be in writing and served either personally or
sent by registered or certified United States mail, postage prepaid, addressed
at the address as set forth below:
TO LANDLORD AT: TO TENANT AT:
Exstar Financial Corp. Peter J. O'Shaughnessy
P. 0. Box 678 42-510 Caracas Place
Solvang, CA 93464 Bermuda Dunes, CA 92201
Such notice shall be deemed to be received within forty-eight hours from
the time of mailing, if mailed as provided for in this paragraph.
22. WAIVERS:
No waiver by Landlord of any provision hereof shall be deemed a waiver of
any other provision hereof or of any subsequent breach by Tenant of the same or
any other provisions.
23. TIME:
Time is of the essence of this Lease.
24. JOINT AND SEVERAL OBLIGATIONS:
"Party" shall mean Landlord and Tenant; and if more than one person or
entity is the Landlord or Tenant, the obligations imposed on the party shall be
joint and several.
25. OPTION TO EXTEND:
Provided that Tenant shall not then be in default hereunder, Tenant shall
have the option to extend the term of this Lease for month to month (month/year)
periods upon the same terms and conditions herein contained, except for fixed
minimum monthly rental, upon delivery by Tenant to Landlord of written notice of
its election to exercise such option(s) at least sixty (60) days prior to the
expiration of the original (or extended) term hereof. The parties hereto shall
have thirty (30) days after the Landlord receives the option notice in which to
agree on the minimum monthly rental during the extended term(s). If the parties
agree on the minimum monthly rent for the extended term(s) during that period,
they shall immediately execute an amendment to this Lease stating the minimum
monthly rent. In the event that there is more than one option to extend the term
of this Lease, the parties hereto shall negotiate the minimum monthly rent as
set forth herein for each extended term of this Lease. If the parties hereto are
unable to agree on the minimum monthly rent for the extended term(s) within said
thirty (30) day period, the option notice shall be of no effect and this Lease
shall expire at the end of the term. Neither party to this Lease shall have the
right to have a court or other third party set the minimum monthly rent. Exhibit
A Expense Schedule which is attached hereto, is made a part hereof.
The parties hereto have executed this Lease on the date first above
written.
LANDLORD: Exstar Financial Corp. TENANT:
By: /S/ Steven C. Shinn By: /S/ Peter J. O'Shaughnessy
Steven C. Shinn, President Peter J. O'Shaughnessy
Page 2 of 2
<PAGE>
EXHIBIT "A"
<TABLE>
<CAPTION>
CARACAS HOUSE EXPENSES TENANT vs. LANDLORD (EXSTAR FINANCIAL)
-------------------------------------------------------------
<S> <C> <C>
Cable TV X
Electrical work for office X
Electrical work for security cameras and sattelite X
Electricity X
Furniture and shelving purchases X
Gas X
Home owner's association fees X
Insurance X
Landscaping X
Pest control X
Pool and spa maintenance X
Property Tax X
Rekeying of locks X
Repairs to house (except damage repairs caused by tenant) X
Sattelite dish installation and service X
Security camera Installation and maintenance X
Trash X
Vehicle repair, maintenance and fuel X
Water X
(The following phone lines are currently installed)
* 360-1539 main personal voice line X
* 772-2048 Personal roll-over voice from 360-1539 X
* 772-4012 office fax line X
* 360-8900 office voice X
* 360-4460 roll over voice line from 360-8900 X
* 360-3439 additional modem line X
* 416-5431 ISDN data line for Office intemet connection X
* 360-3217 voice line for Kyle X
* 360-4218 modem line for Kyle X
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 11,927
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 984
<MORTGAGE> 3,811
<REAL-ESTATE> 9,892
<TOTAL-INVEST> 28,443
<CASH> 5,914
<RECOVER-REINSURE> 3,901
<DEFERRED-ACQUISITION> 1,906
<TOTAL-ASSETS> 66,949
<POLICY-LOSSES> 35,627
<UNEARNED-PREMIUMS> 6,063
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
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0
0
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2,737
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</TABLE>
